Photo of Olivia LynchPhoto of Amy Laderberg O'Sullivan

The Small Business Administration’s (SBA) final rule, Small Business Government Contracting and National Defense Authorization Act of 2013 Amendments, implements changes regarding small business subcontracting plans contained in the National Defense Authorization Act of 2013 (FY2013 NDAA).  We discuss the key changes below.  This rule becomes effective June 30, 2016, but as some of the changes impact the proposal process which can involve planning and team selection months in advance of proposal submission, contractors need to focus on the new requirements now.

Notice to Proposed Small Business Subcontractors

One of the immediate action items for contractors arising out of the final rule comes from the new requirement that if a large prime contractor identifies a small business concern (SBC) by name as a subcontractor in a proposal, offer, bid or subcontracting plan, the prime contractor must notify the SBC in writing prior to such identification. “Large prime contractors” should implement policies and procedures to ensure compliance with this pre-submission notification requirement.

Commentators seeking further clarification on how the notification requirement can be met received concise instructions from SBA in commentary to the final rule: “[t]here are two requirements: first that the notification is in writing; and second that it be given to the party in question.”

Increased Scrutiny on Prime Contractors’ Compliance with Subcontracting Plans

The final rule is likely to lead to increased scrutiny of whether prime contractors are satisfying their small business subcontracting goals over the course of performance.

First, the final rule adds a requirement that the head of the contracting agency must ensure that the agency is collecting and reporting data regarding the extent to which the agency’s contractors are meeting the goals in their subcontracting plans. Under this rule, agencies will have to “periodically” review this data for purposes of ensuring that contractors are complying in good faith with  the requirements in 13 C.F.R. § 125.3.

Second, the SBA has established a “whistleblower” mechanism to allow potential subcontractors to report fraudulent activity or bad faith behavior by a prime contractor with respect to a subcontracting plan. Pursuant to newly added 13 C.F.R. § 125.3(c)(9), anyone who has a reasonable basis to believe that a prime contractor or subcontractor may have made a false statement to the Government or prime contractor with respect to subcontracting plans must report the matter to the SBA Office of Inspector General (OIG). The rule also directs (but does not require) individuals to take all other concerns as to whether a prime contractor or subcontractor has complied with SBA regulations or otherwise acted in bad faith to Government Contracting Area office where the firm is headquartered.

Third, the final rule lays out the process whereby Commercial Market Representatives (described in 13 C.F.R. § 125.3(e) as “SBA’s subcontracting specialists”) with a reasonable basis to believe that a contractor has made a false statement to the Government or prime contractor must report the matter to the SBA OIG.

Fourth, while 13 C.F.R. § 125.3(f) currently provides for compliance reviews by the SBA, the final rule was revised to incorporate language from the FY2013 NDAA modifying the Small Business Act to state that contracting agencies also perform evaluations of a prime contractor’s subcontracting plan performance, and that SBA’s evaluations of subcontracting plan performance are completed as a supplement to the contracting agency’s review.

Penalties for Failure to Demonstrate Good Faith Compliance Augmented

Currently, the failure to demonstrate a good-faith effort to comply with its small business subcontracting plan and/or to provide a written corrective action plan following receipt of a marginal or unsatisfactory rating regarding subcontracting plan performance can subject a contractor to liquidated damages. The final rule specifies that these two occurrences will now also place the contractor in material breach of the contract and the failure to demonstrate good faith must be considered in any past performance evaluation of the contractor, thereby impacting the contractor on future procurements.

We will continue to post discussions of other important aspects of this final rule.