[Senate Report 114-415]
[From the U.S. Government Publishing Office]


                                                       Calendar No. 287
114th Congress }                                            { Report
                                 SENATE
 2d Session    }                                            { 114-415

======================================================================
 
       THE SMALL BUSINESS SUBCONTRACTING TRANSPARENCY ACT OF 2015

                                _______
                                

               December 20, 2016.--Ordered to be printed

   Filed, under authority of the order of the Senate of December 10 
                  (legislative day, December 9), 2016

                                _______
                                

         Mr. Vitter, from the Committee on Small Business and 
               Entrepreneurship, submitted the following

                              R E P O R T

                         [To accompany S. 2138]

    The Committee on Small Business and Entrepreneurship, to 
which was referred the bill (S. 2138) to amend the Small 
Business Act to improve the review and acceptance of 
subcontracting plans, and for other purposes, having considered 
the same, reports favorably thereon, with amendments, and 
recommends that the bill, as amended, do pass.

                            I. INTRODUCTION

    The Small Business Subcontracting Transparency Act of 2015 
(S. 2138) was introduced by Senator Vitter on October 6, 2015.
    During the markup of the bill, S. 2138 was approved 
unanimously by voice vote.

              II. HISTORY (PURPOSE & NEED FOR LEGISLATION)

    Under current law, a contract awarded to an other-than-
small business for more than $700,000 ($1.5 million for 
construction) must include a subcontracting plan. These plans 
must enumerate opportunities for small businesses to 
participate as subcontractors, and must assign both percentage 
and dollar value goals. If an other-than-small business fails 
to make a good faith effort to comply with the subcontracting 
plan, the government must collect liquidated damages from the 
contractor. However, the Small Business Administration's (SBA) 
broad definition of ``good faith efforts'' makes it difficult 
for a contracting officer to issue a notice that a large prime 
contractor has failed to make a good faith effort to comply 
with its subcontracting plan. Additionally, if a notice is 
issued, the threat of liquidated damages is empty for many 
prime contractors. In nearly 30 years, there are no records of 
a company paying these damages.
    GAO has repeatedly found that agencies are failing to 
discover whether contractors are meeting their obligations 
under their subcontracting plans, even on high profile 
contracts. In fact, agencies are failing to ensure that the 
required subcontracting reports are even filed. Instead, the 
House Small Business Committee received reports that prime 
contractors ensured a finding of good faith by sponsoring 
agency small business conferences--writing checks to agencies 
rather than writing subcontracts to small businesses. As a 
result, small businesses struggle to receive subcontracting 
opportunities. Without these plans, Congress and small 
businesses do not possess the data they need to discern whether 
the statutory and administrative goals are being met. Under 
these conditions, agencies will continue to take credit for 
vastly inflated subcontracting numbers.
    In a 2011 report, GAO reported that the greatest challenge 
to the program's effectiveness was the Procurement Center 
Representatives' (PCR) and Commercial Market Representatives' 
(CMR) lack of authority to influence subcontracting. PCRs told 
GAO that they had no means to dispute agency procurements if 
contracting officers did not use their recommendations on 
subcontracting plans. PCRs and CMRs also said it was difficult 
to enforce prime contractor performance under subcontracting 
plans because determining that a contractor was not acting in 
good faith was difficult. GAO recommended that the statute be 
modified to allow PCRs to challenge contracts when the PCRs' 
subcontracting recommendations were not adopted. This 
recommendation will require the contracting officer to listen 
to the PCR on subcontracting, and will serve to increase 
subcontracting goals and opportunities for small businesses.

                      III. HEARINGS & ROUNDTABLES

    In the 114th Congress:
    On October 6, 2015, the House Small Business Committee held 
a subcommittee hearing entitled, ``Subpar Subcontracting: 
Challenges for Small Business Contractors.'' The subcommittee 
heard testimonies from the SBA, the Acting Inspector General 
for the U.S. Department of Interior, Woman Impacting Public 
Policy, the National Defense Industrial Association, and the 
Association of General Contractors. The hearing addressed the 
challenges small businesses face with subcontracting, both when 
the small business is the prime contractor and when it is the 
subcontractor. Specifically, the Subcommittee looked at three 
issues: problems with laws intended to prevent pass-through 
contracts, the issue of large prime contractors not fulfilling 
their subcontracting plans, and problems with the systems 
designed to track subcontracting.

                        IV. DESCRIPTION OF BILL

    The bill requires the SBA to provide examples of activities 
that would be considered bad faith, as opposed to defining good 
faith, so that contracting agencies and the SBA have concrete 
grounds to challenge contractor compliance for subcontracting 
plans. The bill provides clear direction on what should be 
considered a failure to act in good faith by prime contractors. 
Specifically, it states that by failing to file the necessary 
subcontracting reports, the contractor is in breach of 
contract. Additionally, this bill provides authority for a PCR 
or CMR to assess whether a proposed subcontracting plan 
provides the maximum practicable opportunity for small business 
concerns to participate. If the PCR or CMR believes that the 
plan does not provide sufficient opportunities for small 
business participation, the PCR or CMR is permitted to delay 
acceptance of the subcontracting plan for up to 30 days. 
However, if the PCR or CMR fails to reach an agreement with the 
contracting agency's personnel on a plan to provide the maximum 
practicable opportunity; the bill provides that the 
disagreement shall be decided by the head of the contracting 
agency.

