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Federal Register / Vol. 86, No. 152 / Wednesday, August 11, 2021 / Rules and Regulations
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ensure that the benefits of contracts and orders awarded to small businesses flow to the intended beneficiaries.
Prior to section 1651, the limitations on subcontracting and the nonmanufacturer rule were inconsistent across the small business programs. For example, under the 8a and WOSB
Programs, the prime contractor was required to perform a certain percentage of work itself, whereas under the HUBZone and SDVOSB Programs, the prime contractor could include subcontracts to other HUBZone small business or SDVOSB concerns in the percentage of work it performed.
Similarly, with regard to the nonmanufacturer rule, a prime contractor for a contract or order set aside or awarded on a sole-source basis under the HUBZone Program was required to provide products manufactured by another HUBZone small business, but for awards under the other small business programs, the prime contractor was required to provide products manufactured by any small business.
In addition, the basis of the limitations on subcontracting has
changed. Prior to section 1651, the limitations on subcontracting were calculated as a percentage of work to be performed by a prime contractor; the calculation was based on the contractors costs to perform the contract e.g., salaries and other allowable costs under FAR part 31. As a result of section 1651, the limitations on subcontracting will be calculated as a percentage of the overall contract or order amount i.e., the contract price, including costs and profit or fee to be spent by the prime contractor on subcontractors. As a result, for the purpose of compliance with the limitations on subcontracting the prime contractor no longer has to track the percentage of costs incurred that it spends performing work itself. It only has to track the percentage of the overall award amount i.e., contract price that it spends on subcontractors. For small businesses, this change will reduce the burden associated with tracking and documenting compliance with the limitations on subcontracting.
Section 1651 also applied the concept of similarly situated entities to all small business programs. A similarly
situated entity is a small business subcontractor that has the same small business program status as that which qualified the prime contractor for the prime contract. The percentage of the contract or order amount that the prime contractor spends on subcontractors who are similarly situated entities is not considered subcontracted for purposes of compliance with the limitations on subcontracting. Prior to section 1651, small businesses that wanted to work together to comply with the limitations on subcontracting were required to form a joint venture or a new legal entity except in small business programs where the concept of similarly situated entities was already applied. The concept of similarly situated entities eliminates the need for paperwork, coordination, and other costs associated with forming such a joint venture or new legal entity simply to comply with the limitations on subcontracting.
These important changes allow small businesses greater flexibility on how they choose to comply with the limitations on subcontracting. The impact is illustrated in the following example of a non-construction contract:

Limitations on subcontracting
Previous
Contract Value
Small Business Cost of Contract Performance incurred for personnel.
LOS Requirement

$1,000
$800

$1,000.
Not tracked.

Contractor must spend $400i.e., 50 percent of the $800 cost of contract performance incurred for its own personnel. The contract value i.e., $1,000 is not used to determine compliance under previous rule..

Contractor may pay up to $500 50 percent of the contract price to a non-similarly situated entity, e.g., large business, AND/OR
subcontract to a similarly situated entity without limitation.

Under the current limitations on subcontracting, the small business only has one way to comply. In the example above, it must spend at least $400 on its own employees and, therefore, must be able to track its contract costs to ensure compliance with the requirement.
Under the new limitations on subcontracting, there are multiple and less costly ways to comply, and the small business can choose the most efficient option, as demonstrated below:
The small business can continue to spend $400 on its own employees and subcontract $400 to any business, as it did to comply with the previous limitations on subcontracting. Because the prime contractor is not subcontracting more than $500 to businesses that are not similarly situated entities, it will meet the new limitations on subcontracting.
The small business can subcontract to any combination of similarly situated and non-similarly situated entities and remain in compliance with the new
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limitations on subcontracting as long as the amount spent on non-similarly situated entities does not exceed $500.
For example, the small business can subcontract $500 to any business and spend $300 on its own employees, or subcontract $500 to any business, $100
to a similarly situated entity, and spend only $200 on its own employees.
SBAs final rule specified that similarly situated entities must also comply with the limitations on subcontracting. As part of implementing section 1651, the SBA made a few more revisions to their regulations that are reflected in this FAR rule:
The nonmanufacturer rule does not apply to small business set-asides at or below the simplified acquisition threshold. Note that currently, the FAR
applies the nonmanufacturer rule to small business set-asides above $25,000.
Waivers of the nonmanufacturer rule will now be allowed for procurements under the HUBZone Program. Such waivers allow a
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HUBZone small business to provide the product of any size business.
In the event SBA grants a nonmanufacturer rule waiver after the issuance of a solicitation, but before award, contracting officers are required to amend that solicitation to notify potential offerors of the waiver and to give them more time to submit proposals.
The above changes drive both costs and savings; however, the rule is expected to result in net savings to small entities, as well as to the Government. Since the rule will only revise regulations under the various small business programs, there will be no costs or savings to large businesses.
The expected net savings of the rule, calculated at present value using a 7percent discount rate over ten years, is estimated to be $189,298,957.
To access the full regulatory cost analysis for this rule, go to the Federal eRulemaking Portal at http
www.regulations.gov, search for FAR

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