[Federal Register Volume 78, Number 136 (Tuesday, July 16, 2013)]
[Rules and Regulations]
[Pages 42391-42406]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2013-16967]
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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: Final rule.
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SUMMARY: The U.S. Small Business Administration (SBA or Agency) is
amending its regulations governing small business subcontracting to
implement provisions of the Small Business Jobs Act of 2010. In
particular, this rule adds a provision providing that for a ``covered
contract'' (a contract for which a small business subcontracting plan
is required), a prime contractor must notify the contracting officer in
writing whenever the prime contractor does not utilize a small business
subcontractor used in preparing its bid or proposal during contract
performance. This rule also adds a provision requiring a prime
contractor to notify a contracting officer in writing whenever the
prime contractor reduces payments to a small business subcontractor or
when payments to a small business subcontractor are 90 days or more
past due. In addition, this rule clarifies that the contracting officer
is responsible for monitoring and evaluating small business
subcontracting plan performance. The rule also clarifies which
subcontracts must be included in subcontracting data reporting, which
subcontracts should be excluded, and the way subcontracting data is
reported. The rule also makes changes to update its subcontracting
regulations, including changing subcontracting plan thresholds and
referencing the electronic subcontracting reporting system (eSRS).
Further, the rule adds a provision to the regulations which addresses
subcontracting plan requirements and credit towards subcontracting
goals in connection with multiple award multi-agency, Federal Supply
Schedule, Multiple Award Schedule and government-wide acquisition
indefinite delivery, indefinite quantity contracts.
DATES: Effective Date: This rule will be effective August 15, 2013.
FOR FURTHER INFORMATION CONTACT: Dean Koppel, U.S. Small Business
Administration, Office of Government Contracting, 409 Third Street SW.,
8th Floor, Washington, DC 20416, (202) 205-7322, [email protected].
SUPPLEMENTARY INFORMATION: On October 5, 2011, SBA published in the
Federal Register a proposed rule to implement provisions of the Jobs
Act which pertain to small business subcontracting. 76 FR 61626.
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.
The proposed rule called for a 60-day comment period, with comments
to be received by SBA by December 5, 2011. SBA published a notice in
the Federal Register on December 1, 2011, reopening the comment period
for an additional 30 days, until to January 6, 2012. 76 FR 74749.
The proposed rule contained changes to SBA's size regulations (Part
121) and the regulations governing SBA's government contracting
programs (Part 125). SBA received 105 written comments during the
comment period. Many of these comments were lengthy and discussed
numerous proposed amendments. SBA has made changes in this final rule
in response to comments received to its notice of proposed rulemaking.
With the exception of comments which are beyond the scope of this rule,
or which did not set forth any rationale or make suggestions, SBA
discusses and responds fully to all of the comments below.
Summary of Comments and SBA's Responses
Part 121
SBA received one comment on proposed Sec. 121.404(g)(3)(ii), which
added a provision permitting a contracting officer to require a
subcontracting plan if a prime contractor's size status changes from
small to other than small as a result of a size recertification. The
commenter recommended adding that size status at time of contract award
controls subcontracting plan requirements or clarifying how a
subcontracting plan must change if a former small business
subcontractor reclassifies. Section 121.404(g)(3)(ii) provides that
recertification does not change the terms and conditions of a contract,
including the requirement for a subcontracting plan, and otherwise size
is determined at time of offer and will not change during performance.
However, under the final rule a contracting officer has the discretion
to require a subcontracting plan if size status changes as a result of
recertification.
Part 125
The proposed rule revised Sec. 125.3(a) to update 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). One commenter recommended removing the reference to
``a public facility'' in Sec. 125.3(a) because the term is not defined
in the Code of Federal Regulations. SBA does not adopt this comment. It
is up to the contracting officer to determine whether the term applies
to a particular acquisition. Further, this term comes from Section 8(d)
of the Small Business Act, so removing it would require legislative
action.
The proposed rule added Sec. 125.3(a)(1) to define subcontract in
order to clarify which subcontracts must be included when reporting on
small business subcontracting performance. SBA
[[Page 42392]]
received a number of comments on proposed Sec. 125.3(a)(1). Many
commenters supported SBA's definition of a subcontract.
