[Federal Register Volume 76, Number 193 (Wednesday, October 5, 2011)]
[Proposed Rules]
[Pages 61626-61632]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2011-25767]


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SMALL BUSINESS ADMINISTRATION

13 CFR Parts 121 and 125

RIN 3245-AG22


Small Business Subcontracting

AGENCY: U.S. Small Business Administration.

ACTION: Proposed rule.

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SUMMARY: The U.S. Small Business Administration (SBA or Agency) is 
proposing to amend its regulations to implement provisions of the Small 
Business Jobs Act of 2010, which pertain to small business 
subcontracting. SBA is proposing to amend its regulations to provide 
for a ``covered contract'' (a contract for which a small business 
subcontracting plan is required, currently valued above $1.5 million 
for construction and $650,000 for all other contracts), a prime 
contractor must notify the contracting officer in writing whenever the 
prime contractor does not utilize a subcontractor used in preparing its 
bid or proposal during contract performance. SBA is also proposing to 
amend its regulations to require a prime contractor to notify a 
contracting officer in writing whenever the prime contractor reduces 
payments to a subcontractor or when payments to a subcontractor are 90 
days or more past due. In addition, SBA is proposing to clarify that 
the contracting officer is responsible for monitoring and evaluating 
small business subcontracting plan performance. SBA is also proposing 
to clarify which subcontracts must be included in subcontracting data 
reporting, which subcontracts should be excluded, and the way 
subcontracting data is reported.
    SBA is also proposing to make other changes to update its 
subcontracting regulations, including changing subcontracting plan 
thresholds and referencing the electronic subcontracting reporting 
system (eSRS). Some of the SBA's proposed changes would require the 
contracting officer to review subcontracting plan reports within 60 
days of the report ending date.
    Finally, SBA is also proposing to address how subcontracting plan 
requirements and credit towards subcontracting goals can be implemented 
in connection with Multi-agency, Federal Supply Schedule, Multiple 
Award Schedule and Government-wide Acquisition indefinite delivery, 
indefinite quantity (IDIQ) contracts.

DATES: Comments must be received on or before December 5, 2011.

[[Page 61627]]


ADDRESSES: You may submit comments, identified by RIN: 3245-AG23, by 
any of the following methods:
     Federal eRulemaking Portal: http://www.regulations.gov. 
Follow the instructions for submitting comments.
     Mail, for paper, disk, or CD/ROM submissions: Dean Koppel, 
U.S. Small Business Administration, Office of Government Contracting, 
409 Third Street, SW., 8th Floor, Washington, DC 20416.
     Hand Delivery/Courier: Dean Koppel, U.S. Small Business 
Administration, Office of Government Contracting, 409 Third Street, 
SW., 8th Floor, Washington, DC 20416.
    SBA will post all comments on http://www.regulations.gov. If you 
wish to submit confidential business information (CBI) as defined in 
the User Notice at http://www.Regulations.gov, please submit the 
information to Dean Koppel, U.S. Small Business Administration, Office 
of Government Contracting, 409 Third Street, SW., 8th Floor, 
Washington, DC 20416, or send an e-mail to [email protected]. 
Highlight the information that you consider to be CBI and explain why 
you believe SBA should hold this information as confidential. SBA will 
review the information and make the final determination on whether it 
will publish the information or not.

FOR FURTHER INFORMATION CONTACT: Dean Koppel, Office of Government 
Contracting, 409 Third Street, SW., Washington, DC 20416; (202) 205-
9751; [email protected].

