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Focus on Regulation

SBA Places New Small Business Subcontracting Plan Compliance Requirements on Prime Contractors

Marta Anne Thompson, an Associate in Hogan Lovells’ Government Contracts Practice, contributed to this post.

On July 16, 2013, the U.S. Small Business Administration (SBA) released a final rule amending the small business subcontracting rules that apply to prime contractors.  The rule, which implements provisions of the Small Business Jobs Act of 2010, imposes three new notice obligations on contractors in an effort to increase contractor compliance with small business subcontracting plans, and encourage timely payment to small business subcontractors.

First, under the new regulations prime contractors will be required to notify the Contracting Officer (CO) in writing if they pay a small business subcontractor a reduced price upon the subcontractor’s completion of its responsibilities, or if payment to the subcontractor is 90 days past due for goods or services that the subcontractor has provided, and for which the Federal agency has already paid the prime contractor.  

Second, prime contractors will be required to notify the CO if they do not utilize a small business subcontractor that was used in preparing the bid or proposal.  A small business concern is determined to have been “used” in this process if: (1) it has been referenced in the bid, proposal, or associated subcontracting plan as a subcontractor; (2) the offeror has an agreement in place with the small business concern to subcontract a portion of the proposed work; or (3) the small business concern drafted a portion of the bid or proposal, or the concern’s pricing or technical expertise was used by the offeror in preparing the bid or proposal, and there is “written evidence of an intent or understanding that the small business concern will be awarded a subcontract for the related work if the offeror is awarded the contract.”

Third, if at the conclusion of the contract the prime contractor has not met the small business subcontracting goals set forth in its subcontracting plan, the prime must submit to the CO a written explanation as to why it did not meet the plan goals.   

The rule does not provide penalties for a contractor that fails to self-report, but it does assert that the notification requirement is statutory, and states that subcontractors may inform COs directly if a prime has violated the reporting requirement. 

Finally, the rule clarifies that the CO is responsible for monitoring and evaluating a prime contractor’s compliance with its small business subcontracting plan.  Any written notifications that a CO receives from a prime contractor with respect to the prime’s small business subcontracting responsibilities may be considered by the CO when evaluating whether the prime made a good faith effort to abide by the small business subcontracting plan, and when rating the prime contractor for past performance purposes.  In addition, any evidence of disputed payments to subcontractors may also be used by the CO in evaluating whether the contractor should be recorded in the Federal Awardee Performance and Integrity Information System (FAPIIS) as having a history of unjustified untimely or reduced payments.

The new regulations become effective on August 15, 2013.