Congress continues to promote opportunities for small business contractors to do business with the federal government. It also continues to increase the penalties for those taking unfair advantage of small business opportunities. Here is a look at the most recent set of carrots and sticks, which appear in the National Defense Authorization Act for Fiscal Year 2013.

1. Subcontracts with “similarly situated” small businesses

Section 1651 of the 2013 NDAA provides a new exception to the small business subcontracting cap, which restricts small businesses from subcontracting more than 50 percent of the amount paid under a services contract. With the passage of NDAA, the amount paid under any subcontract with a small business concern that has the same small business status as the prime contractor is excluded from the small business subcontracting cap. The term “similarly situated entities” includes service-disabled veteran-owned small businesses, HUBZone small businesses, women-owned small businesses, and economically disadvantaged women-owned small businesses.

This provision also changes the method for calculating the 50-percent subcontracting cap. Previously, the subcontracting limits in FAR 52.219-14 counted only direct labor costs. Under section 1651, “amount paid” under a subcontract, including labor, material, and other direct costs, is used to determine the 50-percent subcontracting cap. This is a strong incentive for small business prime contractors to award subcontracts to similarly situated small businesses. The old formula continues to govern subcontracting limitations for construction contracts, but the NDAA directs the SBA to establish similar limitations on construction contracts.

The penalty for violating the subcontracting cap is the greater of $500,000 or the dollar amount expended over the cap. The “amount expended” clause is a new penalty.

2. New mechanisms to enforce small business subcontracting plan compliance

Section 1653 of the 2013 NDAA states that a contractor’s or subcontractor’s failure to comply in good faith with its small business subcontracting plan “shall be a material breach of such contract or subcontract that may be considered in any past performance evaluation of the contractor.” While these requirements already appear in current law, see FAR 52.219-9(k), the new statute expands the availability of information for parties interested in identifying improper subcontracting activity. Offerors are required to notify a small business concern prior to identifying it as a potential subcontractor in a proposal. SBA is required to establish a reporting mechanism for subcontractor or potential subcontractors to report fraud or bad faith conduct by a contractor concerning its subcontracting plan. In addition, each contracting agency must periodically conduct a review to ensure that its contractors are complying in good faith with their subcontracting plans. They are also required to collect and report on the extent to which their contractors meet subcontracting goals and objectives.

3. Safe harbor for SBA advisory opinions

Section 1681 of the NDAA creates a safe harbor for any small business concern that relies in good faith on a written advisory opinion from a Small Business Development Center or a Procurement Technical Assistance Cooperative program. The SBA is required to issue rules defining what constitutes an adequate advisory opinion. Additionally, the SBA is required to issue a compliance guide to assist businesses in accurately determining their status as a small business concern. The safe harbor will allow small businesses to seek out size determinations rather than wait for a post-award size determination in reaction to a size protest. Advisory opinions will likely be most helpful when small business status often involves interpretation of affiliation rules.

4. Removal of the cap for women-owned small business set asides

Under 15 U.S.C. § 637, the thresholds for setting aside contracts for women-owned small businesses are $5 million for manufacturing contracts and $3 million for all other types of work. The 2013 NDAA eliminates these restrictions entirely. Women-owned small businesses should look out for new small business opportunities.

5. $6.5 million threshold for SBA-guaranteed bonds

Section 1695 of the NDAA permits SBA to guarantee a surety against losses arising under a bid bond, payment bond, performance bond, or an ancillary bond up to a maximum $6.5 million. SBA is permitted to guarantee a surety bond up to $10 million if the contracting officer “certifies that such a guarantee is necessary.” This is a significant increase from the prior $2 million maximum. The new maximum amount will also be automatically adjusted for inflation. It should allow many new small businesses to pursue government contract opportunities that were previously unavailable due to a lack of bonding capacity.

6. Expansion of mentor-protégé program

Section 1641 of the NDAA significantly expands the SBA’s mentor-protégé program. The mentor-protégé program had been restricted to 8(a) businesses. Under the NDAA, mentor-protégé programs may be established for all small business concerns. While this authority presents promising opportunities for many large and small businesses, the permissive language in the statute is important. The SBA is authorized, but not required, to create additional programs modeled on the 8(a) mentor-protégé program.