SUPPLEMENTARY INFORMATION: Section 1321 of the Jobs Act requires the 
SBA Administrator, in consultation with the Administrator of the Office 
of Federal Procurement Policy, to publish regulations establishing 
policies for subcontracting compliance, including assignment of 
compliance responsibilities between contracting offices, small business 
offices, and program offices. A 2010 Senate Report to a bill (S. 2989) 
that contained many of the same or similar provisions to the 
subcontracting provisions in the Jobs Act cites a 2005 Government 
Accountability Office (GAO) report concerning the Department of Energy, 
where GAO found that large business prime contractors had overstated 
their small business subcontracting achievements by excluding certain 
subcontracts from the base, such as electricity and utilities, thereby 
making it appear that the prime contractor awarded a much higher 
percentage of its subcontracts to small business concerns than the 
prime contractors actually awarded. S. Rep. No. 111-343, ``Small 
Business Contracting Revitalization Act of 2010,'' September 29, 2010; 
``Department of Energy, Improved Oversight Could Better Ensure 
Opportunities for Small Business Subcontracting,'' GAO Report No. 05-
459 (May 2005).
    While SBA recognizes the valuable insight provided by GAO in the 
above-referenced report, it does not concur with all of GAO's findings. 
For example, SBA does not believe that electricity and utilities (e.g., 
water, sewer, and refuse collection purchased from a municipality) 
belong in the subcontracting base. Including electricity and other 
utilities in the base creates the illusion that there are more 
subcontracting opportunities for small business than are actually 
available. SBA is proposing to define subcontract so that prime 
contractors and contracting officers will no longer be confused about 
which subcontracts must be included when reporting on small business 
subcontracting performance. For example, when preparing its individual 
subcontracting plan, a prime contractor must decide whether or not to 
include indirect costs in the subcontracting base, for both goaling and 
reporting purposes. Indirect costs must be included in a commercial 
plan to ensure comparability between goals and achievements because 
companies with commercial plans file only a summary report, not an 
individual report. All contractors must include indirect costs in their 
summary subcontracting reports.
    In addition, GAO recommended that prime contractors report 
subcontracting to small businesses as a percentage of total contract 
dollars. Under current reporting requirements, prime contractors report 
subcontracting achievement in whole dollars and as a percentage of 
eligible subcontracts. SBA believes that subcontracting should be 
reported as a percentage of total subcontracting dollars rather than as 
a percentage of total contract dollars. The Small Business Act 
establishes government goals for socioeconomic groups based on a 
percentage of total subcontracted dollars, not total contract dollars. 
15 U.S.C. 644(g)(1). However, SBA is proposing to explicitly authorize 
contracting officers to establish additional goals in terms of total 
contract dollars. Contracting officers are already doing this, and when 
a prime contractor enters its subcontracting achievements (i.e., 
dollars) into eSRS, the system automatically calculates the percentage 
by both methods--i.e., as a percentage of total subcontracting and as a 
percentage of total contract dollars. Thus, the contracting officer has 
the ability to compare achievements against the total contract dollars 
if desired.
    GAO also found that there was confusion within the procuring agency 
about who was responsible for monitoring small business subcontracting 
plan performance. SBA is proposing to amend its regulations to make it 
clear that contracting officers (or administrative contracting officers 
if applicable) are responsible for monitoring and evaluating the prime 
contractor's small business subcontracting plan compliance and 
reporting. SBA is proposing to require the cognizant contracting 
officer to review every prime contractor's Individual Subcontract 
Report (ISR) or Subcontracting Report for Individual Contracts, SF 294, 
if authorized, or when applicable, the Summary Subcontract Report (SSR) 
for a commercial plan, within 60 days of the report ending date (e.g., 
by November 30th for a report submitted for the fiscal year ended 
September 30th) and accept or reject the report in accordance with the 
Federal Acquisition Regulation (FAR) provisions set forth in subpart 
19.7 and the eSRS instructions (http://www.esrs.gov).
    All contractors whose reports are rejected, including those with 
individual contract plans and commercial plans as defined in FAR 
19.701, will be required to make the necessary corrections and resubmit 
their reports within 30 days of receiving the notice of rejection.
    SBA is also proposing to address subcontracting plans in connection 
with Multi-Agency, Federal Supply Schedule, Multiple Award Schedule and 
Government-wide Acquisition IDIQ contracts. Funding agencies have 
expressed interest in receiving credit towards their subcontracting 
goals for orders placed against another agency's task or delivery order 
contract. SBA is proposing that the contracting officer for the IDIQ 
contract will establish subcontracting plans for contractors without 
commercial plans. The contractor will report small business 
subcontracting achievement on an order-by-order basis to the 
contracting officer for the contracting agency. Contractors are 
currently reporting information on all orders collectively on a semi-
annual or annual basis. Reporting on an order-by-order basis will allow 
the funding agency to receive credit towards its small business 
subcontracting goals. SBA is requesting comments on whether the 
reporting requirement should apply to all orders, or only apply to 
orders above a certain threshold. SBA is also proposing to allow the 
funding agency contracting

