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NDAA Brings Significant Change to Small Business Contracting

Posted Jan 10, 2013

The National Defense Authorization Act of 2013 (“NDAA”), signed by President Obama on January 3, includes important changes to the laws and regulations governing small business contracting on the federal level.  Most notably, the NDAA directs the Small Business Administration (“SBA”) to create mentor-protégé programs for each type of small business concern, which will be similar to the mentor-protégé program that currently only applies to 8(a) disadvantaged businesses.  The Small Business Jobs Act of 2010 authorized the SBA to create similar programs for HUBZone businesses, Service Disabled and Veteran Owned businesses, and Women-Owned small businesses.  However, the SBA has not yet created regulations to implement such programs.  The NDAA provides less discretion to the SBA regarding the implementation of these programs and requires the SBA to issue regulations establishing these mentor-protégé programs within 270 days. 

The mentor-protégé program that currently exists for the 8(a) program allows large businesses to act as mentors to small businesses within the program and allows the companies to form joint ventures that are permitted to bid on small business contracts without violating size or affiliation rules.  Despite the NDAA’s expansion of this program to other types of small businesses, there has also been increased scrutiny on these relationships in recent years.  The regulations relating to the 8(a) program were amended to increase the consequences for mentors who fail to provide the required support to their protégés. 

The NDAA also changed the regulations relating to how self-performance by small businesses is calculated.  Previously, in order to prevent a small business from subcontracting the entirety of the work to another business, the regulations required the small business to incur at least 50 percent of the labor costs for service or supply contracts and 25 to 15 percent of the labor cost for general or specialty construction contracts.  This rule was difficult to enforce because agencies could not determine during bid evaluations whether this rule would be followed.  The new rule changes the limitation from cost to price and requires a comparison of prime contract price to subcontract prices.  For service contracts, the small business may not expend more than 50 percent of the prime contract price on subcontractors.  For supply contracts, the small business may not expend more than 50 percent of the prime contract price on subcontractors, less the cost of materials.  For construction contracts, the SBA will determine the percentage after obtaining public comments.  The new law also creates penalties for violating these limits and makes it easier for companies who break the rules and intentionally defraud the government to be suspended or debarred. 

Changes have also been made to the Women-Owned small business program by removing the dollar-amount caps on set aside contracts.  Previously agencies were only allowed to set aside contracts for Women-Owned businesses if the contract did not exceed $6.5 million (manufacturing) or $4 million (all other types).  The NDAA has removed these dollar limits and agencies are now permitted to set aside contracts for Women-Owned businesses of any amount. 

There are several other changes that will affect small businesses as the SBA creates and implements regulations required by the NDAA.  We will continue to provide updates on those changes and their effect on small business concerns as those rules are implemented.