One commenter requested confirmation that the new definition of
subcontract will be coordinated with existing definitions at Federal
Acquisition Regulation (FAR) 19.701 and FAR 52.219-9. SBA agrees that
it is important for SBA's rules and the FAR to be consistent and notes
that its rules will also be incorporated in the FAR after SBA's
regulations are finalized.
One commenter requested that SBA clarify how subcontracts to and by
affiliates will be treated. SBA's long-standing policy has been to
count subcontracts by first-tier affiliates as subcontracts of the
prime contractor. SBA has amended Sec. 125.3(a)(1) to make this clear.
SBA notes that the Subcontracting Report for Individual Contracts (ISR)
(SF-294) and the Summary Subcontract Report (formerly the SF-295, now
discontinued) and their electronic equivalents in eSRS specifically
state that subcontracts to affiliates are not included in the
individual and summary reports.
One commenter recommended excluding bonds and all insurance from
the definition of subcontract. The commenter noted that in the
construction industry, prime contractors generally have established and
ongoing relationships with sureties and insurance providers, and bond
and insurance requirements are generally met through these
relationships, so no real opportunity for small business exists in
those areas. The commenter also noted that the government's
requirements for bonds and insurance--specifically for construction
contracts--normally preclude the use of small business concerns.
Although SBA is sympathetic to this comment, SBA would need more
information on the participation of small business concerns in these
industries before excluding bonds and all insurance from the
subcontracting base government-wide.
One commenter opposed excluding philanthropic contributions from
the definition of subcontract. The commenter noted that on Department
of Defense contracts, services provided to the prime contractor by
Historically Black Colleges and Universities (HBCUs) are generally
funded by a donation or grant rather than charged, and excluding such
donations/grants undermines a prime contractor's ability to support
such HBCUs. SBA disagrees. It is unclear how a philanthropic
contribution could be counted as a subcontract and charged to the
government.
One commenter recommended requiring transparency in calculating the
subcontracting base, arguing that the prime contractor has too much
discretion and there are no checks in place. SBA does not concur. By
statute, the contracting officer is responsible for negotiating a
subcontracting plan that maximizes small business participation and for
monitoring performance. SBA and contracting agencies also monitor
subcontracting plan compliance through compliance reviews.
One commenter recommended requiring discrete subcontracting
reports, rather than comprehensive reports, for all prime contracts of
$1 million or more. SBA notes that comprehensive plans are authorized
by statute and that commercial plans are authorized by the FAR. In
addition, the thresholds for subcontracting plan reports are set by
statute.
Several commenters opposed the exclusion of utilities from the
subcontracting base. One commenter argued that electricity and other
utilities should be included in the subcontracting base because small
business concerns may be licensed or otherwise equipped to provide
these services. Another commenter suggested that the exclusion should
be more specifically defined to exclude services that are not required
municipal services such as those required under local franchise
agreements. SBA has amended the rule to exclude utilities where no
competition exists and thus no small business concern could have an
opportunity to receive a subcontract. Specifically, SBA has amended the
definition to exclude ``utilities such as electricity, water, sewer and
other services purchased from a municipality or solely authorized by
the municipality to provide those services in a particular geographical
region.'' Another commenter argued that not including utilities in the
subcontracting base causes an overstatement of the percentage of
contracts given to small business. Subcontracting plans are required to
the extent subcontracting possibilities exist. As stated above, SBA has
amended the rule to clarify that utilities are only excluded to the
extent there is no choice of provider.
One commenter recommended clarifying that the supplies or services
provided under the agreement must be specific to the particular prime
contract requirements in order for the agreement to be considered a
subcontract. Specifically, the commenter believed it would be useful to
clarify that an agreement to obtain supplies or services that are in
the nature of commercial items and are used to support both commercial
and government contracts would not be considered a ``subcontract.'' The
commenter is further requesting clarification concerning whether
subcontracting flowdown requirements apply to certain types of
contracts. As the commenter notes, certain vendor agreements must be
included in the subcontracting base for commercial plans because those
plans are required to consider indirect costs. Further, FAR 52.219-9(j)
addresses flowdown requirements in the context of commercial items.
