[Federal Register Volume 68, Number 202 (Monday, October 20, 2003)]
[Proposed Rules]
[Pages 60015-60019]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 03-26515]



  Federal Register / Vol. 68, No. 202 / Monday, October 20, 2003 / 
Proposed Rules  

[[Page 60015]]


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SMALL BUSINESS ADMINISTRATION

13 CFR Part 125

RIN 3245-AF12


Small Business Government Contracting Programs

AGENCY: U.S. Small Business Administration.

ACTION: Proposed rule.

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SUMMARY: This proposed rule amends the U.S. Small Business 
Administration (SBA) regulations governing small business 
subcontracting to address several comments received in response to 
SBA's proposed rule on contract bundling. Specifically, this proposed 
rule provides a list of factors to consider in evaluating prime 
contractor's performance and good-faith efforts to achieve the 
requirements in its subcontracting plan. The proposed rule also 
authorizes the use of goals in subcontracting plans, and/or past 
performance in meeting such goals, as a factor in source selection when 
placing orders against Federal Supply Schedules, government-wide 
acquisition contracts, and multi-agency contracts.
    In addition, this proposed rule implements statutory provisions and 
other administrative procedures relating to subcontracting goals and 
assistance. In particular, the proposed rule lists the various 
categories of small businesses that must be afforded maximum 
practicable subcontracting opportunities, and clarifies the 
responsibilities of prime contractors and SBA's Commercial Market 
Representatives (CMRs) under the subcontracting assistance program. The 
proposed rule also supplies guidance on Subcontracting Orientation and 
Assistance Reviews (SOAR), which CMRs perform to assist prime 
contractors to understand and comply with the requirements governing 
the small business subcontracting assistance program.

DATES: Comments must be received on or before December 19, 2003.

ADDRESSES: Send comments to Dean Koppel, Assistant Administrator, 
Office of Policy and Research, 409 Third St., SW., Mail Code: 6500, 
Washington, DC 20416, by e-mail to [email protected], or to 
www.regulations.gov, or by facsimile to (202) 205-6390.

FOR FURTHER INFORMATION CONTACT: Dean Koppel, Assistant Administrator, 
Office of Policy and Research, (202) 401-8150 or [email protected].

SUPPLEMENTARY INFORMATION: 

A. Background

    On January 31, 2003, SBA published a proposed rule in the Federal 
Register, 67 FR 47244, to solicit comments on its proposal to implement 
several recommendations included in the Office of Management and 
Budget's October 2002 report, entitled ``Contract Bundling: A Strategy 
for Increasing Federal Contracting Opportunities for Small Business.'' 
Several of the responding commenters identified the need for more 
guidance on evaluating large prime contractor performance and efforts 
to achieve subcontracting plans, including examples of what types of 
conduct constitute ``good-faith'' efforts to comply with subcontracting 
plans.
    Under section 8(d)(4) of the Small Business Act (15 U.S.C. 
637(d)(4)), large businesses awarded a Federal prime contract in excess 
of $500,000, or $1,000,000 for construction of a public facility, must 
submit a subcontracting plan to the contracting agency. The 
subcontracting plan must include dollar and percentage goals that 
reflect the maximum practicable utilization of small businesses in the 
performance of the contract as subcontractors or suppliers. A prime 
contractor that fails to make a good-faith effort to achieve the goals 
in its subcontracting plan can be found in material breach of contract 
and terminated for default or assessed liquidated damages. SBA and the 
Defense Contract Management Agency (DCMA) also evaluate good-faith 
efforts when they perform joint post-award compliance reviews of 
Department of Defense contractors. Contracting officers also consider a 
contractor's good-faith efforts to achieve its subcontracting goals as 
an important factor in determining whether the contractor deserves an 
acceptable past performance rating.
    This proposed rule would provide more detailed guidance on 
assessing good-faith efforts in performance of subcontracting plans. In 
particular, the proposed rule provides specific examples of conduct 
demonstrating that a prime contractor has made a good-faith effort to 
comply with its subcontracting plan.
    This proposed rule would also increase the dollar threshold above 
which prime contractors must notify unsuccessful offerors from $10,000 
to $100,000. The proposed dollar threshold will conform to the 
Simplified Acquisition Threshold and will be in keeping with the 
Administration's efforts to make Government regulations more practical 
and less burdensome.
    SBA is also proposing amendments to clarify the subcontracting 
assistance program and incorporate existing statutory requirements and 
administrative procedures currently used in administering the program. 
Further, this proposed rule reorganizes Sec.  125.3 into identifiable 
substantive areas with new subsection headings for ease of use and 
clarity. None of these changes impose additional requirements or 
responsibilities on small or large businesses. The proposed amendments 
are simply intended to clarify existing responsibilities in carrying 
out the statutory mandate for small businesses to have the maximum 
practicable opportunity to participate in Federal contracting.
    SBA invites comments on the proposed rule, particularly on the 
provisions concerning the determination of good-faith efforts.

