If you have been following the latest news on subcontracting plan requirements, you will know that the landscape has been rapidly shifting over the past year. In response to various statutory mandates from Congress, both SBA and the FAR Councils have recently introduced proposed rules which will change the already complex existing regulatory web. The end of the changes are not in sight, as Congress continues to propose new legislation addressing subcontracting plans and agencies themselves are taking the initiative to address subcontracting issues.
We at PilieroMazza have been closely tracking the proposed changes for subcontracting plans. We are working to shape the underlying policies so the subcontracting plan rules work more effectively and efficiently for small and large contractors. The following summarizes several recent developments to help you stay up to speed on what has been happening and where subcontracting plan requirements may be headed next year.
- SBA Proposed Rule: Credit for Lower Tier Small Business Subcontracting
On December 7, PilieroMazza submitted its comments on SBA’s proposed rule (click here for the text of the proposed rule) to implement subcontracting plan directives found in the 2014 NDAA. The proposed rule would allow prime contractors with individual subcontracting plans to receive subcontracting plan credit for small business subcontractors at any tier. Currently, prime contractors can only take credit for first-tier subcontractors.
In our comments, which can be downloaded here, PilieroMazza highlighted the possibility that the proposed rule may unintentionally dis-incentivize prime contractors from awarding first tier subcontracts to small businesses. We have heard from our clients and industry partners that first tier subcontract awards allow small businesses to receive greater shares of a prime contract’s profits, and allow small businesses to gain greater direct performance experience. Our comments suggest that SBA mitigate this issue by revising the proposed rule to require firms to state, in their subcontracting plan, a separate lower-tier subcontracting goal if the firm intends to utilize lower tier subcontractors.
We also found several areas in the proposed rule where SBA needs to provide further clarification. For example, SBA should make clear that the proposed rule applies only to subcontracting plans and does not extend to agencies’ prime contract set-aside goals.
We also suggested that SBA provide examples in the regulations to clarify how contractors can avoid “double counting” small business subcontract awards. We also discussed how SBA needs to emphasize distinctions between individual and commercial plans. The regulations must be clear that requirements applying to individual plans (such as those created in the proposed rule) do not apply to commercial plans
Finally, we commented that the proposal to require prime contractors to assign NAICS codes to each subcontract solicitation should be revised to clarify that the requirement only applies to subcontracts under individual subcontracting plans and only in cases where a solicitation is utilized.
A final rule may be issued toward the end of next year.
- FAR Proposed Rule: Small Business Subcontracting Improvements
In August, PilieroMazza submitted comments on proposed changes to the FAR, which are intended to harmonize the existing FAR small business requirements with SBA’s regulations (Click here for text of the proposed rule.) Our comments highlighted potential problems in the proposed changes allowing contracting officers the discretion to establish additional goals tied to the total contract dollar value as opposed to the total subcontracted dollars for individual plans and to require subcontracting plans in instances where prime contractors grow from small to large as a result or re-representation on small contracts.
We also commented that the proposed changes should provide greater distinction between individual and commercial plans, especially for changes requiring contractors to assign NAICS codes to each lower tier subcontract or to flow down subcontracting plan requirements to subcontractors.
A total of 29 entities submitted comments on the proposed rule. A final rule may be issued by next summer, or could be delayed to coordinate with SBA’s more recent proposed rule discussed above.
- 2016 National Defense Authorization Act: Subcontracting Plan Provisions (S. 1356)
The 2016 NDAA contains multiple provisions affecting small business contractors, which we previously summarized in another PilieroMazza blog article. A few of these provisions create new mandates for agencies to better monitor and comply with the small business subcontracting goals already in effect. For example, Section 868 creates a scorecard program for evaluating agencies’ compliance with small business contracting goals, including subcontracting goals, and requires GAO to issue a report validating the methodologies used by agencies in compiling their scorecards. Section 872 also requires SBA to report to Congress any negotiated comprehensive subcontracting plan that SBA determines did not meet the subcontracting goals negotiated in the plan for the prior fiscal year.
These statutory provisions will place more emphasis on monitoring and compliance with subcontracting plans next year. We have already seen a greater focus on subcontracting plan compliance in the last few years.
