SBA Clarifies Subcontracting Plan Rules

The SBA recently issued a final rule concerning numerous aspects of small business contracting. In previous posts, we wrote about a few parts of the rule, including changes to the limitations on subcontracting. The new rule also clarifies some important facets of the rules governing subcontracting plans.

These rules are intended to make it easier to hold large business prime contractors accountable for meeting the goals of their small business subcontracting plans. By the same token, the rules should help small business subcontractors by ensuring small businesses are doing more of the subcontracting.

In line with the 2017 NDAA, SBA is updating its rules found at 13 C.F.R. § 125.3(d) so that it will be a material breach of a contract or subcontract if a contractor with a subcontracting plan fails to comply in good faith with the requirement to submit reports and cooperate with agencies to determine subcontracting plan compliance. In addition, agencies can consider a breach of these subcontracting plan reporting duties in their past performance evaluation.

The rule also changes one item that caused confusion in the proposed rule. While prime contractors must “must provide contracting officers with a written explanation of why they are changing a small business subcontractor” they do not have to get prior approval.

The rule provides examples of actions that could be considered “failure to make a good faith effort to comply with a subcontracting plan” at 13 C.F.R.  125.3(d)(3)(ii). Contractors should take a close look at these examples. But here are some highlights:

  • Turning in subcontracting plan reports late.
  • Not paying small business subcontractors on time.
  • Not having a designated employee to monitor the subcontracting plan.
  • Failure to maintain records or procedures to show compliance with subcontracting plan requirements.
  • Not doing market research (such as outreach, industry days, and database searches) to identify small business subcontractors.

Based on this list, prime contractors should ensure they have robust subcontracting plan policies in place. That way, if questioned, the prime contractor can point to the contemporaneous records of how it is meeting its subcontracting plan requirements.

But contractors also have some additional rights under the rules. As part of the rule, contractors will have the opportunity to correct findings of subcontracting compliance reviews. 13 C.F.R. § 125.3(d)(3)(ii)(F). Plus, contractors retain the right to challenge a bad past performance evaluation as they did in the past. Contractors accused of acting in bad faith on their subcontracting plans will be able to tell their side of the story.

The rule became effective December 30. Hopefully, it can make subcontracting plans a little easier to enforce, so that more subcontracting dollars go to small business subcontractors.