FAR Update: Good Faith in Small Business Subcontracting

For many contracts, large businesses must establish and have the government approve a subcontracting plan that details the goals and efforts the large prime contractor will take to award subcontracts to various types of small businesses. Well, how does the government hold large businesses accountable for these goals? The FAR will soon have a final rule addressing good faith efforts to comply with a small business subcontracting plan.

Back in late 2019, SBA updated its own rules on subcontracting plans to address. The SBA rules were intended to make it easier to hold large business prime contractors accountable for meeting the goals of their small business subcontracting plans. In line with the 2017 NDAA, SBA updated 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. 

Now, the FAR has followed suit in a rule effective September 10, 2021. This will eliminate the inconsistencies between the FAR and SBA rules, which is always nice so both contractors and agencies are on the same page when it comes to subcontracting plans. Here’s a little background on the changes.

Small business subcontracting plans are required from large prime contractors when a contract is expected to exceed $750,000 ($1.5 million for construction) and has subcontracting possibilities. These plans are required for the acquisition of commercial items and COTS items.

FAR 19.704 lists what is required in these plans. This includes goals for subcontracting efforts to provide fair opportunities to compete for subcontracts for various types of small business concerns, including small business, veteran-owned small business, service-disabled veteran-owned small business, HUBZone small business, small disadvantaged business, and women-owned small business concerns. Failure to make a good faith effort to comply with the plan can result in liquidated damages under FAR 52.219-16.

There are two main changes in the rule. First, all indirect costs, with certain exceptions, are included in commercial plans and summary subcontract report (SSRs). Second, revised FAR 19.705-7 now has examples of a good faith efforts to comply with a subcontracting plan, and examples of a failure to make a good faith effort.

Here are some takeaways from the implementation of this rule.

Material Breach. The comments to the rule make clear that “a failure to make a good faith effort to comply with a subcontracting plan is a material breach, sufficient for the assessment of liquidated damages, and also for other remedies the Government may have.” So, this is not something to be taken lightly by prime contractors operating under a subcontracting plan.

Key Good Faith Actions. The rule provides examples of actions that indicated good faith efforts to comply with the subcontracting plan. Here are a few of those:

  • Market research to identify small businesses “through all reasonable means, such as searching SAM, posting notices or solicitations on SBA’s SUBNet, participating in business matchmaking events, and attending preproposal conferences.”
  • “Assisting interested small businesses in obtaining bonding, lines of credit, required insurance, necessary equipment, supplies, materials, or services.”
  • “Participating in a formal mentor-protégé program with one or more small business protégés.”

Like the SBA rule, the FAR rule now provides examples of actions that could be considered “failure to make a good faith effort to comply with a subcontracting plan” at FAR 19.705-7. 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 “terms of the contract” with them.
  • 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.
  • “If a contractor does not either correct substantiated findings or participate in subcontracting plan management training offered by the Government, it could be perceived by the contracting officer as a failure to make a good faith effort.”

But the rule is clear that agencies need to look at “the totality of the contractor’s actions” and, interestingly, mere failure “to meet its subcontracting goals does not, in and of itself, constitute a failure to make a good faith effort.” And there is an example of what may constitute a valid explanation: if there are no available small business sources for certain types of work.

Rebuttal. Note that there is an opportunity for a contractor to respond to an accusation of failure to make good faith efforts. In the rule on liquidated damages, it states: “Before the Contracting Officer makes a final decision that the Contractor has failed to make such good faith effort, the Contracting Officer shall give the Contractor written notice specifying the failure and permitting the Contractor to demonstrate what good faith efforts have been made and to discuss the matter.” As in most things in dealing with government agencies (and other aspects of life), failure to respond can be taken as an admission of fault.

This new rule is important for both large prime contractors and subcontractors. Prime contractors need to make sure they are making these good faith efforts to comply and provide actual opportunities for subcontractors. By that same token, it’s good for small business subcontractors to know about these rules as well and take advantage of these opportunities. Now that the FAR has been updated, there’s no excuse for large prime contractors not to comply and no excuse for agencies not to enforce these rules.

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