                           V. COMMITTEE VOTE

    In compliance with rule XXVI(7)(b) of the Standing Rules of 
the Senate, the following vote was recorded on October 7, 2015.
    A motion to adopt the Small Business Subcontracting 
Transparency Act, a bill to improve the review and acceptance 
of subcontracting plans, was approved unanimously by voice vote 
with the following Senators present: Vitter, Scott, Fischer, 
Gardner, Ernst, Enzi, Shaheen, Cantwell, Cardin, Booker, 
Hirono, and Peters.

                           VI. COST ESTIMATE

    In compliance with rule XXVI(11)(a)(1) of the Standing 
Rules of the Senate, the Committee estimates the cost of the 
legislation will be equal to the amounts discussed in the 
following letter from the Congressional Budget Office:

                                                  October 24, 2016.
Hon. David Vitter,
Chairman, Committee on Small Business and Entrepreneurship,
U.S. Senate, Washington, DC.
    Dear Mr. Chairman: The Congressional Budget Office has 
prepared the enclosed cost estimate for S. 2138, the Small 
Business Subcontracting Transparency Act of 2015.
    If you wish further details on this estimate, we will be 
pleased to provide them. The CBO staff contact is Stephen 
Rabent.
            Sincerely,
                                                        Keith Hall.
    Enclosure.

S. 2138--Small Business Subcontracting Transparency Act of 2015

    S. 2138 would authorize Small Business Administration (SBA) 
employees that review federal contracts to delay the acceptance 
of a subcontracting plan for up to 30 days if the plan fails to 
maximize the participation of small businesses. The bill also 
would require the SBA to issue regulations that provide 
guidance on how to comply with the requirement to maximize 
small business participation. CBO estimates that implementing 
S. 2138 would cost the SBA and other federal agencies $11 
million over the 2017-2021 period. Such spending would be 
subject to the availability of appropriated funds.
    Based on an analysis of information from the SBA about the 
current review process for subcontracting plans, CBO estimates 
that implementing S. 2138 would require up to 18 additional SBA 
employees to undertake additional reviews of subcontracting 
plans from other federal agencies. After federal agencies have 
worked with the new review process for a few years, CBO expects 
the cost of implementing those reviews would decline 
significantly as agencies better accommodate small businesses 
into their subcontracting plans. CBO estimates that the 
additional work would cost $5 million over the 2017-2021 
period.
    Implementing S. 2138 would require federal agencies to 
address weaknesses in subcontracting plans that could be 
subject to the proposed delays. On the basis of information 
from the SBA and the General Services Administration (GSA), CBO 
estimates that it would cost each of the 26 major federal 
agencies about $100,000 a year or a total of about $6 million 
over the 2017-2021 period to conduct more detailed reviews of 
subcontracting plans. CBO estimates that this spending would 
occur mainly in the first two years because the majority of 
delays and reviews would probably occur as contracting officers 
adapt to the new SBA standards.
    Enacting S. 2138 may change the behavior of contracting 
officers by encouraging them to select subcontracting plans 
they believe would be less likely to be subject to a delay 
imposed by the SBA. Those plans might have a higher or lower 
cost to the federal government than the plans they otherwise 
would select under current law. In 2015, the federal government 
spent $440 billion on contract awards. The costs or savings of 
selecting different contracts as a result of implementing S. 
2138 could be substantial; however, CBO has no basis for 
estimating any such effects.
    Because the new subcontracting rules would affect agencies 
whose spending does not depend on annual appropriations, 
enacting S. 2138 would affect direct spending; therefore, pay-
as-you-go procedures apply. Because most of those agencies can 
adjust the amounts they collect as operating costs change, CBO 
estimates that the net effect of any such spending by those 
agencies would be negligible. Enacting S. 2138 would not affect 
revenues.
    CBO estimates that enacting S. 2138 would not increase net 
direct spending or on-budget deficits in any of the four 
consecutive 10-year periods beginning in 2026.
    S. 2138 contains no intergovernmental or private-sector 
mandates as defined in the Unfunded Mandates Reform Act and 
would not affect the budgets of state, local, or tribal 
governments.
    The CBO staff contact for this estimate is Stephen Rabent. 
The estimate was approved by H. Samuel Papenfuss, Deputy 
Assistant Director for Budget Analysis.

                  VII. EVALUATION OF REGULATORY IMPACT

    In compliance with rule XXVI(11)(b) of the Standing Rules 
of the Senate, it is the opinion of the Committee that no 
significant additional regulatory impact will be incurred in 
carrying out the provisions of this legislation. There will be 
no additional impact on the personal privacy of companies or 
individuals who utilize the services provided.

                   VIII. SECTION-BY-SECTION ANALYSIS

Section 1. Title

    This Act may be cited as the ``Small Business 
Subcontracting Transparency Act of 2015.''

