LawFlash

Government Contractors: House Bill Increases Significance of Small Business Subcontracting Plan Compliance

July 05, 2022

The US House of Representatives recently passed HR 7694, the Strengthening Subcontracting for Small Businesses Act of 2022, which aims to amend the Small Business Act to require the federal government to consider prior compliance with a subcontracting plan when evaluating an offeror’s past performance.

The June 8 bill was among a group of seven bipartisan bills targeting the improvement of operation and oversight of Small Business Administration (SBA) programs by encouraging small business development, providing increased accountability for small business pandemic-related fraud, developing the small business workforce, and supporting small business government contractors.

The bill would reward prime contractors with a strong history of working with small businesses and complying with the subcontracting plans they submit to federal agencies when bidding on government contracts. As a result, large businesses would be encouraged to subcontract to small businesses in an effort to achieve those small business subcontracting goals.

Evaluating Small Business Subcontracting Offers

The Small Business Act currently designates two significant factors for evaluating offers where the agency “determines that the contract offers a significant opportunity for subcontracting”:

  1. The rate provided under the offeror’s small business subcontracting plan for small business participation on the contract.
  2. When evaluating past performance of the offeror, the extent to which the offeror achieved its small business participation goals.

See 15 USC § 637(d)(4)(G). The “rate provided” refers to the participation goals expressed as a percentage of products and services to be subcontracted to small businesses.

The bill would broaden application of these significant factors in two important ways.

First, it would require a federal agency to consider these factors when evaluating offers for any contract that requires a subcontracting plan, not only for those with a significant opportunity for subcontracting. This expansion would increase the scope of contracts for which compliance with a subcontracting plan would be considered.

Second, and related to the first factor above, the bill would require federal agencies to evaluate the description of the extent an offeror proposes to use small business subcontractors, rather than simply considering the rate of participation.

Federal Acquisition Regulation (FAR) 19.704 outlines what is required in a small business subcontracting plan, which includes goals for subcontracting efforts to provide fair opportunities to compete for subcontracts, a statement of dollars planned to be subcontracted, a description of the supplies and services to be subcontracted, the method used to develop subcontracting goals and potential sources, and a description of the “duties” or good-faith efforts the offeror will make to ensure a fair opportunity to compete—among other statements and assurances. Failure to make a good-faith effort to comply with the subcontracting plan may result in liquidated damages under FAR 52.219-16.

Certain federal contracts awarded to large businesses must include small business subcontracting plans that detail the goals and efforts of the prime contractor to award subcontracts to small businesses. Generally, this applies to contracts in excess of $750,000 for goods or services and $1.5 million for construction, including for commercial and COTS items, when opportunities for subcontracting exist.

Subcontracting on a larger government project provides an opportunity for small businesses to enter into and expand participation in government contracting. However, there is concern that a lack of contractor compliance with subcontracting plan goals and inconsistent agency oversight of small business subcontracting plans—both before and after contract awards—results in fewer opportunities for small businesses.

Considering Attainment of Goals

The bill would require agencies to consider not only the goals of the subcontracting plan, but the content of that plan and whether the stated goals were attained. In doing so, the bill increases the transparency and oversight of small business subcontracting, which has been promoted in various manners over the last few years.

In June 2020, the Government Accountability Office published a report on small business subcontracting, recommending several opportunities for improvement in the oversight of contractor compliance with subcontracting plans. The SBA updated its rules on subcontracting plans in late 2019 to increase accountability of large prime contractors in meeting subcontracting plan goals—making it a material breach of contract if a contractor fails to comply in good faith with the requirement to submit reports and cooperate with agencies to determine plan compliance. The FAR followed suit in an updated rule effective September 10, 2021, which eliminated inconsistencies between the FAR and the updated SBA rule. Making subcontracting plans and plan performance significant factors for consideration of large business offerors is likely to incentivize those offerors to utilize small businesses, document such usage, and actively monitor compliance with the goals of their subcontracting plans.

Next Steps

The bill serves as a reminder to federal contractors that Congress is focused on small business subcontracting in federal procurement. With strong bipartisan support, the Strengthening Subcontracting for Small Businesses Act of 2022 is expected to pass the Senate.

Contractors should be prepared to review their current policies to ensure that all small business subcontracting plans are being managed appropriately and the subcontracting plan manager is adequately documenting the company’s good-faith efforts to meet the subcontracting goals identified in the plan.

In the event a contractor falls short of the stated goals, documentation supporting the company’s good-faith effort will be important to show that the contractor did what it said it would do in an attempt to meet those goals, and thus fulfilled its good-faith effort requirement.

Contacts

If you have any questions or would like more information on the issues discussed in this LawFlash, please contact any of the following:

Dallas
Sheila Armstrong
Michael A. Cumming

Washington, DC
W. Barron A. Avery
Katie Hilferty
Laura M. Gronauer

Houston
Casey Weaver
Sarah-Jane Lorenzo