[[Page 61628]]

officer the discretion to establish goals in connection with individual 
orders.
    SBA is proposing that contracting officers require prime 
contractors to update subcontracting plans whenever an option is 
exercised, as currently required by FAR 19.705-2(e). SBA is also 
proposing to require subcontracting plans whenever a modification 
causes a contract to exceed the subcontracting plan threshold. As 
currently written the FAR only requires a subcontracting plan if the 
value of the modification exceeds the subcontracting threshold. SBA is 
also proposing to allow the contracting officer to request a 
subcontracting plan when a firm's status changes from small to other 
than small as a result of a size recertification.
    Section 1322 of the Jobs Act established a requirement that a prime 
contractor on a covered contract must notify the contracting officer in 
writing if the prime contractor fails to utilize a small business 
concern used in preparing and submitting the prime contractor's bid or 
proposal. Defining when a prime used a subcontractor in preparing a bid 
or proposal is very difficult. For example, providing a quote, or 
discussing availability, does not rise to the level of collaboration 
that would require notice to the Government. Consequently, we are 
proposing that the notice required by the statute will be triggered 
when: (1) The offeror specifically references a small business concern 
in a bid or proposal, (2) the offeror has entered into a written 
agreement with the small business concern for purposes of performing 
the specific contract as a subcontractor, or (3) the small business 
concern drafted portions of the proposal or submitted pricing or 
technical information that appears in the bid or proposal, with the 
intent or understanding that the small business concern will perform 
that related work if the offeror is awarded a contract.
    Section 1334 of the Jobs Act established a requirement that a prime 
contractor notify the contracting officer in writing whenever a payment 
to a subcontractor is reduced or is 90 days or more past due for goods 
and services provided for the contract and for which the Federal agency 
has paid the contractor. The prime contractor shall include the reason 
for the reduction in payment to or failure to pay a subcontractor in 
the written notice. The contracting officer must consider the prime 
contractor's unjustified untimely or reduced price payments to 
subcontractors when evaluating the prime contractor's performance.
    In addition, we are proposing that the contracting officer should 
consider whether to require a prime contractor to enter into a funds 
control agreement with a neutral third party if the prime contractor 
fails to pay subcontractors in a timely manner or fails to pay the 
agreed upon contractual price without justification. S. Rep. No. 111-
343, p. 15. SBA is specifically requesting comments on how these 
arrangements work in the commercial sector, and specific language which 
can be used to guide contracting officers on the use of such an 
arrangement.
    As required by the statute, SBA is also proposing that the 
contracting officer must record the identity of a prime contractor with 
a history of unjustified, untimely payments to subcontractors in the 
Federal Awardee Performance and Integrity System or any successor 
system. SBA is proposing to define a history of unjustified untimely or 
reduced payments as three incidents within a 12 month period. SBA 
invites comments on the proposed definition or alternatives with 
supporting rationales, or comments on whether such judgments should be 
left to the discretion of the contracting officer.
    SBA is proposing to update its regulations to increase the 
subcontracting plan thresholds which were increased pursuant to the 
government-wide procurement program inflationary adjustments required 
by Section 807 of the Ronald W. Reagan National Defense Authorization 
Act for Fiscal Year 2005, Public Law 108-375, see also 75 FR 53129 
(Aug. 30, 2010). SBA proposes to reference eSRS instead of SF-294 and 
SF-295 (where appropriate). SBA proposes to clarify that compliance 
reviews include reviews to determine whether the prime has assigned the 
subcontract the correct NAICS code and corresponding size standard, and 
whether the subcontractor qualifies under the size or socioeconomic 
status claimed. In addition, SBA is proposing to update its regulations 
to specify that a compliance review includes analysis of whether the 
prime contractor is monitoring its subcontractors with respect to their 
subcontracting plans, achievement of their subcontracting goals and 
reviewing their ISRs or other reports.

Compliance With Executive Orders 12866, 13563, 12988, 13132, the 
Paperwork Reduction Act (44 U.S.C. Ch. 35), and the Regulatory 
Flexibility Act (5. U.S.C. 601-612)

Executive Order 12866

    The Office of Management and Budget (OMB) has determined that this 
proposed rule is a significant regulatory action for purposes of 
Executive Order 12866. Accordingly, the next section contains SBA's 
Regulatory Impact Analysis. This is not a major rule, however, under 
the Congressional Review Act, 5 U.S.C. 801, et. seq.

