By Katie Flood

Right before the tail end of 2016, SBA delivered its long-awaited Final Rule regarding lower-tier small business subcontracting plan credit. Implementing directives initiated by Congress in the 2014 National Defense Authorization Act, the Final Rule allows other than small prime contractors with individual subcontracting plans to receive credit toward small business subcontracting goals for subcontract awards made to small businesses at any tier, to the extent reported on the subcontracting plans of its lower tier subcontractors.

The Final Rule also implements additional, affirmative requirements for prime contractors to monitor subcontractors’ performance and compliance toward reaching the goals set out in their own subcontracting plans, as well as their compliance with subcontracting reporting requirements. Prime contractors must now ensure that their subcontractors are adopting their own subcontracting plans when required, and provide review and approval over those plans. Prime contractors must monitor their subcontractors’ compliance with their approved plans, and ensure that the subcontracting reports are being submitted through acknowledged receipt.

Moreover, they must compare the performance of their subcontractors to their individual subcontracting plans and goals, and discuss performance issues, when necessary, to ensure that their subcontractors are making good-faith efforts to comply with their subcontracting plans. A prime contractor must also provide a “written statement” of the types of records it will maintain to affirmatively demonstrate procedures which it has adopted to ensure that subcontractors of all tiers comply with their subcontracting plan goals and requirements.

Subcontracting plans are required for all other than small prime contractors and subcontractors participating on unrestricted procurements or subcontracts over $700,000, $1.5 million for construction of public facilities. Part of the subcontracting plan obligation is to make a good faith effort to meet or exceed the small business subcontracting goals established in the contractor’s subcontracting plan. Failure to make this effort could result in liquidated damages, default termination, and negative performance reviews.

The Final Rule also provides some needed clarification regarding how a contractor’s compliance with its individual subcontracting plan will be determined. Prime contractors are now required to establish two sets of small business subcontracting goals for their individual subcontracting plans:  one goal for the first tier, and one goal for lower tier subcontracts awarded by their other than small subcontractors. Both prime contractors and subcontractors should only report their own individual first tier subcontracting on the Summary Subcontracting Report (“SSR”). The prime contractor’s performance will be calculated using its own reporting at the first tier for its first tier goal; the subcontractors’ first tier reports under their own plans will be used to calculate the prime contractor’s compliance with its lower tier subcontracting goal. The prime contractor’s total performance under the individual subcontracting plan will then be evaluated based on its combined performance under its first tier and lower tier goals.

In addition to finalizing the ability for prime contractors to take the lower-tier small business subcontracting plan credit, SBA also clarified that contractors must assign a NAICS code to all solicitations that are released in connection with a subcontract. Formal solicitations are not a requirement for each subcontract – however, it is important that the contractor provide some form of written notice of the NAICS code and size standard assigned to potential offerors prior to acceptance and award of any subcontract. Contractors are also allowed to rely on a subcontractor’s electronic representations and certifications, provided 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.

The Final Rule is welcome in the sense that prime contractors are now incentivized to encourage broad small business participation within all aspects of contract performance, not just at the first tier subcontract level. The Final Rule becomes effective on January 23, 2017. If you have any questions regarding these new reporting requirements or other prime contractor subcontracting plan obligations, please email Katie Flood at [email protected].

About the Author: Katie Flood is an associate with PilieroMazza in the Government Contracts Group.