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The Department of Defense (DoD), General Services Administration (GSA), and National Aeronautics and Space Administration (NASA) published a final rule, effective September 10, 2021, that updates the Federal Acquisition Regulation to conform to two changes regarding small business subcontracting, namely by providing examples of what does—and what does not—constitute good faith efforts to comply with a small business subcontracting plan, as well as when indirect costs must be used in commercial subcontracting plans.

The NDAA at issue:  Section 1821 of the National Defense Authorization Act (NDAA) for Fiscal Year (FY) 2017 (section 1821(c) of Pub. L. 114–328; 15 U.S.C. 637) requires the Small Business Administration (SBA) to amend its regulations to provide examples of activities that would be considered a failure to make a good faith effort to comply with a small business subcontracting plan.

SBA Implementation:  SBA issued a final rule at 84 FR 65647, dated November 29, 2019, to implement section 1821 of the NDAA for FY 2017.  SBA added a non-exclusive list of examples of what could and could not be considered good faith efforts to comply with a small business subcontracting plan at 13 C.F.R. § 125.3(d)(3).

Proposed Rulemaking:  DoD, GSA, and NASA published a proposed rule on June 3, 2020, at 85 FR 34155, to implement section 1821 of the FY 2017 NDAA.

Key Change of the Rule:

As noted above, SBA updated 13 C.F.R. § 125.3(d)(3) in 2019 to provide contracting officers guidance on evaluating whether a prime contractor made a good faith effort to comply with its small business subcontracting plan.  The final rule updates FAR 19.705-7, Compliance with the subcontracting plan, to provide similar examples of activities that contracting officers may consider when evaluating whether the prime contractor made a good faith effort to comply with its small business subcontracting plan.  Per commentary in the rule, this change provides contracting officers with consistent and uniform examples to identify and hold large prime contractors accountable for failing to make a good faith effort to comply with their subcontracting plans.

Similar to the SBA final rule, FAR 19.705-7(d) now discusses the corrective actions available to contracting officers when a contractor fails to make a good faith effort to comply with the subcontracting plan and that, in this context, “a failure to make a good faith effort to comply with a subcontracting plan is a material breach, sufficient for the assessment of liquidated damages, and also for other remedies the Government may have.”  The final rule also updates FAR 19.705-6 to address the contracting officer’s responsibilities vis-à-vis a small business subcontracting plan, including initiating action to assess liquidated damages in accordance with FAR 19.705-7.

Commentary in the final rule makes clear that it does not implicate when a small business subcontracting plan is required—merely what activities would be considered a failure to make a good faith effort to comply with such a plan. That means that the rule does not change (1) whether a small business subcontracting plan is required in the acquisition of commercial items, including commercially available off-the-shelf items, nor (2) does it expand the applicability of the small business subcontracting plan requirement to contracts at or below the simplified acquisition threshold.

Other Key Change of the Rule:

SBA amended 13 C.F.R. § 125.3(c)(1)(iv) to require that large prime contractors with commercial subcontracting plans include indirect costs in the commercial subcontracting plan goals.  As explained in the rule, large prime contractors that have a commercial subcontracting plan report on performance through a Summary Subcontract Report (SSR) in the Electronic Subcontracting Reporting System (eSRS).  The FAR required—as SBA’s regulations required prior to publication of SBA’s final rule—that a contractor using a commercial subcontracting plan include all indirect costs in its SSR.  At the same time, the FAR did not require contractors to include indirect costs in their commercial subcontracting plan goals, which led to inconsistencies when comparing the data reported in the SSR to the goals in the commercial subcontracting plan.

As a result, the final rule updates FAR 19.704(d) and FAR clause 52.219-9(g), Small Business Subcontracting Plan, to require that prime contractors with commercial subcontracting plans include indirect costs, with certain exceptions, in their subcontracting goals.  The exceptions are as follows: employee salaries and benefits; payments for petty cash; depreciation; interest; income taxes; property taxes; lease payments; bank fees; fines, claims, and dues; original equipment manufacturer relationships during warranty periods (negotiated up front with the product); utilities and other services purchased from a municipality or an entity solely authorized by the municipality to provide those services in a particular geographical region; and philanthropic contributions.

Per the final rule, these changes ensure that the data reported in the SSR is consistent with the goals in the commercial subcontracting plan.