SBA Proposes Credit For Lower-Tier Subcontracts

Large prime contractors operating under individual subcontracting plans would receive credit for small businesses performing at any subcontracting tier, according to a proposed rule issued yesterday by the SBA.

The proposed rule also requires large primes to assign a NAICS code and size standard to “solicitations” for subcontracts–a notion that may come as a surprise to prime contractors, many of whom do not typically issue formal subcontract solicitations.

The proposed rule implements Section 1614 of the National Defense Authorization Act of 2014.  This legislation “would allow an other than small prime contractor that has an individual subcontracting plan for a contract to receive credit towards its small business subcontracting goals for subcontract awards made to small businesses at any tier.”

The proposed rule notes that, under current law, “a prime contractor generally receives credit toward its small business subcontracting plan goals for awards made at the first tier level” but not for lower-tier awards.  That will change under the proposed rule, which will allow prime contractors under individual subcontracting plans to claim credit for lower-tier subcontract awards made to small businesses and socioeconomic subcategories of small businesses (SDB, HUBZone, SDVOSB, and WOSB).

Predictably, the SBA is concerned that some large primes might try to game the system by counting the same dollars at multiple tiers.  The proposed rule prevents this, stating “[t]he actual subcontracting dollars are only reported once for the same award to avoid double counting the dollars . . ..”

The proposed rule also clarifies how small business status is to be determined at the subcontracting level.  Many large prime contractors (and small subcontractors) erroneously believe that the prime contract’s NAICS code and size standard “flow down” to subcontracts.  Not so.  Under current law, a large prime contractor is responsible for assigning the appropriate NAICS code and size standard to it subcontracts.  The proposed rule would go farther and require large prime contractors to assign NAICS codes and size standards to solicitations for subcontracts:

The contractor must assign to the solicitation and the resulting subcontract the NAICS code and corresponding size standard that best describes the principal purpose of the subcontract (see § 121.410 of this chapter). The prime contractor may rely on a subcontractor’s electronic representations and certifications, if the solicitation for the subcontract contains a clause which provides that the subcontractor verifies by submission of the offer that the size or socioeconomic representations and certifications are current, accurate and complete as of the date of the offer for the subcontract. Electronic submission may include any method acceptable to the prime contractor including, but not limited to, size or socioeconomic representations and certifications made in SAM (or any successor system). A prime contractor or subcontractor may not require the use of SAM (or any successor system) for purposes of representing size or socioeconomic status in connection with a subcontract.

This, of course, begs the question: does the SBA mean to require large prime contractors to issue formal solicitations for their subcontracts?  In my experience, most subcontracts are not awarded as the result of competitive subcontract solicitations.  Assuming that the SBA does not mean to impose such a burden, how should large primes and their small subcontractors interpret the rule?  Will the subcontractor’s signature on a proposed subcontract constitute an “offer for the subcontract”?  Hopefully the SBA will provide some clarification.  (Speaking of clarification, the SBA is accepting comments on the proposed rule for the next 60 days.  To file a comment, simply follow the instructions in the proposed rule.)

Allowing large primes to receive credit for lower-tier subcontracting is a commonsense idea, and one that hopefully will result in the award of more lower-tier subcontracts to small businesses.  I will keep you updated on the progress of the proposed rule.

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