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.