The FAR requires most large business contractors to have a plan approved by the government to subcontract a certain amount of their work to the various types of small business contractors (i.e., SDB, WOSB, SDVOSB, etc.). In the last few years, we have seen a noticeable increase in activity related to these subcontracting plans.
SBA changed its subcontracting rules in July 2013 and since then has stepped up its audits to determine how well contractors are complying with their subcontracting plans. The FAR, which has lagged behind the updated SBA regulations, is now poised to catch up in several respects based on proposed changes released on June 10, 2015.
One of the more controversial aspects of the 2013 SBA rule change was the requirement that a prime contractor must assign a NAICS code and size standard to each subcontract. While perhaps reasonable for individual subcontracting plans that would have subcontracts tied to a particular federal contract, assigning a NAICS code and size standard to every purchase order and invoice is simply not feasible for many large contractors with commercial subcontracting plans.
These contractors may have thousands of vendors, and many times that number of invoices and purchase orders issued each year. A lot of these contractors’ purchases may be commercial rather than governmental. The proposed FAR changes attempt to mirror the SBA requirement by requiring that each subcontracting plan include “[t]he NAICS code and corresponding size standard of each subcontract…” For many contractors, particularly those with commercial subcontracting plans, it will likely be infeasible or too onerous to list the NAICS code and size standard for every subcontract in their subcontracting plan.
There are other FAR provisions not proposed to change that indicate contract-by-contract recordkeeping requirements, such as the assignment of NAICS codes, are relaxed for contractors with commercial subcontracting plans. The final FAR provisions should more clearly indicate that commercial subcontracting plans are exempt from the requirement to list a NAICS code and size standard for each subcontract in the commercial subcontracting plan.
The proposed changes also harmonize the FAR with SBA regulations concerning penalties for failing to comply in good faith with a subcontracting plan. If adopted, FAR 52.219-9 would indicate that failing to comply with a subcontracting plan shall be a material breach of the contract and may be considered in any past performance evaluation of the contractor.
According to the proposed rule, prime contractors should rely on their subcontractors’ size and status representations in SAM.gov. A prime contractor could rely on a written size or status representation from a subcontractor only if the subcontractor does not have a SAM.gov profile.
Other proposed changes would give more discretion to contracting officers. For example, contracting officers would have discretion to establish subcontracting goals for individual subcontracting plans based on total contract value, in addition to the required goals based on total subcontracting dollars.
Contracting officers would also have discretion to require a subcontracting plan when a prime contractor’s size status changes to large as a result of a recertification for a contract containing FAR 52.219-9. It appears that this requirement would not apply to set-aside contracts on which a contractor recertifies as large, since FAR 52.219-9 does not need to be included in a set-aside contract.
The reporting obligations for prime contractors would expand in some respects and contract in others. For example, prime contractors with individual subcontracting plans would be required to report order-level subcontracting information for multiple-award contracts used by multiple agencies. Conversely, the proposal would decrease the reporting obligation for DoD and NASA contracts from semi-annual to annual, and would also eliminate the requirement for prime contractors to submit separate reports to each DoD component for construction and related maintenance and repair contracts.
Finally, the proposed changes to FAR 52.219-9 would incorporate provisions in the current SBA regulations that require the prime contractor to make a good faith effort to utilize subcontractors in contract performance to the same or greater extent as envisioned at the proposal stage. If a prime contractor does not utilize a subcontractor as envisioned, the prime contractor would be required to submit a written explanation to the contracting officer within 30 days after contract completion. This proposal does not contain much “teeth” for the small business subcontractor to get its expected share of the work during contract performance. However, the proposed rule does make clear that the subcontractor is permitted to communicate directly with the contracting officer regarding payment or utilization on the project.
Comments on the proposed changes are due on August 10, 2015. Interested large and small contractors should submit comments—particularly large contractors with commercial subcontracting plans—to get greater clarity on the impact of the changes for commercial plans and to encourage modification or elimination of proposals that are not feasible. Contractors also need to comment on the extent to which the collection of information required under the proposals goes too far and is more than is necessary to serve the aims of the subcontracting program.
Please email me at jwilliams@pilieromazza.com if you would like assistance in preparing comments for your company or to discuss the proposed changes.
About the Author: Jon Williams is a partner with PilieroMazza and a member of the Government Contracts Group.