FAR Subcontracting Plan Update: Credit for Lower Tier Subcontractors Means Lower Tier No Longer Lower Value

Updates to the SBA’s Small Business Subcontracting Plan regulations in response to the National Defense Authorization Act of 2020 Section 870 are changing the circumstances in which a prime contractor can receive credit for lower-tier subcontractors, effective November 13, 2023. Such changes make the inclusion of lower-tier subcontractors in certain situations optional and put the onus on the lower tier subcontractors to report such work to the SBA if the lower tier subcontractor wishes to receive credit. It is important to note that these changes have no effect on any first tier subcontracting requirements.

For those that may be unfamiliar, small business subcontracting plans are a requirement for federal contracts that exceed $750,000, or $1.5 million for construction contracts. A small business subcontracting plan is not needed when an award is made to a small business, there are no subcontracting opportunities, or performance will occur completely outside of the United States and its outlying areas.

But what is a small business subcontracting plan and why is it important? Well, as implemented by FAR 52.219-9 and 13 C.F.R. § 125.3, small business subcontracting plans describe how an other-than-small prime contractor will meet the small business subcontracting requirements of most federal contracts. And they are important to “provide the maximum practicable subcontracting opportunities for small business concerns.”

Prior to the most recent change, prime contractors with individual subcontracting plans were required to include information on lower-tier subcontractors. Now, prime contractors have a choice. They can elect to have their lower-tier subcontracting plans considered with their proposal in certain circumstances. This applies only in situations when the subcontracting plan applies to a single contract with one federal agency. For other situations—including commercial plans, comprehensive contracting plans, governmentwide contracts, and multi-agency contracts—contractors are prohibited from receiving credit for lower-tier subcontractors.

The rule also removes the requirement that a prime offeror submit two different sets of subcontracting goals: one for first-tier subcontractors and one for lower-tier subcontractors. However, the NDAA prohibits agencies from setting subcontracting goals at a specific tier. Therefore, SBA has updated the regulation so prime contractors are only required to submit one small business subcontracting plan regardless of the tier in which subcontractors fall. Note that if the prime contractor wants to receive credit for a lower tier subcontractor, it must incorporate the lower tier subcontractor’s own individual subcontracting plan goals.

Finally, prime contractors are now required to submit, along with offers, a statement of the types of records the will maintain to substantiate subcontracting credit. However, the prime contractors are not required to make reports for their lower-tier subcontracts. Rather, the lower-tier subcontractors must submit that information on their own.

Within the comments and responses, commenters hit on a couple of interesting points that come out of this rulemaking. One commenter requested that SBA define its role in holding subcontractors who fail to meet their lower-tier subcontracting goals accountable. In response, SBA said that, aside from the government sending “a ‘show cause’ letter that proposes debarment for subcontractors that repeatedly fail to meet their lower tier subcontracting goals,” prime contractors can accomplish their goals “by not subcontracting to firms that fail to meet subcontracting requirements.” With this, it seems as though SBA will be hands-off unless and until a contractor has failed to meet their subcontracting requirements repeatedly.

Another commenter requested extra time before the lower tier subcontracting plan was required to be incorporated into the subcontracting plans submitted with proposals, but SBA declined to do so, stating that the plans must be in place by the time of award when required per 13 C.F.R. 125.3(a).

In a response to another question, SBA recognized that contractors may not know of lower tier subcontracting opportunities when initially awarded a contract, but that any change to the subcontracting plan in place at the time of award must be submitted to the contracting officer for a contract modification.

And there you have it. Prime contractors may, but are no longer required, to provide lower tier subcontracting information to agencies or the SBA. If desired, the lower tier subcontracts for single contracts with one federal agency will now be included in the prime contractor’s individual subcontracting-plan goals. Finally, if a lower tier subcontractor wants to receive credit for its work on the lower tier subcontract, the lower tier subcontractor must have its own individual subcontracting plan.

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