As of August 15, 2013, prime contractors on federal projects must take on increased responsibility and accountability for hiring small business subcontractors. The U.S. Small Business Association (SBA) has implemented certain provisions of the Small Business Jobs Act of 2010 through a final rule that amends the regulations governing small business subcontracting. 78 Fed. Reg. 42391. The final rule, housed in 13 C.F.R. 125.3, is part of an effort to increase small subcontractor participation in government contracts and it signifies that the SBA is on the hunt for prime contractors who “bait and switch” the subcontractors. The increased scrutiny subjects prime contractors to several burdensome obligations.
For “covered contracts” that require a prime contractor to create a subcontracting plan (contracts or modifications exceeding $650,000 or, in the case of construction of public facilities, $1,500,000), the prime contractor is charged with “ensuring that small business concerns have the maximum practicable opportunity to participate in the performance of the contract,” and further must conduct market research to identify and vet small business subcontractors.
A prime contractor is responsible for submitting timely and accurate Individual Subcontract Reports and Summary Subcontracting Reports in the eSRS system, and the rule clarifies the types of contracts and data that must be reported. A prime contractor must cooperate in all reviews of subcontracting plan compliance and provide supporting documentation to demonstrate its actual achievement or good faith effort to meet small business subcontracting goals. The rule clarifies that the contracting officer has primary monitoring responsibilities, and prohibits a prime contractor from preventing a subcontractor from discussing any material matter germane to payment or utilization with the contracting officer.
Specifically, a prime contractor:
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Must provide pre-award written notification to unsuccessful small business offerors on all subcontracts over $150,000 for which a small business concern received a preference
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Must represent to the contracting officer that it will make a good faith effort to actually utilize the small business concerns in the same scope, amount, and quality as “used” in preparing and submitting the bid or proposal
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“Used” means that the prime contractor (i) referenced the small business concern in its bid or proposal or the subcontracting plan; (ii) had a written agreement with the small business specific to the contract; or (iii) the small business drafted portions of the proposal with the intent or understanding that it would perform the work (as evidenced in a writing, such as e-mail)
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If the contractor fails to utilize the small business subcontractor, or under-utilizes the subcontractor, it must submit a written report to the contracting officer explaining the failure, prior to invoicing for final payment and the close-out
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Must explain in writing to the contracting officer if the contractor reduces the payment to the small business subcontractor or if payment is more than 90 days past due
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Repeat and unjustified reductions or delays have negative past performance implications and may be added to the Federal Awardee Performance and Integrity Information System (FAPIIS)
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Must, at the conclusion of the contract, explain to the contracting officer in writing the reason it did not meet all of the small business subcontracting goals in the subcontracting plan
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The contracting officer will determine whether the contractor used its good faith efforts to meet the goals
With respect to multiple-award or indefinite delivery/quantity contracts, prime contractors must submit small business subcontracting reports for individual orders on an annual basis.
Enforcement provisions are somewhat lacking in this rule and its effects remain questionable. Still, prime contractors should take care when considering “optimistic” subcontracting plans, and should be realistic about their reliance on small business concerns in bids or proposals, including the specific scope, amount and quality of work delegated to such small businesses. If a prime contractor ultimately does not contract with a small business subcontractor used in its prior bid, proposal, or plan, or reduces the scope of work, it must report and justify its decision and convince the contracting officer that a “bait and switch” was not afoot.
Under the new SBA rule, any payment reductions or delays carry the significant risk that a contracting officer will make a determination of bad faith or non-compliance. At the behest of commenters, the SBA added a provision allowing contractors to explain and justify their good faith efforts to comply with plans and bids, but the contracting officer’s discretion regarding past performance evaluations and FAPIIS implications may impact future work and expose a prime contractor to false claims or other federal procurement liability.
Whether or not this new rule has teeth, it provides affirmative reporting obligations which, in larger construction projects, will require prime contractors to remain vigilant in their use and treatment of small business subcontractors and increase their interactions with contracting officers.