Regulatory Impact Analysis

    1. Is there a need for the regulatory action? The proposed 
regulations implement Sections 1321, 1322 and 1334 of the Small 
Business Jobs Act of 2010, Public Law 111-240, 124 Stat. 2504, 
September 27, 2010 (Jobs Act); 15 U.S.C. 637(d)(6)(G), (d)(12). Section 
1321 of the Jobs Act requires the Administrator to establish a policy 
on subcontracting compliance within one year of enactment.
    2. What are the potential benefits and costs of this regulatory 
action?
    The proposed regulations will benefit small business subcontractors 
by encouraging large business prime contractors to pay small business 
subcontractors in a timely manner and the agreed upon contractual 
price. The proposed regulations will benefit small business 
subcontractors by encouraging large business contractors to utilize 
small business concerns in contract performance where the prime 
contractor used the small business concern to prepare the bid or 
proposal. The proposed regulations will benefit small business 
subcontractors by clarifying the responsibilities of the contracting 
officer in monitoring small business subcontracting plan compliance. 
The proposed regulations will benefit small business subcontractors by 
specifically authorizing procuring agencies to consider proposed small 
business subcontracting when evaluating offers.
    The proposed regulations will benefit small business subcontractors 
by requiring large business concerns to report subcontracting results 
on an order-by-order basis, thereby enabling the funding agency to more 
closely monitor small business subcontracting in connection with the 
order and enabling the funding agency to receive credit towards its 
small business subcontracting goals. The proposed rule benefits funding 
agencies by allowing them to receive credit towards their 
subcontracting goals. The proposed rule benefits small business 
subcontractors by providing transparency with respect to small 
subcontracting on an order-by-order basis, thereby allowing the funding 
agency to monitor performance, and in its discretion, establish 
subcontracting goals for particular orders.
    eSRS will have to be altered to allow large business prime 
contractors to report subcontracting results on an order-by-order 
basis. Other systems may

[[Page 61629]]

have to be altered to allow funding agencies to receive credit towards 
their small business subcontracting goals. Large business prime 
contractors will have to submit subcontracting reports more frequently.
    Large businesses will have to report to the contracting officer in 
writing when they fail to utilize a small business concern in contract 
performance when the prime contractor utilized the small business 
concern in preparing the bid or proposal. Large businesses will have to 
report to the contracting officer in writing when they fail to pay a 
subcontractor within 90 days or when they pay a subcontractor a reduced 
price. The contracting officer will have to consider these written 
explanations when evaluating contract performance. The Federal Awardee 
Performance and Integrity System will have to be modified to allow 
contracting officers to identify large business prime contractors with 
a history of unjustified untimely payments.
    3. What are the alternatives to this final rule?
    Many of the proposed regulations are required to implement 
statutory provisions, and the Jobs Act requires promulgation of a 
policy on subcontracting compliance with within one year of enactment. 
The alternative to the proposed regulation concerning orders would be 
to maintain the current environment, where subcontracting results are 
not reported on an order-by-order basis, and agencies funding orders do 
not receive credit towards their small business subcontracting goals.

Executive Order 13563

    As part of its ongoing efforts to engage stakeholders in the 
development of its regulations, SBA has solicited comments and 
suggestions from procuring agencies on how to best implement the Jobs 
Act. SBA held public forums around the country to discuss 
implementation of the Jobs Act. SBA has incorporated, where feasible, 
public input into the proposed rule. The proposed regulations 
concerning evaluation factors provide contracting officers with the 
discretion to utilize various methods to improve small business 
subcontracting, without requiring their use in all cases. The proposed 
rule concerning orders will provide contracting agencies with 
transparency by providing data concerning small business subcontracting 
for particular orders. Overall, these regulations would minimize the 
burden resulting from these proposed amendments. SBA is proposing to 
amend its regulations to remove outmoded thresholds that have increased 
and remove references to paper based forms that have been replaced by 
electronic reporting through eSRS.
    As part of its implementation of this executive order and 
consistent with its commitment to public participation in the 
rulemaking process, SBA held public meetings in 13 locations around the 
country to discuss implementation of the Jobs Act, and received public 
input from thousands of small business owners, contracting officials 
and large business representatives. Although most of these amendments 
are new, SBA expects that public participation will help to form the 
Agency's retrospective analysis of related contracting regulations that 
are not being amended at this time.

Executive Order 12988

    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(a) and 3(b)(2) of that Order, to 
minimize litigation, eliminate ambiguity, and reduce burden. This rule 
has no preemptive or retroactive effect.

Executive Order 13132

    This rule does not have federalism implications as defined in 
Executive Order 13132. It will not have substantial direct effects on 
the States, on the relationship between the national government and the 
States, or on the distribution of power and responsibilities among the 
various layers of government, as specified in the order. As such it 
does not warrant the preparation of a Federalism Assessment.

