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Federal Register / Vol. 86, No. 152 / Wednesday, August 11, 2021 / Rules and Regulations HUBZone contracts see 13 CFR 125.6.
The Councils have updated the final rule at FAR 19.507e and h to clarify that solicitations and contracts using the HUBZone price evaluation preference to award to a HUBZone small business concern must include the FAR clauses at 52.21914, Limitations on Subcontracting, and 52.21933, Nonmanufacturer Rule. The Councils have also updated the paragraphs entitled Applicability in these clauses to clarify their applicability to contracts awarded to a HUBZone small business concern using the HUBZone price evaluation preference and that the limitations on subcontracting and nonmanufacturer rule do not apply if the price evaluation preference is waived by the offeror.
6a. Similarly Situated Entities Definition Comment: One respondent requested clarification on which subcontractors count as similarly situated entities. The respondent specifically requested additional examples regarding standard small business set-asides.
Response: SBAs regulation at 13 CFR
125.1 states that for small business setaside, partial set-aside, or reserve a similarly situated entity is a subcontractor that is a small business concern. Therefore, the definition of similarly situated entity in this final FAR rule has been revised to clarify that, for a small business set-aside, a similarly situated entity is a small business, without regard to socioeconomic status.

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6b. Similarly Situated Entities Loophole for 8a Participants Comment: One respondent stated the proposed rule circumvents FAR 19.808
1e by allowing a new ANC or Indian Tribe to win a sole-source follow-on contract and then to subcontract it to the incumbent without competing it, which would increase costs to the Government.
The respondent requested language be added to FAR 52.21914e1 through 4 to prohibit treatment of such a subcontractor as a similarly situated entity.
Response: The FAR does not direct subcontracting decisions of prime contractors. Additionally, SBAs regulation does not provide that a prime contractor must compete a subcontract before it can award a subcontract, whether or not the award is to a similarly situated entity. This final rule will not be revised to incorporate the requested language as the rule is consistent with SBAs regulations.

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6c. Treatment of Similarly Situated Entity Subcontractors
6d. Similarly Situated Entities Interpretation of the Rule
Comment: One respondent acknowledged the proposed rule properly provides that first-tier subcontracts awarded to a similarly situated entity are excluded from the calculation of the 50 percent subcontract amount that cannot be exceeded. However, the respondent points out, the clauses then provide that all work further subcontracted by such similarly situated entity does count toward the 50 percent subcontract amount that cannot be exceeded. The respondent believes this formulation creates an inconsistency among small business programs and an administrative burden for prime contractors and urges that this further limitation be deleted.
Response: SBAs regulation at 13 CFR
125.6c limits similarly situated entities to the first-tier subcontractors.
Therefore, this final rule also contains this limitation. Determining compliance with the limitations on subcontracting by including in the calculation subcontracts beyond the prime contractor and first-tier subcontractor creates the possibility that the first-tier subcontractor may subcontract 100% of the work it received from the prime to an entity that is not similarly situated.
This would create a loophole for entities that are not small business concerns and would not have qualified to receive the prime contract, to benefit as subcontractors from Government contracts that are set aside for performance by small business concerns. To address these concerns, SBAs regulations apply the limitations on subcontracting collectively to the prime and any similarly situated firsttier subcontractor. Any work performed by a similarly situated first-tier subcontractor will count toward compliance with the applicable limitation on subcontracting. For purposes of determining whether the prime and its subcontractor complied with the applicable limitation on subcontracting, work that is not performed by the employees of the prime contractor or employees of firsttier similarly situated subcontractors will count as subcontracts performed by non-similarly situated entities. Using similarly situated subcontractors gives the prime contractor greater flexibility but does require monitoring and oversight by the prime contractor to ensure the benefits flow to the intended recipients. The final rule has been revised at FAR 52.21914 to provide additional clarity on this issue.

Comment: One respondent requested clarification of its understanding of the proposed rule regarding the prime contractor not completing 50 percent of the work because it subcontracted to a similarly situated entity.
Response: A prime contractor may subcontract more than 50 percent of the work to a similarly situated entity and still comply with the limitations on subcontracting. SBAs regulation at 13
CFR 125.6c provides three examples to illustrate when the prime contractor meets, or fails to meet, the limitations on subcontracting. One example describes an award for supplies to a service-disabled veteran-owned small business SDVOSB that subcontracts to a similarly situated entity for 51 percent of the work, which does not violate the limitations on subcontracting. However, any work that the similarly situated entity further subcontracts will be counted toward the 50 percent subcontract limit.

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7a. Application of the Limitations on Subcontracting and Nonmanufacturer Rule at or Below the SAT
Comment: Two respondents submitted substantially similar comments suggesting that set-asides below the SAT in all small business and small business socioeconomic categories should be exempt from any limitations on subcontracting, including the nonmanufacturer rule. Another respondent stated the original intent of the nonmanufacturer rule was to promote U.S. innovation in manufacturing and technology by allowing small U.S. manufacturers to compete with large business for Federal Government contracts. This respondent also stated the recent SBA change to raise the value of application of the nonmanufacturer rule to the SAT
contradicts this intent and threatens the U.S. Defense Industrial Base.
Response: This rule implements SBAs policy on the limitations on subcontracting and the nonmanufacturer rule. The rule reflects distinct statutory authorities for setting aside small business procurements and small business socioeconomic category procurements below and above the threshold at 15 U.S.C. 644j.
For small business socioeconomic category procurements i.e., a set-aside or sole source contract for 8a participants, women-owned small businesses, HUBZone small businesses, or SDVOSBs, the limitations on subcontracting, and the nonmanufacturer rule, apply to
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