B. Section-by-Section Analysis

    SBA proposes to amend Sec.  125.3(a) to clarify that the purpose of 
the subcontracting assistance program is to provide maximum practicable 
subcontracting opportunities to small business concerns. The proposed 
Sec.  125.3(a) specifies the various categories of small businesses 
that must be afforded the maximum practicable subcontracting 
opportunities under section 8(d) of the Small Business Act (15 U.S.C. 
637(d)), 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. The proposed Sec.  125.3(a) also makes clear that 
the subcontracting assistance program implements the requirement that 
large prime contractors provide subcontracting plans.
    SBA proposes to amend Sec.  125.3(b) to clarify the 
responsibilities of all prime contractors, as provided under section 
8(d)(3) of the Small Business Act (15 U.S.C. 637(d)(3)). Section 
8(d)(3) applies to ``all contracts let by any Federal agency'' that 
exceed the simplified acquisition threshold, that do not include work 
that will be performed entirely outside of the United States, and that 
are for services that are personal in nature. It requires all awardees 
of such prime contracts to carry out ``the policy of the United States 
that small business concerns'' have the ``maximum practicable 
opportunity to participate'' in the performance of contracts, including 
subcontracts for subsystems, assemblies,

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components, and related services for major systems.
    In implementing that existing statutory requirement, the proposed 
Sec.  125.3(b)(1) expressly requires that all prime contractors, 
including small business prime contractors, that receive the covered 
Federal contracts ensure that small business concerns have the maximum 
practicable opportunity to participate in the performance of the 
contract as subcontractors and suppliers, consistent with the efficient 
performance of the contract. SBA believes that the responsibility to 
maximize subcontracting opportunities for small businesses applies 
equally to all prime contractors that receive contracts above the 
simplified acquisition threshold. This provision does not, however, 
extend the requirement for subcontracting plans to small business 
concerns. As indicated in the proposed Sec.  125.3(c), discussed below, 
the requirement for subcontracting plans applies only to large 
businesses that receive a contract or contract modification exceeding 
$500,000, or $1,000,000 in the case of construction of a public 
facility.
    The proposed Sec.  125.3(b)(2) lists examples of actions prime 
contractors may take to increase small business subcontracting 
opportunities. Two comments submitted in response to SBA's proposed 
bundling rule published in the Federal Register on January 31, 2003 (67 
FR 47244), requested strategies for maximizing small business 
subcontracting opportunities. In response to those comments, the 
proposed Sec.  125.3(b)(2) provides specific guidance to prime 
contractors on providing the maximum practicable subcontracting 
opportunities to small businesses.
    The proposed guidance in Sec.  125.3(b)(2) is not intended to 
impose additional burdens or responsibilities on small businesses or to 
operate as a basis for denying a small business a contract award. 
Instead, SBA intends that the proposed guidance provide suggested 
measures for ensuring small business subcontracting opportunities in 
procurements. As discussed below in connection with the proposed Sec.  
125.3(d), documentation that a large business performed the actions and 
strategies outlined in the proposed Sec.  125.3(b)(2), may serve as 
evidence that the large business prime contractor made a good-faith 
effort to comply with its subcontracting plan.
    SBA proposes to amend Sec.  125.3(c) to address the additional 
responsibilities of large prime contractors selected for award of a 
contract or contract modification that exceeds $500,000, or $1,000,000 
in the case of construction of a public facility. These 
responsibilities include the existing requirements for submitting 
subcontracting plans, providing timely subcontracting reports and for 
cooperating in compliance reviews. The proposed Sec.  125.3(c)(1)(v), 
sets forth the pre-award written notification currently included in the 
existing Sec.  125.3(a) of SBA's regulations. The current provision 
requires large prime contractors to provide pre-award written 
notification to unsuccessful small business offerors on all 
subcontracts over $10,000 for which a small business concern received a 
preference. Unlike that provision, the proposed Sec.  125.3(c)(1)(v) 
requires such pre-award notification on all subcontracts over $100,000. 
