Changes to Small Business Subcontracting On the Horizon

Last week, the Federal Acquisition Regulation (“FAR”) Council issued a Final Rule to implement regulations adopted by the Small Business Administration in 2013.  The Final Rule significantly amends FAR Parts 19 and 52 by imposing additional small business-related obligations on prime contractors and clarifying the consequences of failing to satisfy those obligations.  The Final Rule largely tracks the proposed rule, which we previously discussed.  It will be effective November 1, 2016.The most noteworthy amendments to the FAR’s small-business subcontracting requirements include:

• Small Business Subcontractors Identified in a Bid or Proposal: The Final Rule requires that contractors include assurances in their small business subcontracting plans that they will use “good faith efforts” to use the small business subcontractors identified in their bid or proposal.  The FAR Council declined to define “good faith efforts” in the Final Rule, and instead pointed to FAR 52.219-16 (Liquidated Damages-Subcontracting Plan).  Under this clause, the “willful or intentional failure to perform in accordance with the requirements of a subcontracting plan” results in a “failure to make a good faith effort to comply with a subcontracting plan.”  Applying this definition to the Final Rule suggests that some level of intentional or willful disregard of the contractor’s plan to use subcontractors in its bid or proposal is required to establish a failure to use “good faith efforts.”  That said, the level of effort required to satisfy this requirement remains unclear.

• Consequences of Failing to Make “Good Faith Efforts”: Should a contractor not acquire from a small business identified in the bid or proposal, the contractor must inform its contracting officer in writing within 30 days of contract completion.  The Final Rule charges the contracting officer to determine whether the contractor made good faith efforts to comply with its small business subcontracting plan.  Under the Final Rule, a failure to provide good faith efforts results in a material breach of the contract that could lead to liquidated damages under FAR 52.219-16. The failure could also be considered in future past performance evaluations.  (In addition to this increased monitoring, the Final Rule also requires that subcontracting plans contain an assurance that the prime contractor “will not prohibit a subcontractor from discussing with the contracting officer any material matter pertaining to payment to or utilization of a subcontractor.”  This requirement may incentivize communications between small business subcontractors and contracting officers regarding a prime contractor’s utilization of small business concerns.)

• Subcontracting Plans for Former Small Business Primes: As FAR 19.301-2 presently provides, a change in size status does not change the terms and conditions of the contract.  However, the Final Rule adds that a change in size status allows the contracting officer to require a subcontracting plan if the change in status is from small to other than small.

• Need to Assign NAICS Codes to Subcontracts: The Final Rule mandates that prime contractors provide assurances in their subcontracting plan that they will assign each subcontract the NAICS code and corresponding size standard that “best describes the principal purpose of the subcontract.”  This requirement prevents prime contractors from simply flowing down the NAICS code assigned to the prime contract without first assessing the type of subcontract at issue.

In addition to this non-exclusive list of new requirements, the Final Rule will also require contractors to calculate subcontracting goals to incorporate the total value of a contract and report subcontracting achievements at the order-level for certain IDIQ contracts.  In light of the Final Rule’s expanded obligations, large prime contractors would be well advised to assess (1) existing subcontracting plans, (2) subcontract management procedures, (3) post-closeout reporting procedures, and (4) pre-award procedures for developing new subcontracting plans to confirm compliance with the Final Rule’s requirements.