SBA delays in implementing rule changes costs small contractors millions

Wednesday - 7/16/2014, 12:14pm EDT

Reaching a consensus on Capitol Hill is a rare thing these days. So, when Congress successfully added numerous small business procurement reforms to the National Defense Authorization Act (NDAA) for Fiscal Year 2013, it was seen as something of a bipartisan coup.

But, it's been 18 months since President Barack Obama signed the bill into law and small businesses are still waiting for the Small Business Administration to implement the NDAA reforms.

"Unfortunately, what should have been a bipartisan success story has soured due to inaction and inattention," said Rep. Richard Hanna (R-N.Y.), chairman of the House subcommittee on contracting and workforce. "A year-and-a-half later, the vast majority of these reforms remain unimplemented. And this is causing real harm to small businesses. We are are a society of laws. Our businesses need to know what laws apply to them so they can comply, and so that they can thoughtfully chart their future course."

The subcommittee convened a hearing Tuesday to hear from small business representatives about how the delays were impacting them and from the SBA as to why it's taken so long to implement the NDAA reforms.

For example, Congress began reforming the Mentor- Protégé Program with the 2010 Small Business Jobs Act, continuing the reforms with the 2013 NDAA. However, SBA has not issued any program guidance or regulations.

"This means small businesses don't know if they should pursue a mentor- protégé agreement at the Department of Homeland Security or if the SBA will declare the program invalid in a year," Hanna said. "This creates an unnecessary barrier to growth."

Small business struggle under conflicting guidance

One of the key areas of focus at Tuesday's hearing was over conflicting guidance regarding subcontracting limits.

"In a much needed reform, the NDAA modified the Small Business Act to add a new provision relating to limitations on subcontracting for federal prime contracts awarded to small businesses under 'set-aside' programs," said Angela B. Styles, a partner at Crowell & Moring LLP, in her written statement to the subcommittee.

SBA has yet to issue new regulations that are consistent with limitations on subcontracting statutory provisions introduced by the NDAA.

New contracts executed by the federal government today contain an old provision (FAR 52.219-14) that requires "at least 50 percent of the cost of contract performance incurred for personnel (is) expended for employees of" the small business prime contractor.

"The contract clause, however, does not exempt the small business prime contractor from also complying with the NDAA statutory provision on limitations on subcontracting," Baker wrote in her testimony. "Compliant and diligent small businesses are left in the position of implementing two inconsistent provisions, a statute that allows them to subcontract 50 percent of the amount they are paid and a contract clause which requires them to perform 50 percent of the cost of performance with their own employees. This inconsistency is adding millions of dollars to compliance costs for small businesses."

Under the new law, a small business prime contractor that wins a set-aside contract can also subcontract out to a similarly situated small business. Under current rules, small business prime contractors awarded a prime contract as a set- aside have to ensure that at least 50 percent of the contract performance costs were incurred by their own employees.

"In practice, what constitutes the 'cost of contract performance' for personnel has been impossible to understand or implement," Baker wrote in her testimony.

As an example, she described a situation in which a small contractor was awarded a $100,000 contract to maintain trucks at a military base. The contractor chooses to subcontract out to a large contractor the engine maintenance for the trucks. To do that, the small contractor, as the prime, has to convert the fixed price of the engine maintenance into a "cost of performance" metric, which has to be compared to the prime's cost of performance for personnel and to the cost of performance of the subcontractor.

"No one (the business or the government) really knows if they are administering the limitations on subcontracting correctly and this uncertainty has led to many disputes with the government and between prime and subcontractors," Baker wrote. "Fortunately, the NDAA changed this vague requirement into a simple calculation. In our example, the small business prime contract awarded a set-aside contract could subcontract $50,000 of the award to a large business — simple and easy to administer."

John Shoraka, SBA's associate administrator for government contracting and business development, told the subcommittee that his agency has already taken action where it could.