This proposed increase in the dollar threshold from $10,000 to $100,000 
conforms to the simplified acquisition threshold. It also is in keeping 
with the Administration's efforts to make Government regulations more 
practical and less burdensome on businesses.
    The proposed Sec.  125.3(c)(2) addresses commercial plans. This 
section makes clear that large prime contractors may use commercial 
plans for services as well as for products, as long as the product or 
service being procured meets the definition of a commercial item in 48 
CFR 2.101.
    SBA proposes to amend Sec.  125.3(d) to address good-faith effort 
with respect to a large prime contractor's compliance with its 
subcontracting plan. Under section 8(d)(4)(f) of the Small Business Act 
(15 U.S.C. 637(d)(4)(f)), a contracting officer may assess liquidated 
damages against a large business that failed to make a good-faith 
effort to achieve the small business goals in its subcontracting plan. 
Several commenters on the SBA's January 31, 2003, proposed bundling 
rule requested guidance on evaluating a large prime contractor's good-
faith efforts to achieve its small business goals. The proposed Sec.  
125.3(d) indicates that evidence of good-faith efforts includes 
supporting documentation that the contractor performed the actions 
described in the proposed Sec.  125.3(b). The proposed Sec.  125.3(d) 
further provides that evidence of good faith may also include 
supporting documentation that other contractors awarded contracts of 
similar scope, size or dollar value did not achieve or exceed the goals 
stated in their subcontracting plan, despite their good-faith efforts 
to do so.
    SBA proposes to add a new Sec.  125.3(e) to explain the role of 
SBA's CMRs, who perform a number of different activities to further the 
objectives of SBA's subcontracting assistance program. In 2002, the 
General Accounting Office conducted a study (GAO-03-54) on the role of 
the CMR. The Study, entitled ``The Commercial Marketing Representatives 
Role Needs To Be Strategically Planned and Assessed'' concluded that 
SBA should seek ways to strengthen the position of CMRs. One of the 
most important functions of CMRs is to assist prime contractors to 
understand and comply with the requirements of the subcontracting 
assistance program. Over time, SBA has found that it is preferable to 
familiarize a prime contractor with the requirements at the time it 
receives its first contract requiring a subcontracting plan, than to 
wait until the time of the compliance review. This avoids 
misunderstandings and other problems that may result in marginal and 
Unsatisfactory ratings.
    SBA has developed the Subcontracting Orientation and Assistance 
Review (SOAR) to implement this concept. This proposal incorporates the 
SOAR into SBA's regulations. Section 125.3(e) describes the CMRs 
responsibilities in conducting SOARS to assist prime contractors in 
understanding and complying with the requirements under the 
subcontracting assistance program.
    SBA also proposes to add a new Sec.  125.3(f) to address SBA's 
approach to conducting compliance reviews of prime contractors with 
subcontracting plans. This section provides the procedures for 
conducting on-site compliance reviews and follow-up reviews and 
validation of the SF-295, Summary Subcontract Report, and SF-294, 
Subcontracting Report for Individual Contracts. The proposed Sec.  
125.3(f) further describes the existing rating process and the 
different procedures for conducting compliance reviews of prime 
contractors under a commercial plan. This section also indicates 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. SBA has entered into one such 
agreement with the Defense Contracts Management Agency under a 
Memorandum of Understanding dated May 9, 2003.
    Finally, in response to comments to SBA's proposed bundling rule 
published on January 31, 2003 (68 FR 5134), SBA proposes to add a new 
Sec.  125.3(g) to address the use of subcontracting plans as an 
evaluation factor. Several commenters urged that SBA explore incentives 
that would reward large prime contractors for their subcontracting 
opportunities and

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achievements. In response to those comments, the proposed Sec.  
125.3(g) authorizes contracting officials to use subcontracting plans 
as an evaluation factor in the award of task orders and delivery orders 
under Federal Supply Schedules, Government-wide acquisition contracts, 
and multi-agency contracts. Specifically, the section allows 
contracting officers to consider the proposed subcontracting goals for 
the specific requirement and the contractor's past performance in 
meeting its subcontracting goals in previous contracts.