Consequently, we have declined to address this matter in the final
rule.
One commenter recommended clarifying if the list of exclusions is
exhaustive or illustrative. SBA agrees and has amended the rule to
state that the list ``includes but is not limited to.''
One commenter recommended clarifying whether vendors of commercial
items are subcontractors for flow-down clauses. SBA has clarified that
flow-down clauses apply to commercial item vendors, except when the
subcontract is for a commercial item and the prime contract contains
FAR clause 52.212-5 or 52.244-6. Under this scenario, the prime
contractor is required to flow down FAR clause 52.219-8 but not the
clause at 52.219-9; accordingly, no subcontracting plan is required
from other than small subcontractors at any tier (see Federal
Acquisition Streamlining Act of 1994, Pub. L. 103-355, and FAR 52.219-
9(j), 52.212-5(e), and 52.244-6(c)).
One commenter requested clarification of whether contracts in
connection with foreign military sales are subject to the
subcontracting plan requirements of the Small Business Act and the FAR.
Based on the proposed definition, which SBA is adopting, contracts in
connection with foreign military sales are subject to the
subcontracting plan requirements, unless this requirement is waived in
accordance with the procuring agency's regulations. Specific questions
concerning specific contracts should be directed to the contracting
officer.
The proposed rule added Sec. 125.3(a)(2) to explicitly authorize
contracting officers to establish additional subcontracting goals in
terms of total contract dollars. As explained in the proposed rule,
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--that is, 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
[[Page 42393]]
the total contract dollars if desired. Several commenters supported
SBA's proposal to allow contracting officers to set additional
subcontracting goals in terms of total dollars.
One commenter opposed proposed Sec. 125.3(a)(2), arguing that the
change would result in the illusion that there are more subcontracting
opportunities for small businesses than in fact exist. The commenter
argued under some contracts more than 70% of total contract dollars are
spent on personnel expenses related to salary and benefits, which are
costs for which there are no subcontracting opportunities. However, the
commenter noted that the contracting officer has the ability to compare
achievements either way (percent of subcontracting dollars or percent
of total contract dollars) because eSRS automatically calculates
percentage by both methods when prime contractors report achievements
in whole dollars. Thus, SBA believes that contracting officers should
have the discretion to set goals in terms of total contract dollars.
Some contracting officers already set current goals in terms of total
contract dollars, and as the commenter notes, the calculation is
already available in eSRS. Contracting officers need to set realistic
goals, taking into account the opportunity for subcontracting and the
percentage of dollar value that accrues to personnel expenses. However,
subcontracts for labor are counted towards the total dollar contract
value. SBA does not want to limit contracting officer flexibility that
benefits small businesses.
One commenter questioned whether under the amended rule, small
business goals set in terms of percentage of subcontracting dollars
would be evaluated in terms of percentage of total contract dollars.
SBA notes that the goals still must be set in terms of percentage of
subcontracting dollars, but can be set in terms of total contract
dollars as well.
The proposed rule added Sec. 125.3(a)(3) to define a history of
unjustified untimely or reduced payments as three incidents within a 12
month period. SBA invited comments on the proposed definition,
alternatives with supporting rationales, and/or comments on whether
such judgments should be left to the discretion of the contracting
officer. SBA received several comments on the proposed definition of a
history of unjustified late payment. Some commenters recommended that
the definition should look for patterns, as opposed to specific
numbers. Others recommended defining it based on percentages, and
others recommend establishing a dollar value threshold. Others asked
SBA to define when a payment that is late is unjustified. Some
commenters argued that it should be left in the discretion of the
contracting officer.
