New SBA Rule Enhances Past Performance Opportunities for Small Businesses

On August 22, 2022, the U.S. Small Business Administration (SBA) will implement a final rule that provides two new methods by which small businesses can obtain past performance credit when competing for federal prime contracts. First, the rule allows certain small business offerors to rely on the past performance of joint ventures (JV) in which they were a member. Second, the rule establishes a process by which certain small businesses can request, obtain, and rely upon past performance obtained when performing as a first-tier subcontractor. This rule greatly expands the ability of small businesses to establish a record of meaningful and relevant past performance. Key takeaways of the final rule are discussed below.

1. Expanded Past Performance Credit for JV Members

• Case law suggests that agencies may consider a JV’s experience when evaluating one of its members for a prime contract only when “the offeror had a sufficient role in the JV to make the performance relevant.” However, what that means is not always clear, and given the discretion agencies have when evaluating past performance, contractors have reason to be wary of trying to rely on JV past performance.
• Under the SBA’s final rule, a small business offeror may now clearly rely on the past performance of a JV in which it is a member, regardless of whether the other members were small businesses, provided it was involved in performance of the JV’s contract(s) and does not independently demonstrate past performance necessary for award.
• When electing to use such JV experience, the small business must: (1) identify the JV; (2) identify the JV contracts it intends to rely upon; and (3) explain what duties and responsibilities it carried out or is carrying out as part of the JV.
• The small business cannot claim past performance credit for work performed exclusively by other partners to the JV.
• No Distinction Between Prime and JV Past Performance: The final rule requires agencies to “consider the small business’ past performance for the evaluated contract or order similarly to a prime-contract past performance.”

2. Obtaining Past Performance as a First-Tier Subcontractor

• Under the final rule, certain first-tier small business subcontractors may now request past performance ratings from their prime contractors.
• The rule only applies to small businesses first-tier subcontractors under prime contracts that include subcontracting plans (i.e., generally speaking, any contract to a large business with a value over $750,000 or $1.5 million for construction).
• The eligible subcontractor must make the request for a performance rating within 30 calendar days of the completion of the prime contract’s period of performance. The prime contractor and subcontractor can negotiate a later deadline, but the prime contractor cannot impose an earlier deadline.
• The prime contractor must provide a rating to any eligible subcontractor within 15 calendar days of the request.
• The rating must utilize the five-scale rating system found in FAR 42.1503: Exceptional, Very Good, Satisfactory, Marginal, and Unsatisfactory.
• While the rating will not appear in the Contractor Performance Assessment Reporting System (CPARS), it should use the same evaluation factors.
• If the subcontractor intends to use the rating for an offer on a prime contract, it must include, at a minimum, the following evaluation factors in the requested rating: (a) technical (quality of product or service); (b) cost control (not applicable for firm-fixed-price or fixed-price with economic price adjustment arrangements); (c) schedule/timeliness; (d) management or business relations; and (e) other (as applicable).
• Under the rule, a small business member of a JV may request a past performance rating from the JV’s prime contractor where the JV performed as a first-tier subcontractor under a prime contract that included a subcontracting plan and can rely on that rating when pursuing a prime contract, provided it can establish that it was involved in performing the JV contract.
• No Relevancy Time Limit: Unlike CPARs, which need to be within three years (six years for construction and architect-engineering) to be considered relevant, the final rule provides agencies the discretion to determine what is relevant with regard to subcontractor ratings.
• No Dollar Threshold: Unlike CPARs, which need only be completed when the prime contract exceeds certain dollar thresholds, the final rule applies to all eligible first-tier small business subcontractors performing on prime contracts with subcontracting plans, regardless of subcontract value.
• No Distinction Between Prime and Subcontractor Past Performance: The final rule requires agencies to “consider the small business’ past performance for the evaluated contract or order similarly to a prime-contract past performance.”
• No Rebuttal Process: Unlike CPARs, which can be rebutted and formally challenged through the claims and appeals process, the final rule does not contain a mechanism by which a subcontractor can challenge the rating assigned by a prime contractor. Subcontractors could try to negotiate a rebuttal process as part of their subcontract, something which SBA noted when enacting the rule.
• Consequences for a Prime Failing to Provide a Required Rating: The prime’s obligation to respond to an eligible subcontractor request will be included in its subcontracting plan. Thus, failing to provide a rating could subject the prime to penalties including: (1) termination for default or the withholding of award fees; (2) a lower past performance rating under the subcontracting element; (3) liquidated damages for failing to make a good faith effort to comply with the subcontracting plan; and (4) even debarment if the failure is willful or repeated. The final rule also encourages subcontractors to notify the contracting officer of the prime’s failure to provide a required rating.

3. What About Prime Contracts that Do Not Require Subcontracting Plans?

• Since the rule only applies to small business first tier-subcontractors under prime contracts with subcontracting plans, it does not benefit other subcontractors seeking past performance ratings from their primes. However, in enacting the rule, SBA noted that a prime contractor could still choose to provide a past performance rating to a first-tier small business subcontractor, even if the contract did not include a subcontracting plan and, in turn, an agency could consider that rating at its discretion.

While the final rule promises to enhance the ability of certain small businesses to obtain qualifying past performance when pursuing prime contracts, there will no doubt be questions and concerns as subcontractors and prime contractors begin navigating the rule’s many requirements. If you have questions about the new rule and how best to integrate it into your business practices, please contact the author of this blog, Sam Finnerty, or another member of PilieroMazza’s Government Contracts Group. Special thanks to Kelly Kirchgasser for her assistance drafting this blog.