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More Opportunities On the Horizon for Small Businesses Seeking to Sell Cloud Computing to the Government

Each year, the Government purchases more and more cloud computing from contractors.  But while many small businesses can provide cloud computing, the current rules associated with small business set-aside contracts prevent agencies from awarding prime contracts with a large cloud computing component to small businesses.

Currently, a small business cannot subcontract more than 50% of the prime contract amount under a services contract to businesses that are not small.  13 C.F.R. 125.6.  This “limitation on subcontracting” rule is intended to ensure contract awards are made to capable small businesses and to prevent “pass through” situations in which a small business is awarded a prime contract, but a large company ends up doing most of the work.  However, in the cloud computing context, this rule has the effect of eliminating small business participation in IT service contracts with a substantial cloud computing component.  Typically, a small business is not able to commit to a situation in which it (together with other small businesses, if needed) will provide more than 50% of the services under these contracts.

On December 4, 2018, the Small Business Administration (“SBA”) proposed a rule to lift restrictions associated with cloud computing.  83 Fed. Reg. 62516.  The proposed rule suggests cloud computing be excluded from the limitation on subcontracting rule calculation altogether in cases where the small business will perform other services that are the primary purpose of the acquisition.  Alternatively, SBA suggests cloud computing be characterized as a “product” (rather than a “service”), which would bring the non-manufacturer rule into play and allow SBA to issue broad waivers of the rule.  A waiver of the non-manufacturer rule would allow a small business to provide products it did not manufacture from both large and small businesses. Thus, if the proposed rule becomes effective, small businesses will be limited in subcontracting only with respect to the portions of an IT service contract that do not involve cloud computing.

The SBA’s proposed rule is a very welcome proposal for many small businesses, which will see more contract opportunities and a broader range of IT services that they can provide to the Government.  As the terms of the final rule may change, we will continue to monitor developments as they occur.

Copyright © 2020, Sheppard Mullin Richter & Hampton LLP.National Law Review, Volume IX, Number 58

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About this Author

Townsend Bourne, Government Affairs Attorney, Sheppard Mullin Law FIrm
Associate

Ms. Bourne's practice focuses on Government Contracts law and litigation. Her experience includes complex litigation in connection with the False Claims Act, bid protest actions both challenging and defending agency decisions on contract awards before the Government Accountability Office and Court of Federal Claims, claims litigation before the Armed Services Board of Contract Appeals and the Civilian Board of Contract Appeals, investigating and preparing contractor claims, and conducting internal investigations. 

Ms. Bourne advises clients on a...

202-469-4917
Bochan Kim, Sheppard Mullin Law Firm, Seoul, Corporate and Finance Law Attorney
Associate

Bochan Kim is an associate in the Government Contracts, Investigations and International Trade Practice Group in the firm's Seoul office. Ms. Kim is also barrister and solicitor of New South Wales, Australia and New Zealand.

Areas of Practice

Ms. Kim represents major financial institutions and companies involved in the entertainment and digital media. Her work mostly involves advising banks and other financial institutions in connection with banking law regulatory issues as well as matters in relation to internal investigations. She has worked on numerous financing deals and specializes in regulatory side of the matters. Her work for financiers includes acting for banks, entrepreneurs and financial groups, often involving secured lending and complex multi-party arrangements. Ms. Kim has worked on the commercial side of corporate deals involving renown Korean companies.

822-6030-3020