Subcontracting Plans: SBA Proposes Stronger Enforcement

Large businesses’ subcontracting plans would be subject to stricter compliance standards under a SBA proposed rule introduced December 29.

The intent of the new regulations is to compel prime contractors to make good faith efforts to comply with their subcontracting plans by implementing reporting mechanisms and harsher penalties for fraudulent actions or actions made in bad faith.  Small businesses subcontractors are likely to agree that these are positive changes.

Many large businesses take their subcontracting obligations seriously, and make every effort to meet (or exceed) their goals.  But there are also the bad apples–those that continually over-promise and under-deliver when it comes to small business subcontracting.  Dealing with these bad apples have led some small businesses to become skeptical that large primes will follow through on their stated subcontracting intentions.

The SBA’s proposed regulation attempts to address this problem.  Under the new rule, a large business that identifies a small business by name in a proposal would be required to notify that small business in writing prior to identifying the small business in a proposal, bid, offer or subcontracting plan.  The hope is to discourage large business prime contractors from using the names of small businesses in proposals simply to create the appearance of an intent to use those small businesses, despite any teaming agreement or binding arrangement to do so (and despite, in some cases, the small business’s knowledge that its name has been used in this fashion).

Under current law, it is unclear to many prospective subcontractors where to complain about such violations–and contracting officers are often hesitant to get involved.  To address this problem, the proposed regulation creates a reporting mechanism which allows anyone who has a reasonable basis to believe that the prime contractor may have made a false statement with respect to a subcontracting plan to report the matter to the SBA Office of Inspector General.  In addition, any other concerns regarding compliance with subcontracting plan regulations or bad faith actions can be reported to the Government Contracting Area Office where the concern is headquartered.

The proposed regulation is also intended to improve the ways in which the government evaluates large primes’ compliance with their subcontracting plans.  Under the proposal, evaluation of a prime contractor’s subcontracting plan performance is to be completed by the contracting agency as a supplement to its compliance and follow-up reviews.  The failure of a contractor to provide a written corrective action plan after receiving a marginal or unsatisfactory rating for subcontracting plan performance or the failure to make a good faith effort to comply will not only be a breach of contract but may also be considered in any past performance evaluation.

The proposed rule would mark a strong step forward in holding large primes’ feet to the fire when it comes to subcontracting plans.  But at this stage, it is important to note that this is merely a proposed rule.  The proposed rule is not yet effective, and the final rule may vary from this proposal.

The SBA is accepting public comments on the proposed rule on or before February 27, 2015.  Instructions for submitting comments can be found in the proposed rule itself.  After the SBA receives comments, it will publish a final version of the rule, which will ultimately have the force of law.

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