United States: DoD, GSA And NASA Issue Proposed Rule Addressing Credit For Lower-Tier Small Business Subcontracting

Eric S. Crusius is a Partner and Amy L. Fuentes is an Associate in our Tysons office.

The U.S. Department of Defense (DoD), the U.S. General Services Administration (GSA), and the National Aeronautics and Space Administration (NASA), (collectively, the Agencies) just issued a Proposed Rule that addresses increased opportunities for contractors to receive credit for lower-tier small business subcontracting. The Proposed Rule will amend the Federal Acquisition Regulation (FAR) to implement Section 1614 of the National Defense Authorization Act (NDAA) for Fiscal Year (FY) 2014, as implemented by the U.S. Small Business Administration (SBA).

Prime contractors with existing robust compliance systems to track subcontractor compliance with small business contracting plans will benefit from the additional potential credit. Other contractors will need to update their subcontract agreements and modify compliance systems to become compliance with this updated FAR provision.

Section 1614 of the NDAA for FY 2014

Section 1614 amended the Small Business Act to provide that, "where a prime contractor has an individual subcontracting plan for a contract with a single executive agency, the prime contractor shall receive credit towards its subcontracting goals for awards made to small business concerns at any tier by subcontractors with individual subcontracting plans."

In addition, Section 1614 provided new provisions for inclusion in subcontracting plans related to prime and upper-tier contractors' efforts to monitor the performance of their lower-tier contractors with respect to compliance with their respective subcontracting plans.

Section 1614 also requires contractors to demonstrate their procedures established to ensure subcontractors at all tiers comply with their subcontracting plans.

Finally, Section 1614 revised the definition of "subcontract" in the Small Business Act to include lower-tier contractors.

The SBA's Final Rule

The SBA issued its final rule implementing Section 1614 on Dec. 23, 2016, which became effective Jan. 23, 2017. The SBA's final rule required a prime contractor with an individual subcontracting plan to receive subcontracting credit for subcontracts awarded to small business concerns at any tier by subcontractors with individual subcontracting plans. These changes required the prime contractor to have two sets of goals in its individual subcontracting plan:

  1. One set of goals including the prime contractor's direct subcontract awards (i.e., the first-tier goals); and
  2. A second set of goals that includes subcontracts awarded at any tier by other than small business subcontractors with individual subcontracting plans (i.e., lower-tier goals).

The purpose of the lower-tier goals is to ensure maximum opportunity for credit for all small business concerns at all tiers in the performance of the contract. This requirement to have two sets of subcontracting goals applies only to the prime contractor's individual subcontracting plan and does not apply to subcontractors' subcontracting plans.

Per the SBA's final rule, the prime contractor's performance under the individual subcontracting plan will be evaluated based on its combined performance under the first-tier and lower-tier goals. In addition, the final rule implemented the statutory requirements related to the new assurances and written statement to be included in subcontracting plans.

Despite the existence of the SBA's final rule that would have implemented these changes, the SBA took the position that a final FAR rule was needed before this change could be applied: "it is SBA's position that this regulation will require changes to FAR prior to full implementation in eSRS."

The Proposed Rule

The just-issued Proposed Rule also addresses credit for lower-tier small business subcontracting.

The FAR currently requires large businesses with subcontracts valued over $700,000 ($1.5 million for construction) to have subcontracting plans and to report their subcontracting achievements in the Electronic Subcontracting Reporting System (eSRS).  The proposed rules would permit prime contractors  to use these existing subcontracting reports in eSRS as a way to monitor subcontractors' achievements. Prime contractors would not be responsible for their subcontractor's eSRS reporting.

The proposal would make the following changes to three Subparts of the FAR:


FAR Part Proposed Change(s)

FAR Subpart 19.7, The Small Business Subcontracting Program.

1. Update the definition of "subcontract" to the following:

Subcontract means a legally binding agreement—

(1) Between a contractor, that is under contract to another party to perform work, and a third party (i.e., the subcontractor);

(2) For the subcontractor to perform a part of the work that the contractor has undertaken; and

(3) That is not an employer-employee relationship.

2. Add the following definitions of first-tier and lower-tier subcontract:

First-tier subcontract means any subcontract directly with the prime contractor.

Lower-tier subcontract means any subcontract other than a subcontract directly with the prime contractor.

