Changes to the Federal Acquisition Regulation’s (FAR) small business subcontracting rules have been slow in coming, but the FAR Council is finally catching up with the Small Business Administration (SBA) in making regulatory modifications to implement a few changes intended to help prime contractors reach their small business subcontracting goals as required by Section 1614 of the National Defense Authorization Act of 2014 (2014 NDAA). Specifically, the changes focus on aiding prime contractors possessing an individual subcontracting plan for a contract with a single executive agency. Now, in such instances, the prime contractor will receive credit toward its subcontracting goals for awards made to small business concerns employed at any tier by subcontractors through their respective subcontracting plans. This should be helpful news to prime contractors.
The proposed changes to the FAR track the SBA’s rule change which revised 13 C.F.R. 125.3 A(1)(i)(c) to implement this new method of earning subcontracting goals credit, and also introduce a requirement that the prime contractor have two sets of goals in its individual subcontracting plan: one for the prime contractor’s direct subcontract awards, and one for subcontracts awarded at any tier by other than small business subcontractors with individual subcontracting plans. Under the SBA rule – and, likely, the final FAR rule – the prime contractor’s performance is to be evaluated based on its combined performance under its “first-tier” and “lower-tier” subcontracting goals.
The proposed FAR rule, published June 26, 2019, details many potential amendments to the FAR that will provide much-needed clarity for contractors of all sizes by updating Subparts 19.7, 42.15, and 52.2 of the FAR in four key ways: (1) revising the definition of “subcontract”; 2) adding definitions of first-tier and lower-tier subcontracts; (3) adding requirements that the prime contractor provide assurances that it will monitor the performance of subcontractors with regard to subcontracting plans; and (4) adding the requirement for a contractor to demonstrate that it has procedures in place to ensure subcontractors at all tiers comply with their subcontracting plans.
The Government has invited comments on the proposed rule that must be received before August 26, 2019. It has also identified four specific areas of potential concern where comments may be focused:
- The use of Individual Subcontract Reports (ISRs) submitted in the Electronic Subcontracting Reporting System (eSRS) by subcontractors with individual subcontracting plans to calculate a prime contractor’s achievement toward its lower-tier goals. This means that if the lower-tier subcontractors do not submit ISRs in eSRS, the prime contractor’s achievement of the lower-tier goals would be negatively impacted, which could, in turn, negatively impact the evaluation of the prime contractor’s performance rating.
- What nonproprietary data prime contractors need to see in eSRS in order to monitor achievement of their lower-tier goals.
- Whether a mandatory lower-tier goal would inadvertently encourage more subcontracting at the first-tier to other than small businesses, which would then subcontract to small businesses in order to meet the lower-tier goal.
- Whether there are any alternative, more efficient processes or methodologies that could be used to credit prime contractors for subcontracts awarded to small businesses at lower-tiers.
The rule, when finalized, has the potential to significantly impact the way contractors plan and manage their small business subcontracting throughout their supply chain. As a result, contractors should begin assessing existing subcontracting plans to determine how these changes can be advantageously incorporated into those plans. They should take advantage of them to the extent that they can. Small business contractors, too, should begin thinking about how to position themselves to take advantage of this opportunity to enter the government supply chain at a lower-tier and provide some potential credit for larger primes. After all, the ultimate goal of the rule will be to inject more small businesses into the federal supply chain. While there are still many unknowns, including when the final rule will be issued, we can be assured that the government won’t allow contractors to take the same leisurely pace in complying with these changes that the Government took in making them. Therefore, contractors – new and old – should take the time now to ensure the changes, when they come, cause as little disruption as possible; slow and steady wins the race, but a head start never hurts.