C. Compliance With Executive Orders 12866, 12988, and 13132, the 
Paperwork Reduction Act (44 U.S.C. Ch. 35), and the Regulatory 
Flexibility Act

    OMB has determined that this rule is a significant regulatory 
action under Executive Order 12866. The proposed rule revises the SBA 
regulation governing small business subcontracting assistance to define 
good-faith effort. For purposes of Executive Order 12988, SBA has 
drafted this proposed rule, to the extent practicable, in accordance 
with the standards set forth in section 3 of that Order. For purposes 
of Executive Order 13132, SBA has determined that this proposed rule 
has no federalism implications warranting the preparation of a 
Federalism Assessment. For purposes of the Paperwork Reduction Act, 44 
U.S.C. ch. 35, SBA determines that this proposed rule imposes no new 
reporting or recordkeeping requirements.
    SBA certifies that this proposed rule, if promulgated, would not 
have a significant economic impact on a substantial number of small 
entities within the meaning of the Regulatory Flexibility Act, 5 U.S.C. 
601-612. The proposed rule does not impose any new substantive 
responsibilities, nor does it require any new reporting or 
recordkeeping requirements. Instead, this proposed rule clarifies the 
existing statutory responsibilities under the subcontracting assistance 
program, including the responsibilities of prime contractors to 
maximize small business subcontracting opportunities. It also provides 
guidance to government officials in monitoring and determining the 
achievements of subcontracting goals. Accordingly, the proposed rule is 
primarily procedural in nature and therefore would not have a 
significant economic impact on small entities. As a result, no initial 
regulatory flexibility analysis is required under 5 U.S.C. 605(b).

List of Subjects in 13 CFR Part 125

    Government contracts, Government procurement, Reporting and 
recordkeeping requirements, Small businesses, and Technical assistance.

    For the reasons set forth in the preamble, SBA proposes to amend 13 
CFR part 125 as follows:

PART 125--GOVERNMENT CONTRACTING PROGRAMS

    1. The authority citation for 13 CFR part 125 continues to read as 
follows:

    Authority: 15 U.S.C. 634(b)(6), 637 and 644; 31 U.S.C. 9701 and 
9702.

    2. Revise Sec.  125.3 to read as follows:


Sec.  125.3  Subcontracting assistance.

    (a) General. 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. The subcontracting assistance program 
implements section 8(d) of the Small Business Act, which includes the 
requirement that other-than-small firms awarded contracts that offer 
subcontracting possibilities by the Federal Government in excess of 
$500,000, or in excess of $1,000,000 for construction of a public 
facility, must submit a subcontracting plan to the contracting agency. 
The Federal Acquisition Regulation sets forth the requirements for 
subcontracting plans in 48 CFR 19.7, and the clause at 48 CFR 52.219-9.
    (b) Responsibilities of prime contractors. (1) Prime contractors 
(including small business prime contractors) selected to receive a 
Federal contract that exceeds the simplified acquisition threshold, 
that will not 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 that is not for services which are 
personal in nature, are responsible for ensuring 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;
    (2) Efforts to provide the maximum practicable subcontracting 
opportunities for small business concerns include:
    (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 SBA's PRO-Net, posting Notices of 
Sources Sought and/or Requests for Proposal on SBA's SUB-Net, 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; and
    (viii) Utilizing the available services of small business 
associations; local, state, and Federal small business assistance 
offices; and other organizations.
    (c) Additional responsibilities of large prime contractors. (1) In 
addition to the responsibilities provided in paragraph (b) of this 
section, a prime contractor selected for award of a contract or 
contract modification that exceeds $500,000, or $1,000,000 in the case 
of construction of a public facility, is responsible for:
    (i) Submitting and negotiating before award an acceptable 
subcontracting plan that reflects maximum practicable utilization of 
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 48 CFR 
2.101;
    (ii) Making a good-faith effort to achieve the dollar and 
percentage goals and other elements in its subcontracting plan;

