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Panoptic Enterprises' FEDERAL CONTRACTS DISPATCH

DATE: December 20, 2004

SUBJECT: Small Business Administration; Small Business Subcontracting

SOURCE: Federal Register, December 20, 2004, Vol. 69, No. 243, page 75820

AGENCIES: Department of Defense (DOD), General Services Administration (GSA), and National Aeronautics and Space Administration (NASA)

ACTION: Final Rule

SYNOPSIS: SBA is revising its regulations in 13 CFR 125.3, Subcontracting Assistance, to address various aspects of small business subcontracting. Of particular note is the list of factors to be considered in the evaluation of a prime contractor's performance and good-faith efforts to achieve the requirements in its subcontracting plan, and the authorization to use goals in subcontracting plans, and/or past performance in meeting such goals, as a factor in source selection when placing orders against Federal Supply Schedule (FSS) contracts, government-wide acquisition contracts (GWACs), and multi-agency contracts (MACs).

EDITOR'S NOTE: The SBA's regulations are in Title 13 of the Code of Federal Regulations (CFR). The SBA small business subcontracting regulations are in Chapter 1, Small Business Administration; Part 125, Government Contracting Programs.

For more on SBA’s proposed rule on subcontracting plan goal achievement, see the October 20, 2003, FEDERAL CONTRACTS DISPATCH “Small Business Administration (SBA); Achievement of Subcontract Plan Goals.”

For more on SBA’s rule on contract bundling which led to SBA’s subcontracting plan proposed rule, see the January 31, 2003, FEDERAL CONTRACTS DISPATCH “Federal Acquisition Regulation (FAR) and Small Business Administration (SBA); Contract Bundling,” and the October 20, 2003, FEDERAL CONTRACTS DISPATCH “Federal Acquisition Circular (FAC) 2001-17 and Small Business Administration (SBA); Contract Bundling.”

EFFECTIVE DATE: December 20, 2004.

FOR FURTHER INFORMATION CONTACT: Dean Koppel, Assistant Administrator, Office of Policy and Research, 202-401-8150, or e-mail: dean.koppel@sba.gov.

SUPPLEMENTAL INFORMATION: On January 31, 2003, SBA solicited comments on its proposed rule that would implement several recommendations in the Office of Management and Budget (OMB) report “Contract Bundling: A Strategy for Increasing Federal Contracting Opportunities for Small Business” (see the October 30, 2002, FEDERAL CONTRACTS DISPATCH "Office of Federal Procurement Policy (OFPP); Contract Bundling: A Strategy for Increasing Federal Contracting Opportunities for Small Business"). Several of those responding to SBA's proposed rule identified the need for more guidance on evaluating large prime contractor performance and efforts to achieve the goals specified in their subcontracting plans, including examples of what types of conduct constitute "good-faith" efforts to comply with subcontracting plans. SBA said it agreed “that effective procedures to mitigate the effects of contract bundling on small businesses necessitates more stringent requirements for monitoring compliance with subcontracting plans to ensure that small businesses receive the maximum practical opportunity to participate as subcontractors in large federal contracts." Therefore, on October 20, 2003, SBA published a proposed rule that would amend 13 CFR 125.3 to address this issue and others pertaining to small business subcontracting.

SBA received 19 comments from members of Congress, federal agencies, prime contractors, trade associations, small business advocacy groups, small businesses, and a private citizen. As a result of these comments, SBA is adopting, with changes, the October 20, 2003, proposed rule. The following are the significant provisions of the final rule, with the differences between the proposed and final rules identified:

• Paragraph (a) clarifies that the purpose of the subcontracting assistance program is "to provide the maximum practicable subcontracting opportunities for small business concerns, including small business concerns owned and controlled by veterans, small business concerns owned and controlled by service-disabled veterans, qualified HUBZone small business concerns, small business concerns owned and controlled by socially and economically disadvantaged individuals, and small business concerns owned and controlled by women." Also, it makes clear that the subcontracting assistance program implements the requirement that other-than-small prime contractors (such as large businesses and non-profit organizations) provide subcontracting plans for contracts exceeding $500,000 ($1,000,000 for construction of a public facility) that offer subcontracting opportunities “unless otherwise exempt.” The phrase “unless otherwise exempt” was added to the final rule to reflect that there are two exceptions to this requirement, and they are listed at the beginning of paragraph (b): (1) the contract will be performed entirely outside of any state, territory, or possession of the United States, the District of Columbia, or the Commonwealth of Puerto Rico, and (2) the contract is for services which are personal in nature.
  