- Small Business Subcontracting Transparency Act (S. 2138)
In a bill found here, Congress would amend the Small Business Act to improve the review and acceptance of subcontracting plans. Titled the Small Business Subcontracting Transparency Act of 2015 (S.2138), the bill would give agencies’ SBA procurement center representatives (PCR) or commercial market representatives (CMR) the ability to delay the acceptance of an apparently successful offeror’s subcontracting plan. If passed, the legislation would allow the PCR or CMR to impose the delay when he or she determines that an offeror’s proposed subcontracting plan fails to provide the “maximum practical opportunity for covered small business concerns” to participate in contract performance, a core tenet of subcontracting plan compliance.
Currently, before approving a proposed subcontracting plan, contracting officers are directed to “obtain advice and recommendations” from PCRs or CMRs during the negotiation process. See FAR 19.705-4(d)(7). It is unclear how active of a role they play in negotiations. Under the proposed bill, the PCR or CMR could delay the acceptance of a subcontracting plan by providing written notice to the head of the procuring activity, if the PCR or CMR determines that the proposed plan does not include the maximum practicable opportunity for covered small business contractors to participate in contract performance. The proposed bill provides for a delay of up to 30 days, while recommendations are considered to bring the plan into compliance. If an impasse remains, the legislation provides for the SBA Administrator to send the matter to the head of the contracting agency for a final determination.
There are also some exceptions in the proposed legislation. For DOD contracts, the PCR or CMR may only delay acceptance for a 15-day period, so long as the delayed acceptance period does not cause a delay of the award or of contract performance. Furthermore, a PCR or CMR would not be permitted to delay the acceptance of a subcontracting plan if the head of the contracting agency certifies that contract performance must proceed based on urgent and compelling circumstances.
If the proposed legislation passes, large contractors should expect that the negotiation process regarding the acceptability of their subcontracting plans will take on a new dimension. These contractors must formulate their subcontracting plans prepared to justify the small business participation levels, and expect SBA pushback at the outset if their plans are not up to par.
- Small Business Committee: Panel on “SBA’s ‘Fuzzy Math’ and Other Challenges for Small Contractors” Includes Subcontracting Plan Discussions
On November 18, the House Small Business Committee conducted a panel of small business stakeholders regarding issues facing small business contractors (Click here for a press release regarding the hearing.) The panel stressed that Congress should ensure that small business subcontracting opportunities are “real,” and that “subcontractors with the desire and capability are able to transition to being prime contractors.”
The Committee noted that while SBA recently reported that the federal government exceeded the statutory goal of awarding 23 percent of prime contracts to small businesses each year for the last two years,” the reality is that the federal government excluded nearly 20 percent of its contract dollars before making that determination.”
The small businesses represented on the panel advocated for stricter accountability for prime contractors’ subcontracting plan goals, and enforcement mechanisms to implement the same. This hearing may lead to more legislation next year aimed at improving the monitoring and success of subcontracting plans.
- GAO Recommends Authorization of DOD Test Program for Negotiation of Comprehensive Small Business Subcontracting Plans
Since 1990, DOD has been conducting a congressionally-directed test program related to how contractors report their subcontracting activities. The purpose of the program is to test whether using comprehensive subcontracting plans that cover multiple contracts across contractor plants, divisions, or entire companies can yield administrative cost savings and enhance small business subcontracting opportunities.
In a November report, GAO recommended that Congress permanently reauthorize the 25-year-old Test Program for Negotiation of Comprehensive Small Business Subcontracting Plans, even though DOD has never officially reported on the Test Program’s results. GAO’s report found that the program helped 12 participating companies avoid “about $18.5 million in costs through the use of single comprehensive subcontracting plans rather than multiple individual subcontracting plans.” Program participants and DOD officials whom the GAO interviewed stated that the program also has resulted in non-financial benefits, including greater company-wide awareness of small business subcontracting opportunities.
The participants GAO interviewed said that without the program, their companies might be less inclined to award subcontracts to small businesses. While the program enhances small business subcontracting opportunities, participants’ performance in meeting individual goals has varied over the years.
- Subcontracting Plan Webinar – Save the Date
On January 21, 2016, from 11 am to 12 pm, PilieroMazza will be participating in a joint webinar with Aronson, LLC to discuss subcontracting plan requirements and the latest trends. Please visit our events page, where more details on this webinar will be posted soon.
About the Authors: Jon Williams is a partner with PilieroMazza and a member of the Government Contracts Group. He may be reached at [email protected]. Katie Flood is an associate with PilieroMazza in the Government Contracts Group. She may be reached at [email protected].