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    (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; and
    (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.
    (2) 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 
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.
    (3) The additional prime contractor responsibilities described in 
paragraph (c)(1) of this section do not apply if:
    (i) The prime contractor is a small business concern;
    (ii) The prime contract or contract modification is a personal 
services contract;
    (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; 
or
    (iv) The modification is to a contract that did not originally 
contain the clause at 48 CFR 52.219-8, Utilization of Small Business 
Concerns (or equivalent prior clauses).
    (d) Determination of good-faith efforts. Evidence that a large 
business prime contractor has made a good-faith effort to comply with 
its subcontracting plan or other subcontracting responsibilities 
includes supporting documentation that:
    (1) The contractor performed the actions described in paragraph (b) 
of this section; or
    (2) Other contractors awarded contracts of similar scope, size or 
dollar value have not achieved or exceeded the goals stated in their 
subcontracting plans, despite other evidence of their good-faith 
efforts to comply. The determination of the subcontracting plan 
compliance of other contractors may be based on available 
subcontracting past performance records and other information.
    (e) CMR Responsibilities. Commercial Market Representatives (CMRs) 
are SBA's subcontracting specialists. CMRs are responsible for:
    (1) Facilitating the matching of large prime contractors with small 
business concerns;
    (2) Counseling large prime contractors on their responsibilities to 
maximize subcontracting opportunities for small business concerns;
    (3) Instructing large prime contractors on identifying small 
business concerns by means of SBA's PRO-Net, SUB-Net, and other 
resources and tools;
    (4) Counseling small business concerns on how to market themselves 
to large prime contractors;
    (5) Maintaining a portfolio of large prime contractors and 
conducting Subcontracting Orientation and Assistance Reviews (SOAR). 
SOARs are conducted for the purpose of assisting prime contractors in 
understanding and complying with their small business subcontracting 
responsibilities, including developing subcontracting goals that 
reflect maximum practicable opportunity for small business; maintaining 
acceptable books and records; and periodically submitting reports to 
the Government; and
    (6) Conducting periodic reviews, including compliance reviews in 
accordance with paragraph (f) of this section.
    (f) Compliance reviews. (1) A prime contractor's performance under 
its subcontracting plan is evaluated by means of on-site compliance 
reviews and follow-up reviews. A compliance review is a surveillance 
review that determines a contractor's achievements in meeting the goals 
and other elements in its subcontracting plan for both open contracts 
and contracts completed during the previous twelve months. A follow-up 
review is done after a compliance review, generally within six to eight 
months, to determine if the contractor has implemented SBA's 
recommendations.
    (2) All compliance reviews begin with a validation of the 
contractor's most recent SF-295, Summary Subcontract Report, and SF-
294, Subcontracting Report for Individual Contracts, if applicable. The 
validation includes a review of the contractor's methodology for 
completing these reports and a sampling of specific documentation to 
substantiate small business status.
    (3) Upon completion of the review and evaluation of a contractor's 
performance and efforts to achieve the requirements in its 
subcontracting plans, the contractor's performance will be assigned one 
of the following ratings: Outstanding, Highly Successful, Acceptable, 
Marginal, or Unsatisfactory. The factors listed in paragraph (c) of 
this section will be taken into consideration, where applicable, in 
determining the contractor's rating. However, a contractor may be found 
Unsatisfactory, regardless of other factors, if it cannot substantiate 
the claimed achievements under its subcontracting plan.
    (4) Reviews and evaluations of contractors with commercial plans 
are identical to reviews and evaluations of other contractors, except 
that contractors with commercial subcontracting plans do not submit the 
SF-294, Subcontracting Report for Individual Contracts. Instead, goal 
achievement is determined by comparing the goals in the approved 
commercial subcontracting plan against the cumulative achievements on 
the SF-295, Summary Subcontract Report, for the same period. The same 
ratings criteria set forth in paragraph (f)(3) of this section apply to 
contractors with commercial plans.
    (5) SBA is authorized to enter into agreements with other Federal 
agencies or entities to conduct compliance reviews and otherwise 
further the objectives of the subcontracting program. Copies of these 
agreements will be published on www.sba.gov/GC. SBA is the lead agency 
on all joint compliance reviews with other agencies.
    (g) Subcontracting consideration in source selection. When an 
ordering agency anticipates placing an order or entering into a blanket 
purchase agreement against a Federal Supply Schedule, government-wide 
acquisition contract (GWAC), or multi-agency contract (MAC), the 
ordering agency may evaluate subcontracting as an important factor in 
its source selection process. This evaluation may include any of the 
following:
    (1) The subcontracting to be performed on the specific requirement;

[[Page 60019]]

    (2) The goals negotiated in the commercial plan, if applicable; and
    (3) The contractor's past performance in meeting subcontracting 
goals in previous contracts.

    Dated: October 8, 2003.
Hector V. Barreto,
Administrator.
[FR Doc. 03-26515 Filed 10-17-03; 8:45 am]
BILLING CODE 8025-01-P