Paperwork Reduction Act, 44 U.S.C. Ch. 35

    For the purpose of the Paperwork Reduction Act, SBA has determined 
that this rule, if adopted in final form, would impose new government-
wide reporting requirements on large prime contractors. The Jobs Act 
requires such contractors to notify contracting officers, at the 
applicable procuring agency, in writing whenever a prime contractor 
fails to utilize a small business subcontractor used in preparing and 
submitting a bid or proposal; when the prime contractor pays a 
subcontractor a reduced price without justification; or when payments 
to a subcontractor are 90 days or more past due. These requirements 
will also be incorporated in the Federal Acquisition Regulations.

Regulatory Flexibility Act, 5 U.S.C. 601-612

    SBA has determined that this proposed rule, if adopted in final 
form, may have a significant economic impact on a substantial number of 
small entities within the meaning of the Regulatory Flexibility Act 
(RFA), 5 U.S.C. 601-612. Therefore, SBA has prepared an Initial 
Regulatory Flexibility Act (IRFA) analysis addressing the proposed 
regulation.

IRFA

    When preparing a Regulatory Flexibility Analysis, an agency shall 
address all of the following: a description of why the action by the 
agency is being considered; the objectives and legal basis of the rule; 
the estimated number of small entities to which the rule may apply; a 
description of the projected reporting, recordkeeping and other 
compliance requirements; identification of all Federal rules which may 
duplicate, overlap or conflict with the proposed rule; and a 
description of significant alternatives which minimize any significant 
economic impact on small entities. This IRFA considers these points and 
the impact the proposed regulation concerning subcontracting may have 
on small entities.

(a) Need for, Objectives, and Legal Basis of the Rule

    The majority of the proposed regulatory amendments are required to 
implement Sections 1321, 1322 and 1334 of the Small Business Jobs Act 
of 2010, Public Law 111-240, 124 Stat. 2504, September 27, 2010 (Jobs 
Act); 15 U.S.C. 637(d)(6)(G), (d)(12). The proposed regulations that 
are not required by the Jobs Act are intended to help small business 
subcontractors by explicitly authorizing procuring agencies to consider 
proposed small business participation when evaluating offers from other 
than small business concerns, and to require other than small prime 
contractors to report data on small business subcontracting in 
connection with certain orders.

(b) Estimate of the Number of Small Entities to Which the Rule May 
Apply

    The RFA directs agencies to provide a description of and, where 
feasible, an estimate of the number of entities that may be affected by 
the proposed rules, if adopted. The RFA defines ``small entity'' to 
include ``small businesses,'' ``small organizations,'' and ``small 
governmental jurisdictions.'' SBA's programs generally do not apply to 
``small organizations'' or ``small governmental jurisdictions'' because 
they are non-profit or governmental entities and do not generally 
qualify as ``business concerns'' within the meaning of SBA's 
regulations. SBA's

[[Page 61630]]

programs generally apply only to for-profit business concerns. However, 
to the extent this rule will impact small organizations or small 
governmental jurisdictions that receive prime contracts from the 
Federal government with values that exceed the threshold, the numbers 
would be minimal, and the major provisions would only apply if the 
entity fails to pay or utilize small business subcontractors.
    The proposed rule will not directly negatively affect any small 
business concern, because it applies to other than small concerns and 
contracting officers. The proposed rule will indirectly benefit small 
business concerns, by requiring other than small prime contractors to 
report to the contracting officer when the prime contractor has failed 
to utilize a small business subcontractor used in preparing the bid or 
proposal. The proposed rule will also indirectly benefit small business 
concerns, by requiring large business prime contractors to report to 
the contracting officer when the prime contractor has failed to pay a 
small business subcontractor in a timely manner or pays a subcontractor 
a reduced rate without justification.
    There are in approximately 348,000 concerns listed as small 
business concerns in the Dynamic Small Business Search (DSBS) database. 
We do not know how many of these concerns participate in small business 
subcontracting. Firms do not need to register in the DSBS database to 
participate in subcontracting. The DSBS database is primarily used for 
prime contracting purposes. Thus, the number of firms participating in 
subcontracting may be greater than or lower than the number of firms 
registered in the DSBS database.

(c) Projected Reporting, Recordkeeping and Other Compliance 
Requirements

    To the extent the proposed rule imposes new information collection, 
recordkeeping or compliance requirements, they are imposed on other 
than small business concerns, not on small business concerns.

(d) Federal Rules Which May Duplicate, Overlap or Conflict With the 
Proposed Rule

    SBA is not aware of any rules which duplicate, overlap or conflict 
with the proposed rule. The proposed rule primarily implements 
statutory provisions.

