FAR Council Beefs Up Small Business Subcontracting Rules: Federal Acquisition Regulatory Council
The FAR Council has released a proposed rule calling for significant revisions to the provisions in FAR Parts 19 and 52 addressing small business subcontracting plans. The proposed changes, which are intended to implement regulations adopted by the Small Business Administration (SBA) in 2013, should serve as a not-so-subtle reminder of the range of small business-related obligations imposed on prime contractors, as well as the consequences of failing to satisfy those obligations.
The proposed rule’s origins can be traced back to the Small Business Jobs Act of 2010, which required the promulgation of regulations addressing various aspects of small business subcontracting compliance. The SBA adopted regulations in accordance with this statutory directive in July 2013, but until now, no conforming changes were made to the FAR. As a result, some prime contractors may have overlooked the responsibilities imposed upon them, including the following:
Use of Small Business Subcontractors in Performance: The proposed rule would amend FAR 19.704 and 52.219-9 to provide that all small business subcontracting plans must include assurances that, in the performance of the contract, “the offeror will make a good faith effort to acquire articles, equipment, supplies, services, or materials . . . from the small business concerns that the offeror used in preparing the bid or proposal, in the same or greater scope, amount, and quality used in preparing and submitting the bid or proposal.” Moreover, in the event that the prime contractor does not use a small business subcontractor to the same extent as described in its proposal, the proposed rule adds a requirement that the prime contractor draft a “written explanation [that] shall be submitted to the contracting officer within 30 days of contract completion.” In other words, large prime contractors will be expected to follow through on the small business subcontracting plans set forth in their proposals, and they will be called to account if they fail do so.
Identification of NAICS Codes for Subcontracts: The proposed rule also would amend FAR 52.219-9 to make clear that prime contractors bear the responsibility for assigning the North American Industry Classification System (NAICS) codes and corresponding size standard to each subcontract. Again, this requirement tracks existing obligations set forth in the SBA regulations, but its inclusion in the FAR should dispel the common misconception that NAICS codes and size standards simply flow down from the prime contract. To the contrary, it is the prime contractor’s responsibility to identify and assign the NAICS code that best describes the principal purpose of each subcontract.
Consequences of Noncompliance with Subcontracting Plan: The proposed rule also includes a tweak to clarify the consequences of a prime’s failure to satisfy the requirements of its subcontracting plan. Although FAR 52.219-9 currently provides that a contractor’s failure to comply with its small business subcontracting plan constitutes a “material breach” of the contract, the proposed rule explicitly states for the first time that such noncompliance also may be counted against the contractor “in any past performance evaluation of the Contractor.” By including this direct reference to past performance evaluations, the proposed rule increases the likelihood that a contracting officer will focus on compliance with subcontracting plans—or lack thereof—when completing evaluations.
Although the provisions noted above may warrant particular attention, large primes would be well-advised to closely review the proposed rule in its entirety to ensure that their subcontracting plans are up to standard—and to confirm their compliance with these plans in their own performance. For example, prime contractors should confirm that they are equipped to (i) meet new deadlines for correcting subcontracting reports, (ii) revise their method for calculating subcontracting goals to incorporate the total value of a contract when required, and (iii) report order-level subcontracting information under individual plans. This sort of internal subcontracting review typically demands only a small commitment of time and resources, but it can be invaluable to ensuring that a contractor remains well-positioned to compete for future opportunities.