Legal Dig

Under FAR 52.219–14, the limitations on subcontracting for contracts reserved for small business concerns are: (1) for services, except for construction, at least fifty percent of the cost of the contract performance must be expended for employees of the small business; (2) for general construction, the small business concern is required to perform at least fifteen percent of the cost of the contract with its own employees, excluding the cost of materials; and (3) for construction by special trade contractors, the small business concern must perform at least twenty five percent of the cost of the contract with its own employees, excluding the costs of the materials.

Does the FAR contain any mandatory reporting requirements for subcontractors?

Under FAR 52. 204–10, there are certain requirements for reporting executive compensation and first-tier subcontract awards. In part, a first-tier subcontract is defined as a “subcontract award by the contractor for the purpose of acquiring supplies or services (including construction) for performance of a prime contract.” A small business concern that has entered into a subcontract agreement with a first-tier subcontractor must report, by the end of the month following the month of the award of the first-tier subcontract, certain background information to the Federal Funding Accountability and Transparency Act Subaward Reporting System (FSRS) about the first-tier subcontracting company and the subcontract agreement.

Within that same time period, the small business concern is also required to report the names and total compensation of each of the five most highly compensated executives of the first-tier subcontractor for the preceding fiscal year to the FSRS, if in the prior completed fiscal year the first-tier subcontractor received (1)eighty percent or more annual gross revenue from federal contracts or subcontracts, loans, grants, subgrants, cooperative agreements, and other forms of federal financial assistance; and (2)the first-tier subcontractor received $25 million or more annual gross revenue from federal contractors, subcontracts, loans, grants, subgrants, cooperative agreements and other forms of federal financial assistance. The first-tier subcontractor must meet both of these requirements to trigger the small business concerns’ reporting requirement.

What are the penalties for misrepresentation of size status by a small business concern?

If a small business concern misrepresents its size status as a small business when submitting a bid, proposal, or application for a project that is reserved for small businesses; when registering in a federal electronic database as a small business; or when signing any certification related to the procurement of a project reserved for a small business, the SBA retains the authority to suspend or debar the small business concern. Further, the small business concern may be subject to severe civil penalties under numerous federal laws, such as, but not limited to, the Fraud Claims Act and the Fraud Civil Remedies Act. Additionally, individuals of a small business concern may be subject to criminal penalties if it is determined that these individuals knowingly misrepresented the size status.

Conclusion

It is important to have a comprehensive understanding of the SBA requirements for construction projects and NAICS codes before bidding and entering into contracts for projects reserved for small business concerns. Prior to initiating the procurement process, you may want to contact counsel to ensure that your project qualifies as a small business concern and to avoid potential penalties.

your line of credit can affect bonding and banking relationships

By: richard higgins, CPA, mccarthy & company

Building a solid foundation for good relationships with sureties and bankers is important for every contractor, impacting growth and profitability. Sureties and bankers rely on your credit history, payment record, credit score, and performance when making a credit decision. Sureties also factor the three C’s into their decision to issue a bond: a contractor’s capital, capacity, and character. In addition to these indicators, bankers and sureties also consider the following factors when determining a company’s creditworthiness:

Profitability – A contractor’s gross profit percentage and net income as a percent of revenue compared to industry averages.

Working Capital – To realize the expected profit margin on a job, a contractor needs to have enough working capital to meet short-term expenses; otherwise, the project might have to be financed, which increases costs and reduces profits.

Liquidity Ratios – Liquidity ratios (current ratio, quick ratio, and operating cash flow ratio) measure a company’s ability to pay debt obligations. Bankers and sureties will look at a contractor’s liquidity ratios to determine if the company is highly leveraged and using a high percentage of its revenue to pay off debt.

Although sureties like to see that a contractor has a line of credit (LOC) in place, using it can impact your ability to maintain your bonding capacity. Sureties will scrutinize how and why you are using the LOC to finance your business and specific jobs. Ideally, they are looking for minimal or no borrowings on the line.

What is a Line of Credit?

A line of credit is a predetermined amount of funding that can be borrowed over time from a financial institution such as a bank. The client can take out money until they reach the maximum loan amount and, in the case of an open line of credit, they can borrow the money again as they repay the debt. This arrangement is contingent on the borrower not exceeding the credit limit or missing minimum payments.

Like a credit card, you are required to make the minimum payment each month on your line of credit. Your account balance can fluctuate significantly depending on the amount you draw out of your account and the variable interest rate. By contrast, if you took out a loan, you would receive the funds in a lump sum with interest rates and payments fixed over the life of your loan.

What Do Sureties Look for in a Line of Credit?

Bank borrowings are fine for contractors and subcontractors, but sureties want to see:

Demand Clause – The bank can call in the LOC whenever they like, and the contractor will have to pay it back on demand. Therefore, surety companies consider lines of credits a current liability even if it is not due in more than one year. Banks that call in a line can have a devastating impact on a business.

Working Capital – Sureties (and bankers) are focused on working capital. The definition of working capital is current assets minus current liabilities. Sureties consider lines of credit a current liability. Therefore, they reduce working capital unless they are converted to term loans and reclassified as a long-term liability.

Cash vs. Borrowing – Most sureties want to see that cash and receivables are greater than your bank borrowings, so it is important to have the ability to pay off the LOC if the bank demands immediate repayment.

Extend the Maturity Date – Since most sureties will consider a LOC as a current liability, it is advantageous to have the maturity date extend beyond two years. Some sureties will reclassify some of the debt as a long-term liability if you can do so.