Room for Improvement: Statistics Suggest It is Unclear if Large Businesses are Meeting Small Business Subcontracting Goals.

Just as agencies have established goals to award a certain percentage of their procurements to small businesses and businesses participating in socio-economic programs like the 8(a) Program, large business contractors must establish goals to include small business subcontractors in their pool of subcontractors for unrestricted awards over the applicable threshold in FAR 19.702 ($750,000 for most contracts, $1.5 million for construction contracts). While the specific goal will vary with each contract (or in some cases may be on a company-wide basis), it is rare for a contracting officer to find a large business hasn’t met the given goal. However, an investigation by GAO indicates that large business contractors aren’t meeting their small business subcontracting goals as often as the government would hope. Let’s take a deeper look at these findings.

The Gist

On November 9, 2023, GAO issued its report regarding large business compliance with small business subcontracting plans. (Helpfully, it summarizes this report very quickly here, in case reviewing the whole report isn’t particularly time-effective for you). This report has proven to be quite eye-opening. GAO reviewed six separate agencies: The Air Force, the Army, Homeland Security (DHS), Health and Human Services (HHS), Veterans Affairs (VA), and NASA. For the report, GAO interviewed contracting officers to see how large businesses were reporting their compliance with these small business subcontracting requirements. Most contracting officers said their contractors were meeting the goals, and that they rarely assigned “below satisfactory” ratings to them.

However, GAO noted that “[i]n contrast, according to government-wide data released by the Small Business Administration (SBA), many contractors reported not meeting their subcontracting goals in fiscal year 2022.” Indeed, for only 63% of completed contracts, large businesses met their small business subcontracting goal, meaning close to 40% failed to meet it. And that’s for the goals for small businesses in general. When it comes to goals for socio-economic programs, like the 8(a) Program and WOSB Program, compliance was even worse. It was as low as 35.9% of completed contracts for 2022 for SDVOSBs!

There is a substantial discrepancy here that makes it very uncertain whether contractors are complying with these small business subcontracting goals. For its part, GAO observed that “most federal agencies GAO reviewed do not report or review data on contractors’ achievement of their subcontracting goals at the agency level, as required by statute.” In the report, GAO stated:

Our selection of contracting offices was not generalizable, which may partially explain this apparent discrepancy. It is difficult to explain the differences between the contracting officers’ experiences and the government-wide data because these data generally are not broken down by agency. We have previously found that some contracting officers did not ensure that contractors submitted required ISRs and SSRs, and that some contracting officers accepted subcontracting report submissions with erroneous information on subcontracting goals.

Recommendations for Agencies and SBA

As it stands, GAO essentially feels there is not enough information being collected to tell what’s really going on. This problem it laid at the feet of the agencies. It noted that of the six agencies, only NASA was collecting information on small business subcontracting compliance as required by statute (15 U.S.C. § 637(d)(7)). After discussing the lack of compliance on the part of the agencies, GAO observed:

By periodically collecting and reviewing agencywide data, these agencies could better understand the extent to which contractors comply in good faith with their subcontracting plans and the overall success of the agencies’ small business subcontracting program, as well as ensure they are in compliance with statutory requirements. Further, they could identify opportunities to adjust their efforts or improve oversight.

At the same time, GAO also called out SBA for what it felt were insufficient numbers of “subcontracting program compliance reviews” (“SPCRs”). Apparently, for fiscal years 2021 and 2022, SBA only completed six SPCRs. It was even more concerning to GAO that despite each of the SPCRs finding that contractors generally weren’t complying with their subcontracting plans (with many companies being out of compliance both years), that further review efforts weren’t being undertaken. GAO stated “SBA has not analyzed the risk to its understanding of contractor compliance gained by conducting only six SPCRs in each fiscal year, with selection criteria that results primarily in contracts with commercial subcontracting plans.”

Good Faith Standard

Finally, GAO looked at the entire good faith standard for small business subcontracting compliance. Where large businesses fail to meet their goals, they will not receive unsatisfactory ratings if they can show they made good faith efforts to meet them, per FAR 19.705-7. While agencies noted the benefits of this standard (and GAO certainly did not recommend that this standard be abandoned), contracting officers did express frustration with how inherently subjective the standard is. It is worth noting, however, that FAR 19.705-7 provides examples of indicators of good faith (or lack thereof) for contracting officers to look out for. In any case, GAO recommends further training of contracting officers on evaluating large business compliance efforts.

Our Thoughts

Needless to say, some of the numbers from SBA’s reviews are striking. Certainly, we would not expect large businesses to always meet their subcontracting goals. That’s something that isn’t always in their control. But figures suggesting that up to two-thirds of large business contractors aren’t meeting goals for particular socio-economic programs like SDVOSBs and HUBZone businesses is concerning. We are of course aware that there may not always be businesses with those statuses available for subcontracts, which of course is why the good faith standard is needed. But we also hear of many small businesses that are eager and willing to do many types of work in the federal contracting sphere. But these numbers do raise concerns that that compliance with the small business subcontracting plans isn’t being taken seriously enough. The fact that many agencies weren’t even complying with federal statutory requirements for reporting only further solidifies this concern. Of course, we very much doubt that this was an intentional choice on the part of the agencies—it shows a marked lack of interest from the agencies, though. That is why reviews like that conducted by GAO are essential. We hope this will lead to an improvement in how agencies monitor small business subcontracting plan compliance. In turn, that will no doubt lead to more large business contractors meeting their plan goals.

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