Changes made last year to the Limitations on Subcontracting (LOC) rule further clarified the bounds of revenue split for 8(a) and other socio-economic contractors operating a definitive contract.

As a refresher, the changes require that the amount paid to an 8(a) contractor must be at least 50% of the total paid under the contract to comply with rule 13 C.F.R. § 125.6.  This is a higher percentage than is allowed for non-services.

The 50% rule can be satisfied if a subcontractor(s) also qualifies as an 8(a) .

Together, the prime and first-tier subcontractors must receive 50% of the contract amount paid to the performing contractors. Amounts paid to a second-tier contractor, even if an 8(a), does not count towards satisfaction of the 50% rule.

Mark Ryan, one of the brightest minds on 8(a) compliance and founder of ez8a.com, urges caution from some of the recent SBA rule changes on the LOC application, noting the following: 

1. Previously, the SBA would accept compliance with the LOC regulation provided teammates realized the 50% share over the life of a definitized contract.  Now the parties must comply with the FAR clause each and every year under the contract.
2. For IDIQ’s, teammates must meet the 50% test for each task order on that contract each year, where previously compliance could be claimed when measuring all task orders performed under the IDIQ. 
3. For prime contractors found to be non-compliant under the LOC clause, COs can no longer issue positive CPARS on that task or contract even if the work otherwise performed merited a positive score. Contractors can claim justification as to why they did not meet the LOC requirements if they can demonstrate 1 of 7 conditions, including modification to scope, or if unbeknownst to them, their subcontractor became non- compliant with their social economic qualification.

These exceptions will apply only when these conditions are not within your control and you have no ability to mitigate them without imposing undue cost to you.

For more information about the changes to Contract Revenue Share, check out these video resources:

1. Mark Ryan provides a great explanation of the rules for subcontracting small business contracts in this video.
2. You can read more about the details of changes to the regulations governing the 8(a) program here.