  
• Paragraph (b)(1) clarifies the responsibilities of all prime contractors, "including small business prime contractors," that receive contracts exceeding the simplified acquisition threshold, to ensure that "small business concerns have the maximum practicable opportunity to participate in the performance of the contract, including subcontracts for subsystems, assemblies, components, and related services for major systems, consistent with the efficient performance of the contract."
  
  
• Paragraph (b)(2) was added to clarify that “a small business cannot be required to submit a formal subcontracting plan or be asked to submit a formal subcontracting plan, [though] a small-business prime contractor is encouraged to provide maximum practicable opportunity to other small businesses to participate in the performance of the contract, consistent with the efficient performance of the contract.” This paragraph was added to the final rule because ten of the commenters misunderstood the proposed rule to mean that SBA was either intending to require small businesses to submit subcontracting plans or planning to impose new reporting requirements on them. (EDITOR’S NOTE: In the introduction to the final rule, SBA notes that Federal Acquisition Regulation (FAR) 19.1202, Evaluation Factor or Subfactor, which addresses the small disadvantaged business subcontracting evaluation factor, requires “all offerors, including small business offerors, [to] submit targets for small disadvantaged business (SDB) participation, and the successful offeror must submit a final report on SDB participation at contract completion. The requirement to submit targets for SDB participation does not constitute a subcontracting plan...”)
  
  
• Paragraph (b)(3) ((b)(2) in the proposed rule), lists the following as examples of actions prime contractors may take to increase small business subcontracting opportunities:

        “(i) Breaking out contract work items into economically feasible units, as appropriate, to facilitate small business participation;
        “(ii) Conducting market research to identify small business subcontractors and suppliers through all reasonable means, such as performing on-line searches on the Central Contractor Registration (CCR), posting Notices of Sources Sought and/or Requests for proposal on SBA's SUB-Net, participating in Business Matchmaking events, and attending pre-bid conferences;
        “(iii) Soliciting small business concerns as early in the acquisition process as practicable to allow them sufficient time to submit a timely offer for the subcontract;
        “(iv) Providing interested small businesses with adequate and timely information about the plans, specifications, and equirements for performance of the prime contract to assist them in submitting a timely offer for the subcontract;
        “(v) Negotiating in good faith with interested small businesses;
        “(vi) Directing small businesses that need additional assistance to SBA;
        “(vii) Assisting interested small businesses in obtaining bonding, lines of credit, required insurance, necessary equipment, supplies, materials, or services;
        “(viii) Utilizing the available services of small business associations; local, state, and Federal small business assistance offices; and other organizations; and
        “(ix) Participating in a formal mentor-protégé program with one or more small-business protégés that results in developmental assistance to the protégés.” (EDITOR’S NOTE: Participation in a mentor-protégé program was added to the final rule.)

• Paragraph (c) is amended to address the additional responsibilities of large prime contractors:

        “(1)(i) Submitting and negotiating before award an acceptable subcontracting plan that reflects maximum practicable opportunities for small businesses in the performance of the contract as subcontractors or suppliers. A prime contractor may submit a commercial plan, described in paragraph (c)(2) of this section, instead of an individual subcontracting plan, when the product or service being furnished to the Government meets the definition of a commercial item under [FAR] 2.101 [Definitions];
        “(ii) Making a good-faith effort to achieve the dollar and percentage goals and other elements in its subcontracting plan;
        “(iii) Submitting a timely, accurate, and complete SF-294, Subcontracting Report for Individual Contract, and SF-295, Summary Subcontract Report; or entering the same information into an electronic database approved by SBA;
        “(iv) Cooperating in the reviews of subcontracting plan compliance, including providing requested information and supporting documentation reflecting actual achievements and good-faith efforts to meet the goals and other elements in the subcontracting plan;
        “(v) Providing pre-award written notification to unsuccessful small business offerors on all subcontracts over $100,000 for which a small business concern received a preference. The written notification must include the name and location of the apparent successful offeror and if the successful offeror is a small business, veteran-owned small business, service-disabled veteran-owned small business, HUBZone small business, small disadvantaged business, or women-owned small business; and
        “(vi) As a best practice, providing the pre-award written notification cited in paragraph (c)(1)(v) of this section to unsuccessful and small business offerors on subcontracts at or below $100,000 whenever it is practical to do so.” (EDITOR’S NOTE: The requirement for a prime contractor to notify unsuccessful offerors is increased from $10,000 to $100,000 to conform to the simplified acquisition threshold. However, because some commenters suggested this change would be harmful to small businesses, SBA decided to add the notification of unsuccessful offerors on subcontracts below $100,000 as a “best practice.”)