3. Reorganize the existing text at FAR 19.704 to group together basic requirements for all subcontracting plans, special requirements for commercial plans, special requirements for individual subcontracting plans, and special requirements for master subcontracting plans.

4. Revise existing text regarding the requirements for the current (i.e., first-tier) goals for clarity (but the requirements are unchanged).

5. Add text concerning the new assurances related to monitoring the performance of subcontractors with regard to subcontracting plans, and the written statement regarding the contractor's records to demonstrate procedures adopted to ensure subcontractors at all tiers comply with their subcontracting plans.

6. Add new paragraph (d) entitled "Special requirements for individual subcontracting plans" to address existing and new requirements specific to individual plans.  This paragraph covers existing requirements such as individual subcontract reports in eSRS, as well as the new requirements related to lower-tier goals.

FAR Subpart 42.15, Contractor Performance Information.

1. Proposes to add the below new paragraph to FAR 42.1501:

     (a) * * *
(5) Good faith effort to comply with the requirements of the small business subcontracting plan (see 19.705-7(d)).  See 13 CFR 125.3(d)(3) for examples of good faith effort . . . .

2. Proposes to amend FAR 42.1503(a), (b) by replacing "goals as negotiated" with "goals as negotiated, including lower-tier goals as applicable" in the Evaluation Ratings Definitions, and Definitions in Exceptional, and Very Good.

3. Proposes to amend FAR 42.1503(c) by replacing "subcontracting goals" with "subcontracting goals, including lower-tier goals as applicable" in the Definition of "Satisfactory."

4. Proposes to amend FAR 42.1503(d) by replacing "plan elements" in "Marginal" with "plan elements, including lower-tier goals as applicable."

5. Proposes to amend FAR 42.1503(e) by replacing "contract/order" in "Unsatisfactory" with "contract/order, including lower-tier goals as applicable."

FAR Subpart 52.2, Text of Provisions and Clauses.

Proposes to amend the following contract clauses:

1. FAR 52.212-5, Contract Terms and Conditions Required to Implement Statutes or Executive Orders—Commercial Items: amend to revise the dates of FAR 52.219-9, Small Business Subcontracting Plan, and its Alternates.

2. FAR 52.219-9, Small Business Subcontracting Plan: amended to (i) update the definition of subcontract; (ii) add definitions of first-tier and lower-tier subcontracts; (iii) add the new assurances at FAR 52.219-9(d)(9); (iv) add a written statement at FAR 52.219-9(d)(12) to be included in the subcontracting plan; (v) combine paragraphs (d)(1) and (2) for clarity; (vi) insert a new paragraph (e) applicable only to individual subcontracting plans that require the inclusion of separate goals for subcontracting at the lower tiers; and (vii) add a new paragraph (m) to provide guidance to contractors regarding when and how to include the clause in subcontracts.

The Proposed Rule states it will not require any additional action by the prime contractor in eSRS to approve or acknowledge achievement for the lower-tier goals. The DoD, GSA, and NASA intend to use Individual Subcontract Reports (ISRs) submitted in eSRS by subcontractors with individual subcontracting plans to calculate a prime contractor's achievement for the lower-tier goals. The Proposed Rule notes that lower-tier subcontractors that do not submit ISRs in eSRS could impact a prime contractor's achievement toward the lower-tier goals (which could in turn impact the evaluation of the prime contractor's performance rating).

The DoD, GSA, and NASA do not intend to apply the requirements of Section 1614 to contracts at or below the simplified acquisition threshold. The agencies also do not intend to apply the requirements to contracts for the acquisition of commercial items, including commercially available off-the shelf (COTS) items.

The DoD, GSA, and NASA are accepting written comments on or before Aug. 26, 2019.

Key Takeaways

Under the Proposed Rule, there are some things for contractors to be happy about and others that will amount to additional compliance requirements. Most obvious is the biggest benefit offered to contractors: They will be able to take credit for their lower-tier subcontractors' small business utilization. That benefit, however, comes with strings attached. For instance, contractors will have to assure the Government that they are monitoring lower-tier subcontractors' compliance with their subcontracting plans. This will require contractors to work more closely with their lower-tier subcontractors and amend their subcontract agreements to allow them more visibility into subcontractors throughout their supply chain.

We will continue to monitor this development including the issuance of the final rule.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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