The set-aside rule that trips up teams
When you win a small business set-aside or sole-source award, you agree to limit how much of the contract you pay to subcontractors that are not "similarly situated." A similarly situated subcontractor has the same small business status that qualified you for the award, for example another 8(a) firm on an 8(a) contract, and is small under the contract's NAICS code. Work done by similarly situated subcontractors counts as your own.
Limits are measured as a share of the amount the government pays you. For supplies and construction, the cost of materials is excluded. Breaking the rule can bring significant penalties. Under SBA rules, that can be the greater of $500,000 or the amount by which you exceeded the limit.
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Pro tips
- Track compliance monthly from your job-cost data, not once a year.
- Teaming agreements should state each partner's similarly situated status and workshare in dollars.
- Check whether your contracting officer measures compliance over the base period and each option, or over the whole contract.
- Independent contractors (1099) are usually treated as subcontractors.
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