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Oles Morrison

SBA Proposes to Allow Prime Contractors to Count Lower-Tier Subcontracts Towards Small Business Subcontracting Goals

Yesterday, the Small Business Administration (“SBA”) issued a proposed rule to amend its regulations to implement Section 1614 of the National Defense Authorization Act for Fiscal Year 2014 (the “2014 NDAA”). The amendment proposes to expand the credit prime contractors may receive towards their small business subcontracting goals for subcontracts awarded to lower tiered subcontractors. Comments on the proposed rule are due to the SBA on or before December 7, 2015.

Prime contractors are required to develop a small business subcontracting plan prior to the award of a federal contract, provided that the firm is a large business (i.e., not a small business concern) and the dollar value of the awarded contract is expected to exceed $650,000 (or $1.5 million for construction of a public facility). The subcontracting plan must include targeted goals, expressed as a percentage of all forecasted subcontracting dollars, for subcontract awards to: small businesses; veteran-owned small businesses; service-disabled veteran-owned small businesses; HUBZone small businesses; small disadvantaged businesses; and women-owned small businesses.

Currently, the Federal Acquisition Regulation provides that a prime contractor may report its progress towards achieving its small business subcontracting goals by calculating subcontract awards made only to the prime contractor’s “immediate next-tier subcontractors.” See FAR 52.219-9(l). Under the proposed rule, however, prime contractors will begin to receive credit for subcontracts awarded to small business concerns at any tier. According to the SBA:

The proposed amendments authorized by [the 2014 NDAA] would allow an other than small prime contractor that has an individual subcontracting plan for a contract to receive credit towards its small business subcontracting goals for subcontract awards made to small business concerns at any tier.

Although the proposed rule will make it easier for prime contractors to achieve their small business subcontracting goals, this change is not without increased compliance requirements. Most notably, the proposed rule will require prime contractors to:

  • Review and approve its subcontractors’ small business subcontracting plans;
  • Describe and adopt procedures aimed at ensuring that its subcontractors comply with their small business subcontracting plans;
  • Ensure that its subcontractors submit annual reports (i.e., Individual Subcontract Reports (ISR) and/or Summary Subcontract Reports (SSR)) informing the government of subcontract awards made to small business concerns; and
  • Confirm that the subcontracting dollars expended on awards made to small business concerns are only reported once, and to avoid double and triple credit for the same dollars.

Based on the requirements described above, prime contractors would be well-advised to closely monitor the proposed rule. Further, prime contractors should begin reviewing internal policies and procedures to ensure that their standards comply with the requirements of the proposed rule.