(e) Significant Alternatives to the Rule Which Could Minimize Impact on 
Small Entities

    Section 1321 of the Jobs Act requires SBA to promulgate regulations 
implementing it. Section 1321 of the Jobs Act and its proposed 
implementing regulations primarily apply to contracting officers. 
Sections 1322 and 1334 of the Jobs Act amend portions of the Small 
Business Act, which SBA is responsible for administering and 
implementing through its regulations. The proposed rules implementing 
Sections 1322 and 1334 of the Jobs Act primarily apply to other than 
small concerns. As discussed above, the proposed rule indirectly 
benefits small business concerns, without requiring small business 
concerns to report, keep records or take other compliance actions.

List of Subjects

13 CFR Part 121

    Government procurement, Government property, Grant programs--
business, Individuals with disabilities, Loan programs--business, Small 
businesses.

13 CFR Part 125

    Government contracting programs; Small business subcontracting 
program.

    For the reasons stated in the preamble, SBA proposes to amend parts 
121 and 125 of title 13 of the Code of Federal Regulations as follows:

PART 121--SMALL BUSINESS SIZE REGULATIONS

    1. The authority citation for 13 CFR part 121 continues to read as 
follows:

    Authority: 15 U.S.C. 632, 634(b)(6), 636(b), 637(a), 644, and 
662(5); and Public Law 105- 135, sec. 401 et seq., 111 Stat. 2592.

    2. Amend Sec.  121.404(g)(3)(ii) by adding the following sentence 
at the end of the paragraph:


Sec.  121.404  When does SBA determine the size status of a business 
concern?

* * * * *
    (g) * * *
    (3) * * *
    (ii) * * * However, a contracting officer may require a 
subcontracting plan if a firm's size status changes from small to other 
than small as a result of a size recertification.
* * * * *

PART 125--GOVERNMENT CONTRACTING PROGRAMS

    3. The authority citation for part 125 is revised to read as 
follows:

     Authority: 15 U.S.C. 632(p), (q); 634(b)(6); 637; 644 and 
657(f); Pub. L. 111-240, Sec.  1321.

    4. Amend Sec.  125.3 as follows:
    a. Revise paragraph (a);
    b. Revise paragraph (b)(1);
    c. Revise paragraph (c)(1) introductory text;
    d. Revise paragraph (c)(1)(iii);
    e. Redesignate paragraphs (c)(1)(iv), (v), and (vi) as (c)(1)(vii), 
(viii) and (ix) and add new paragraphs (c)(1)(iv), (v), and (vi);
    f. Revise newly redesignated paragraphs (c)(1)(viii) and (ix);
    g. Redesignate paragraph (c)(3) as (c)(6) and add new paragraphs 
(c)(3), (c)(4) and (c)(5);
    h. Revise paragraph (d);
    i. Revise paragraph (f)(2);
    j. Revise paragraph (g); and
    k. Add paragraph (h).
    The additions and revisions 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, certified HUBZone small business concerns, 
certified 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, unless otherwise exempt, other-than-small business 
concerns awarded contracts that offer subcontracting possibilities by 
the Federal Government in excess of $650,000, or in excess of 
$1,500,000 for construction of a public facility, must submit a 
subcontracting plan to the appropriate 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.
    (1) Subcontract under this section means any agreement (other than 
one involving an employer-employee relationship) entered into by a 
Government prime contractor or subcontractor calling for supplies and/
or services required for performance of the contract or subcontract 
(including modifications). Purchases from a corporation, company, or 
subdivision that is an affiliate of the prime contractor or 
subcontractor are not included. Subcontract award data

[[Page 61631]]

