SBA May Allow Prime Contractors to Receive Credit for Small Business Subcontracts, To Impose Subcontractor Monitoring Requirements

Ogechi Achuko, an Associate in Hogan Lovells' Government Contracts Practice, contributed to this post. On October 6, 2015, the Small Business Administration (SBA) released a Proposed Rule [1]/ that allows prime contractors to count lower-tier subcontracts at all levels toward their small business subcontracting goals. While this would be a welcome change for many prime contractors, the proposed rule also increases a prime contractor’s oversight responsibilities with respect to its subcontractors’ small business subcontracting plan compliance. Also, the Proposed Rule clarifies that the size standard for a particular subcontract must appear in the solicitation for the subcontract and allows prime contractors to rely on a subcontractor’s electronic size and socioeconomic representations if the solicitation requires subcontractor verification. In order to promote federal contracting opportunities for small businesses, large businesses are required to submit and maintain small business subcontracting plans if they receive a federal contract that exceeds or is expected to exceed $650,000 ($1.5 million in the case of construction contracts for public facilities) and there are opportunities for subcontracting. The subcontracting plan must contain separate percentage goals for small businesses and small disadvantaged business concerns, including veteran-owned, service disabled veteran-owned, HUBZone, women-owned, and other disadvantaged small business concerns. Also, the plan must set forth the total dollars planned to be subcontracted among the various small business concerns. [2]/ The requirement to submit a subcontracting plan is “flowed-down” to subcontractors that receive contracts in excess of the above threshold. Currently, a prime contractor that is other than small establishes its small business subcontracting goals at the first tier level and therefore, only receives credit for subcontracts that it directly awards to small businesses. In contrast, the Proposed Rule allows a prime contractor that has an individual subcontracting plan for a specific contract to receive credit for subcontracts made to small business concerns at any tier, meaning subcontracts between the prime contractor’s subcontractor and other small business subcontractors would be counted towards the prime contractor’s small business subcontracting goals. Below are highlights of the Proposed Rule’s significant provisions:

  • Lower-Tier Subcontracting Incorporated in Plan: Prime contractors must incorporate lower-tier subcontracting performance into their subcontracting plan goals. In order to avoid double or triple counting, prime contractors must ensure that subcontracting dollars are only reported once for the same award notwithstanding the fact that a small business subcontract may be reported under more than one subcontracting plan. Lower tier subcontractors are still required to submit their individual subcontracting plans if the subcontract amount is above the applicable threshold.
  • Applicable to Only Individual Subcontracting Plans: The lower tier reporting credit only applies to individual subcontracting plan goals for a specific contract. The lower tier reporting credit does not apply where a subcontracting plan applies to more than one contract or to one contract with more than one executive agency. Accordingly, this credit does not apply to commercial and comprehensive subcontracting plans that cover subcontracting goals on a division or company-wide basis and do not allow multi-tier reporting.
  • Increased Subcontractor Oversight: In order to ensure that subcontractors are meeting small business subcontracting goals, prime contractors are required to: 1) review and approve small business subcontracting plans; 2) monitor subcontractors’ compliance with plans; 3) ensure that subcontractors submit subcontracting reports (i.e. Individual Subcontractor Reports (ISR) and Summary Subcontract Reports (SSR)); 4) discuss performance with subcontractors when necessary to ensure compliance with plans; and 5) state in their subcontracting plan the types of records (i.e. small business source lists) it will maintain to demonstrate that their procedures ensure subcontractors’ compliance with their plans.
  • Size Clarification in Solicitation: The North American Industry Classification System (NAICS) code and corresponding size standard required for a firm to be eligible as a small business concern for that subcontract must appear in the solicitation for the particular subcontract.
  • Acceptance of Electronic Representations: Prime contractors are allowed to accept a subcontractor’s electronic self-certification (i.e. via System for Award Management (SAM)) as to size and socioeconomic representations so long as the solicitation required the subcontractor to verify the accuracy and completeness of representations. It is important that contractors keep their SAM representations and certifications accurate and up to date because they may be deemed to be a certification when submitting a proposal.
The Proposed Rule would amend SBA’s small business regulations in order to implement Section 1614, Credit for Certain Small Business Subcontractors, of the National Defense Authorization Act for Fiscal Year 2014. The amendments will be made in 13 CFR Parts 121 and 125. Comments on the Proposed Rule are due by December 7, 2015. [1]/         Small Business Administration, 80 Fed. Reg. 60,300 (proposed Oct. 6, 2015) (to be codified in 13 CFR Parts 121 and 125). [2]/         Contractors that submit small business subcontracting plans are required to submit Individual Subcontract Reports (ISR) and Summary Subcontract Reports (SSR) via the Electronic Subcontract Reporting System (eSRS) which requires annual and bi-annual reporting of small business subcontracting activity. See 48 FAR Part 19.704(9).

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