New Rules and Other Tips for Government Contractors Working With Small Businesses

Most federal contracts require the awardee to enter into a subcontracting plan that includes percentage goals for using various subcategories of small businesses. The requirement applies to federal contracts exceeding $750,000 ($1.5 million for construction), unless the awardee is a small business, the contract does not offer subcontracting opportunities, or the contract will be performed entirely outside the United States and its outlying areas.

At one time, the regulations of the U.S. Small Business Administration (SBA) permitted a prime contractor to count only its first-tier subcontracts toward the goals in its subcontracting plan. A December 2016 final rule, however, mandated that prime contractors receive credit for lower-tier subcontracts under certain criteria. Then, in Section 870 of the National Defense Authorization Act of 2020, Public Law 116-92, Congress changed the criteria for receiving such credit, and SBA has at long last announced a final rule that implements those statutory changes.

Section 870 made three changes to subcontracting plan requirements. Previously, it was mandatory for contractors with individual subcontracting plans to take credit for lower-tier subcontracts. This sounds good, but it imposed a burden on contractors to monitor and keep records of their subcontractors’ subcontracting. Section 870 and the new final rule remove the mandate and state that prime contractors “may elect to receive credit” either for first-tier subcontracts on their own, or for subcontracts at any tier.

Additionally, the prior rule only allowed for contractors to receive lower-tier subcontracting credit if the contractor had two sets of subcontracting goals — another administrative burden. A contractor needed to have a goal for small-business subcontracting at the first tier, and an additional goal for small business subcontracting at lower tiers. Section 870 prohibits agencies from setting tier-specific goals for prime contractors that use lower-tier credit, and the new final rule revises the regulations so that all prime contractors will have only one set of subcontracting goals.

Lastly, the new final rule implements the requirement from Section 870 that contractors include in their subcontracting plans a statement of the types of records they will maintain to substantiate subcontracting credit.

All of the above relates to the general requirement that prime contractors create Small Business Subcontracting Plans, either for specific contracts or for an entire plant or division of the company (see 13 C.F.R. 125.3 and FAR subpart 19.7). Whether or not a contractor is making good faith efforts to comply with such a plan is what is known as a “contract administration issue,” for example, something for the contracting agency to determine as performance progresses.

Separately, agencies sometimes include “small business participation” and/or "subcontracting" as an evaluation factor in a request for proposals. When submitting a proposal in response to such an RFP, offerors should read the language carefully to see what they will or will not get evaluation credit for. Unlike a contract administration issue, the agency’s failure to properly evaluate an offer under the these, or any, evaluation factors can give rise to a bid protest.

More than 20 years ago, this writer successfully litigated a bid protest in which the Government Accountability Office (GAO) held that agency’s evaluation of the protester’s proposal under a “small business program support” evaluation criterion was unreasonable. There, the evaluation criteria stated: “Evaluation will include the extent of participation of small businesses in terms of the total value of the acquisition.” “Extent of participation” does not necessarily equate to “subcontracting,” and the protester submitted its proposal as a teaming agreement/joint venture between a large business and a small business, with the small business designated to perform 40% of the work. That is far more than large contractors usually subcontract. Nevertheless, ignoring the express language of the evaluation criteria, the agency considered only the protester’s proposed small business subcontracting, not whether the protester’s performance itself entailed the participation of a small business, and GAO found that that was improper. (Burns and Roe Services Corporation, B-291530, 2004 CPD ¶ 85)

Some practical takeaways:

• If you are a large business, familiarize yourself with the new regulations and comply with them.
• If you are a small business, consider taking advantage of subcontracting opportunities as a way to break into government contracts.
• Large or small, always read a solicitation’s evaluation criteria carefully and tailor your proposal to get the maximum benefit.