Section 2. Good faith compliance

    Currently, the Small Business Act provides that any 
contractor or subcontractor which fails to award small business 
subcontracts to the fullest extent consistent with the 
efficient performance of a contract, fails to cooperate in any 
studies or surveys as may be conducted by the SBA or relevant 
procuring agency, or fails to comply with its subcontracting 
plan shall be considered in material breach of contract and 
such breach may be considered in any past performance 
evaluation of the contractor.
    This provision adds that it will be considered material 
breach of contract if a contractor fails to submit required 
periodic reports or cooperate in any studies or surveys as may 
be required by the Federal agency or the SBA in order to 
determine the extent of compliance by the offeror or bidder 
with the relevant subcontracting plan.

Section 3. Transparency in subcontracting goals

    Under current law, the SBA is authorized to review 
procuring agencies' solicitations to determine the maximum 
practicable opportunity for small business concerns to 
participate as subcontractors in the performance of the 
contract resulting from the solicitation, and to submit 
advisory findings to the appropriate procuring agency.
    This provision removes the requirement that the 
Administration's reported findings be treated as advisory in 
nature.

Section 4. Improving subcontracting plans

    This subsection provides authority for a PCR or CMR to 
assess whether a proposed subcontracting plan provides the 
maximum practicable opportunity for small business concerns to 
participate. If the PCR or CMR believes that the plan does not 
provide sufficient opportunities for small business 
participation, the PCR or CMR is permitted to delay acceptance 
of the subcontracting plan for up to 30 days. However, if the 
PCR or CMR fails to reach an agreement with the contracting 
agency's personnel on a plan to provide the maximum practicable 
opportunity; this subsection provides that the disagreement 
shall be decided by the head of the contracting agency.
    In a 2011 Report,\1\ GAO cited the PCRs' and CMRs' lack of 
authority to influence subcontracting opportunities as one of 
the greatest challenges to the effectiveness of the program. 
PCRs told GAO that they had no means to dispute agency 
procurements if contracting officers did not use their 
recommendations on subcontracting plans. PCRs and CMRs also 
said it was difficult to enforce prime contractor performance 
under subcontracting plans because determining that a 
contractor was not acting in good faith was difficult. GAO 
recommended that statute be modified to allow PCRs to challenge 
contracts when the PCRs' subcontracting recommendations were 
not adopted. This recommendation would force the contracting 
officer to listen to the PCR on subcontracting, and serve to 
increase subcontracting goals and opportunities for small 
businesses.
---------------------------------------------------------------------------
    \1\GAO-11-549R, Improvements Needed to Help Ensure Reliability of 
SBA's Performance Data on Procurement Center Representatives.
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Section 5. Defining good faith compliance

    This provision requires SBA's Administrator to issue 
regulations providing examples of activities that would be 
considered a failure to make a good faith effort to comply with 
a contractor's subcontracting plan.
    Currently, the Federal Acquisition Regulations (FAR) 
require that a contracting officer examine the totality of a 
contractor's actions in determining whether a contractor failed 
to make a good faith effort to comply with its subcontracting 
plan. The FAR acknowledges that a contractor can make diligent 
efforts to identify and solicit offers from small businesses 
and fail to achieve its subcontracting goals. As such, the FAR 
provides the following examples of actions which may be 
considered as indicators of a failure to make a good faith 
effort: a failure to attempt to identify, contact, solicit, or 
consider for contract award small business, veteran-owned small 
business, service-disabled veteran-owned small business, 
HUBZone small business, small disadvantaged business or women-
owned small business concerns; a failure to designate and 
maintain a company official to administer the subcontracting 
program and monitor and enforce compliance with the plan; a 
failure to submit the relevant subcontract reports; a failure 
to maintain records or otherwise demonstrate procedures adopted 
to comply with the plan; and the adoption of company policies 
or procedures that have as their objectives the frustration of 
the objectives of the plan.
    SBA's regulations provide that a prime contractor can 
demonstrate that it has made a good faith effort in one of 
three ways: (1) by meeting its goals; (2) by overachieving in 
some categories to make up for an underachievement in other 
categories; or (3) by performing one or more of the following 
actions\2\:
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    \2\13 C.F.R. Sec. 125.3(d).
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          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 System for Award Management (SAM), 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 requirements 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;
          ix. Participating in a formal mentor-protege program 
        with one or more small-business proteges that results 
        in developmental assistance to the proteges.
    This broad list makes it difficult for a contracting 
officer to issue a notice that a large prime contractor has 
failed to make a good faith effort to comply with its 
subcontracting plan. However, if such notice is issued, the 
contracting officer is then responsible for ``[i]nitiating 
action to assess liquidated damages.''\3\
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    \3\48 C.F.R. Sec. 19.705-6(f).
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    The threat of liquidated damages is empty for many prime 
contractors. In nearly 30 years, there is no record of any 
company paying these damages.
    By requiring the SBA to provide examples of bad faith, as 
opposed to defining good faith, contracting agencies and the 
SBA would have concrete grounds to challenge contractor 
compliance with their subcontracting plans.

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