  Paragraph (c)(3) exempts the following from the additional responsibilities: “(i) The prime contractor is a small business concern; (ii) the prime contract or contract modification is a personal services contract; or (iii) the prime contract or contract modification will be performed entirely outside of any state, territory, or possession of the United States, the District of Columbia, or the Commonwealth of Puerto Rico.”
  
  Paragraph (c)(2) addresses “commercial plans”: “A commercial plan, also referred to as an annual plan or company-wide plan, is the preferred type of subcontracting plan for contractors furnishing commercial items. A commercial plan covers the offeror's fiscal year and applies to the entire production of commercial items sold by either the entire company or a portion thereof (e.g., division, plant, or product line). Once approved, the plan remains in effect during the contractor's fiscal year for all federal government contracts in effect during that period. The contracting officer of the agency that originally approved the commercial plan will exercise the functions of the contracting officer on behalf of all agencies that award contracts covered by the plan.”
  
  
• Paragraph (d) addresses "evidence that a large business prime contractor has made a good-faith effort to comply with its subcontracting plan or other subcontracting responsibilities." Such evidence includes supporting documentation that “(1) the contractor performed one or more of the actions described in paragraph (b) of this section, as appropriate for the procurement; and (2) although the contractor may have failed to achieve its goal in one socio-economic category, it exceeded its goal by an equal or greater amount in one or more of the other categories.” (EDITOR’S NOTE: In the proposed rule, (d)(2) listed as evidence of good-faith effort “other contractors awarded contracts of similar scope, size or dollar value have not achieved or exceeded the goals stated in their subcontracting plans..." One commenter pointed out that this language would permit the federal government to penalize a company that is in compliance based on a comparison to other companies that are performing better, or could compare a company that is barely complying to companies that have failed to comply and conclude that the company is making a good-faith effort when it is not. Based on this comment, SBA has deleted the proposed (d)(2) and replaced it with the final (d)(2).
  
  
• New paragraph (e) explains the role of SBA's Commercial Market Representatives (CMRs) in conducting Subcontracting Orientation and Assistance Reviews (SOARs) to assist prime contractors in understanding and complying with the requirements under the subcontracting assistance program.
  
  
• New paragraph (f) provides the procedures for conducting on-site compliance reviews and follow-up reviews and validation of the SF-294 and SF-295. In addition, paragraph (f) describes the existing rating process and the different procedures for conducting compliance reviews of prime contractors under a commercial plan. Finally, paragraph (f) states that SBA is authorized to enter into agreements with other federal agencies and entities to conduct compliance reviews and otherwise further the objectives of the subcontracting program (copies of these agreements will be published on http://www.sba.gov/GC). (EDITOR'S NOTE: SBA has added the following subparagraphs to the final rule: “(f)(4) Any contractor that receives a marginal or unsatisfactory rating must provide a written corrective action plan to SBA, or to both SBA and the agency that conducted the compliance review if the agency conducting the review has an agreement with SBA, within 30 days of its receipt of the official compliance report.
  
  “(5) Any contractor that fails to comply with paragraph (f)(4) of this section, or any contractor that fails to demonstrate a good-faith effort, as set forth in paragraph (d) of this section, may be considered for liquidated damages under the procedures in [FAR] 19.705-7 [Liquidated Damages] and the clause at [FAR] 52.219-16 [Liquidated Damages -- Subcontracting Plan]. This action shall be considered by the contracting officer upon receipt of a written recommendation to that effect from the CMR. The CMR's recommendation must include a copy of the compliance report and any other relevant correspondence or supporting documentation.”)
  
  
• New paragraph (g) authorizes contracting officials to use subcontracting plans as an "important" evaluation factor in the award of task and delivery orders against an FSS, GWAC, or MAC. In addition, the ordering agency may also evaluate subcontracting as a significant factor in source selection when entering into a blanket purchase agreement. At the time of contract award, the contracting officer must disclose to all competitors which one (or more) of these three elements will be evaluated as an important source selection evaluation factor in any subsequent procurement action. A small-business offeror automatically receives the maximum possible score or credit on this evaluation factor without having to submit a subcontracting plan and without having to demonstrate subcontracting past performance. The factors that may be evaluated, individually or in combination, are: (1) the subcontracting to be performed on the specific requirement; (2) the goals negotiated in previous subcontracting plans; and (3) the contractor's past performance in meeting the subcontracting goals contained in previous subcontracting plans.” (EDITOR’S NOTE: SBA added the following to the final rule: (1) subcontracting may be a significant evaluation factor in blanket purchase agreements; (2) the contracting officer must disclose which of the three elements will be evaluated; and (3) small business offerors automatically receive the maximum possible score or credit for this evaluation factor.)

FOR FURTHER INFORMATION CONTACT: Panoptic Enterprises at 703-451-5953.

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