reported by prime contractors and subcontractors shall be limited to 
awards made to their immediate next-tier subcontractors. Credit cannot 
be taken for awards made beyond the immediate next-tier, unless the 
contractor or subcontractor has been designated to receive a small 
business or small disadvantaged business credit from an ANC or Indian 
Tribe. Only subcontracts involving performance in the United States or 
its outlying areas should be included, with the exception of 
subcontracts under a contract awarded by the State Department or any 
other agency that has statutory or regulatory authority to require 
subcontracting plans for subcontracts performed outside the United 
States and its outlying areas and subcontracts for foreign military 
sales unless waived in accordance with agency regulations. The 
following should not be included in the subcontracting base: Internally 
generated costs such as salaries and wages, employee insurance; other 
employee benefits; payments for petty cash; depreciation; interest; 
income taxes; property taxes; lease payments; bank fees; fines, claims, 
and dues; Original Equipment Manufacturer relationships during warranty 
periods (negotiated up front with product); electricity; utilities such 
as water, sewer, and other services purchased from a municipality; and 
philanthropic contributions. Utility companies may be eligible for 
additional exclusions unique to their industry, which may be approved 
by the contracting officer on a case-by-case basis.
    (2) Subcontracting goals required under paragraph (c) must be 
established in terms of the total dollars subcontracted and as a 
percentage of total subcontract dollars. However, a contracting officer 
may establish additional goals as a percentage of total contract 
dollars.
    (3) A prime contractor has a history of unjustified untimely or 
reduced payments to subcontractors if the prime contractor has reported 
itself to a contracting officer in accordance with paragraph (c)(5) on 
three occasions within a 12 month period.
    (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.
* * * * *
    (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 $650,000, or $1,500,000 in the case 
of construction of a public facility, is responsible for:
* * * * *
    (iii) A prime contractor may not prohibit a subcontractor from 
discussing any material matter pertaining to payment or utilization as 
set forth in paragraph (c) with the contracting officer;
    (iv) When developing an individual subcontracting plan (also called 
individual contract plan), the contractor must decide whether to 
include indirect costs in its subcontracting goals. If indirect costs 
are included in the goals, these costs must be included in the 
Individual Subcontract Report (ISR) in http://www.esrs.gov (eSRS) or 
Subcontract Reports for Individual Contracts (the paper SF-294 (if 
authorized). If indirect costs are excluded from the goals, these costs 
must be excluded from the ISRs (or SF-294 if authorized); however, 
these costs must be included on a prorated basis in the Summary 
Subcontracting Report (SSR) in the eSRS system. A contractor authorized 
to use a commercial subcontracting plan must include all indirect costs 
in its SSR;
    (v) Assigning each subcontract the NAICS code and corresponding 
size standard that best describes the principal purpose of the 
subcontract (see 121.410);
    (vi) Submitting timely and accurate ISRs and SSRs in eSRS, or if 
information for a particular procurement cannot be entered into eSRS, 
submit a timely SF-294, Subcontracting Report for Individual Contract. 
When a report is rejected by the contracting officer, the contractor 
must make the necessary corrections and resubmit the report within 30 
days of receiving the notice of rejection;
* * * * *
    (viii) Providing pre-award written notification to unsuccessful 
small business offerors on all subcontracts over $150,000 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
    (ix) As a best practice, providing the pre-award written 
notification cited in paragraph (c)(1)(viii) of this section to 
unsuccessful and small business offerors on subcontracts at or below 
$150,000 whenever it is practical to do so.
* * * * *
    (3) An offeror must represent to the contracting officer that it 
will make a good faith effort to acquire articles, equipment, supplies, 
services, or materials, or obtain the performance of construction work 
from the small business concerns that it used in preparing the bid or 
proposal, in the same amount and quality used in preparing and 
submitting the bid or proposal. An offeror used a small business 
concern in preparing the bid or proposal if:
    (i) The offeror references the small business concern as a 
subcontractor in the bid or proposal;
    (ii) The offeror has a subcontract or agreement in principle to 
subcontract with the small business concern to perform a portion of the 
specific contract; or
    (iii) The small business concern drafted any portion of the bid or 
proposal or the offeror used the small business concern's pricing or 
cost information or technical expertise in preparing the bid or 
proposal, where there is an intent or understanding that the small 
business concern will be awarded a subcontract for the related work if 
the offeror is awarded the contract.
    (4) If an offeror fails to acquire articles, equipment, supplies, 
services or materials or obtain the performance of construction work as 
described in paragraph (c)(3) of this section, the offeror must provide 
the contracting officer with a written explanation.
    (5) A prime contractor shall notify the contracting officer in 
writing if the prime contractor pays a reduced price to a subcontractor 
for goods and services upon completion of the responsibilities of the 
subcontractor or the payment to a subcontractor is more than 90 days 
past due for goods and services provided for the contract and for which 
the Federal agency has paid the prime contractor. The prime contractor 
shall include the reason for the reduction in payment to or failure to 
pay a subcontractor in any written notice.

