Effective May 26, 2022, the Federal Acquisition Regulation (FAR) gives contracting officers the discretion to apply the Small Business Act (Act)—implemented by FAR Part 19—outside the United States and its outlying areas.  This final rule (Rule) could create significant business opportunities for small business government contractors capable of competing for overseas procurements. 

By way of background, the Small Business Administration (SBA) has consistently taken the position that the Act is not geographically limited and, as a result, FAR Part 19, should apply overseas.  Historically, however, SBA’s implementing regulations were silent on the Act’s application overseas and FAR Part 19 included a longstanding overseas exception, indicating that it applies only in the United States and its outlying areas.  In October 2013, after the Government Accountability Office issued a bid protest decision that gave deference to the FAR and found that the Act did not apply overseas, SBA revised its regulations to make clear that the Act applies to overseas acquisitions. 

Yet, despite SBA making clear that it intends for the Act to apply overseas, confusion continued to abound as contracting officers look to the FAR when administering contracts and the FAR’s overseas exception persisted.  And, when there are inconsistencies between SBA regulations and the FAR, contracting officers are directed to follow the FAR.  Recognizing this tension, the Civilian Agency Acquisition Council and the Defense Acquisition Regulations Council (the Councils) enacted the Rule “to support SBA’s [2013] changes” and “allow for application of FAR part 19 overseas and thereby expand opportunities for small business concerns overseas.”

In issuing the Rule, the Councils recognized that it may not always be possible to apply the Act’s small business preferences overseas due to “international agreements, treaties, local laws, diplomatic and other considerations that are unique to the overseas environment[.]”  Therefore, the Councils amended FAR 19.000(b) “to make the use of part 19 discretionary outside the United States and its outlying areas, so agencies and their contracting officers can consider these factors in the exercise of their discretion.” SBA representatives participated in the development of and concurred with the Rule.   

It is important to note that if contracting officers decide to apply set-aside procedures to overseas procurements, prime contractors will have to navigate compliance with a host of other rules, such as the Act’s limitations on subcontracting.  During the rulemaking process, commentors expressed concern that, under the Rule, “small businesses will likely have difficulties complying with the limitations on subcontracting requirements,” due to foreign laws that mandate the use of local labor or require that non-local contractors must be “sponsored” by delegating on-site performance to foreign subcontractors.  The Councils recognized these concerns but explained that it is “not practicable” to amend the FAR to list all factors that could affect overseas acquisitions. Instead, the Councils noted that concerns like these are the reason contracting officers should exercise discretion before using set aside procedures overseas.

While the Rule is discretionary, it marks a significant shift in policy that may lead to increased opportunities and potential challenges for small business government contractors.  If you would like to know more about the Rule or its impact on your company, please contact Sam Finnerty, the author of this blog, or another member of PilieroMazza’s Government Contracts Group. Special thanks to law clerk Kelly Kirchgasser for her assistance with this post.