[[Page 61632]]

    (d) Contracting officer responsibilities. The contracting officer 
(or administrative contracting officer if specifically delegated in 
writing to accomplish this task) is responsible for evaluating the 
prime contractor's compliance with its subcontracting plan, including:
    (1) Ensuring that all contractors submit their subcontracting 
reports into the eSRS or, if applicable, the SF-294, Subcontracting 
Report for Individual Contracts, within 30 days after the report ending 
date (e.g., by October 30th for the fiscal year ended September 30th);
    (2) Reviewing all reports in eSRS within 60 days of the report 
ending date (e.g., by November 30th for a report submitted for the 
fiscal year ended September 30th);
    (3) Evaluating whether the prime contractor made a good faith 
effort to comply with its small business subcontracting plan. 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:
    (i) The contractor performed one or more of the actions described 
in paragraph (b) of this section, as appropriate for the procurement;
    (ii) Although the contractor may have failed to achieve its goal in 
one socioeconomic category, it overachieved its goal by an equal or 
greater amount in one or more of the other categories; or
    (iii) The contractor fulfilled all of the requirements of its 
subcontracting plan.
    (4) Evaluating the prime contractor's written explanation 
concerning the prime contractor's failure to use a small business 
concern in performance when the prime contractor used the small 
business concern to prepare the bid or proposal.
    (5) Evaluating the prime contractor's written explanation 
concerning its payment of a reduced price to a subcontractor for goods 
and services upon completion of the responsibilities of the 
subcontractor or its payment to a subcontractor more than 90 days late 
for goods and services provided for the contract and for which the 
Federal agency has paid the prime contractor.
    (6) Evaluating whether a prime contractor that has failed to pay 
subcontractors in a timely manner or failed to pay subcontractors an 
agreed upon contractual price without justification should be required 
to enter into a funds control agreement with a neutral third party for 
the purpose of paying subcontractors the contractual amount in a timely 
manner.
    (7) Evaluating whether the prime contractor has a history of 
unjustified untimely or reduced payments to subcontractors, and if so, 
recording the identity of the prime contractor in the Federal Awardee 
Performance and Integrity Information System (FAPIIS), or any successor 
database.
    (8) A contracting officer must require the prime contractor (other 
than a prime contractor with a commercial plan) to update its 
subcontracting plan when an option is exercised.
    (9) A contracting officer must require the prime contractor (other 
than a contractor with a commercial plan) to submit a subcontracting 
plan if the value of a modification causes the value of the contract to 
exceed the subcontracting plan threshold.
    (10) A contracting officer may require a subcontracting plan if a 
firm's size status changes from small to other than small as a result 
of a size recertification.
* * * * *
    (f) * * *
    (2) All compliance reviews begin with a validation of the 
contractor's most recent ISR (or SF-294, if applicable) or SSR.
    (i) A compliance review includes an evaluation of whether the prime 
contractor assigned the proper NAICS code and corresponding size 
standard to a subcontract, and a review of whether small business 
subcontractors qualify for the size or socioeconomic status claimed.
    (ii) A compliance review includes validation of the contractor's 
methodology for completing its subcontracting reports.
    (iii) A compliance review includes consideration of whether the 
contractor is monitoring its subcontractors with regard to their 
subcontracting plans, achievement of their proposed subcontracting 
goals, and reviewing their subcontractors' ISRs (or SF-294s, if 
applicable).
* * * * *
    (g) Subcontracting consideration in source selection. (1) A 
solicitation requiring a subcontracting plan may contain an evaluation 
factor or subfactor for small business subcontracting participation in 
the subject procurement. A small business concern submitting an offer 
must receive the maximum score or credit under the evaluation factor or 
subfactor, without having to submit any information in connection with 
this factor or subfactor.
    (2) When an ordering agency anticipates placing an order against a 
Federal Supply Schedule, government-wide acquisition contract (GWAC), 
or multi-agency contract (MAC), the ordering agency may evaluate 
subcontracting as a significant factor in its source selection process. 
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:
    (i) The subcontracting to be performed on the specific requirement;
    (ii) The goals negotiated in previous subcontracting plans; and
    (iii) The contractor's past performance in meeting the 
subcontracting goals contained in previous subcontracting plans.
    (h) Multi-agency, Federal Supply Schedule, Multiple Award Schedule 
and Government-wide Acquisition Contracts. Except where a prime 
contractor has a commercial plan, the contracting officer shall require 
subcontracting plans for Multi-agency, Federal Supply Schedule, 
Multiple Award Schedule and Government-wide Acquisition indefinite 
delivery, indefinite quantity (IDIQ) contracts with estimated values 
above the subcontracting plan thresholds and that have subcontracting 
possibilities.
    (1) Contractors shall submit small business subcontracting reports 
for individual orders to the contracting agency on an annual basis.
    (2) The agency funding the order shall receive credit towards its 
small business subcontracting goals.
    (3) The agency funding the order may in its discretion establish 
small business subcontracting goals for individual orders.

    Dated: September 26, 2011.
Karen G. Mills,
Administrator.
[FR Doc. 2011-25767 Filed 10-4-11; 8:45 am]
BILLING CODE 8025-01-P