SBA has decided to retain the proposed definition of three payments
in a twelve month period that are more than 90 days past due, after
performance has occurred and the government has paid the prime
contractor, where the late payment is unjustified. If a payment is late
but it is justified in the opinion of the prime contractor, e.g.,
unacceptable or incomplete performance, then the late payment would be
justified, and there would be no requirement to notify the contracting
officer. On the other hand, if satisfactory performance by the
subcontractor has occurred, the prime contractor has been paid by the
government, and payment to the subcontractor is more than 90 days past
due, the prime contractor owes the contracting officer an explanation,
regardless of the dollar value of the contract. The statute stipulates
that payment to a subcontractor after 90 days is unacceptable unless
justified. Further, looking for patterns or percentages would overly
complicate a fairly simple principle: if satisfactory performance has
occurred and the prime has been paid, subcontractors must be paid
within 90 days.
Additional Responsibilities of Large Prime Contractors
The proposed rule amended the introductory text of Sec.
125.3(c)(1) to reflect the updated subcontracting plan thresholds, as
discussed above. One commenter opposed changing the thresholds, arguing
that the higher the thresholds, the less small business participation
will occur because small businesses are not required to submit
subcontracting plans. However, the thresholds are set by statute, and
subcontracting plans require percentages that are realistic based on
subcontracting opportunity.
One commenter recommended amending Sec. 125.3(c)(1)(i) to require
prime contractors to give at least 30% of contracts to small business
subcontractors. SBA disagrees. Subcontracting plans are established
based on small business subcontracting opportunity. It would be
inefficient and unfair to establish thresholds that would apply to all
contracts government-wide.
SBA proposed to amend Sec. 125.3(c)(1)(iii) to provide that a
prime contractor may not prohibit a subcontractor from discussing with
the contracting officer any material matter pertaining to payment or
utilization. Some commenters argued that the proposed change conflicts
with the principle of privity of contract. SBA disagrees. The
contracting officer will not take any action with respect to the
subcontractor. Rather, the contracting officer can take action with
respect to the prime contractor's performance, which is the purpose of
the statutory provisions. Other commenters argued that the contracting
officer will become the entry point for contract disputes between
primes and subcontractors. SBA notes that the contracting officer
cannot be a party to disputes between subcontractors and prime
contractors but must be involved in evaluating prime contractors'
performance.
SBA received several comments on proposed Sec. 125.3(c)(1)(iv),
which provided that 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.
Some commenters argued that this change would be an administrative
burden on contractors and would not further the goals of the program.
In proposing this rule, SBA's intent was to memorialize current
practice. As explained in the proposed rule, 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.
As discussed in the proposed rule, Sec. 125.3(c)(1)(iv) is being
amended to reflect current practice.
One commenter recommended providing a specific definition for
``indirect cost'' as it pertains to small business subcontracting plans
and eSRS reporting. The commenter noted that the definition in FAR Part
2 is vague and does not work well in this context. SBA disagrees. For
consistency, SBA uses the FAR definition. SBA notes that requests to
change the FAR should be directed to the FAR Council.
SBA proposed to add Sec. 125.3(c)(1)(v), providing that large
prime contractors are responsible for assigning NAICS codes and
corresponding size standards to subcontracts. In response to comments,
SBA has amended proposed Sec. 125.3(c)(1)(v) to clarify that in
assigning NAICS codes to subcontracts, prime contractors should use the
guidance in SBA's regulations governing contracting officers'
assignment of NAICS codes to prime contractors, 13 CFR 121.410. In
addition, SBA has amended the regulation to clarify that prime
contractors may rely on
[[Page 42394]]
subcontractors' electronic representations and certifications made in
the System for Award Management (SAM) (or any successor system),
provided the subcontract contains a clause similar to current FAR
clause 52.204-8(d) which clearly provides that the subcontractor is
representing its size or socioeconomic at the time of offer for the
subcontract. However, SBA notes that SAM was created for firms that
want to do business with the government as prime contractors, and some
subcontractors may not want to enter data into SAM. As such, SBA has
also clarified that a prime contractor (or subcontractor) may not
require the use of SAM (or a successor system) for size or
socioeconomic representation for subcontracts.
One commenter recommended clarifying whether Sec. 125.3(c)(1)(v)
applies to all subcontractors or only to certified small business
subcontractors. The commenter also inquired as to whether a list of
applicable NAICS codes would be provided at the time of proposal
request. The assignment of a NAICS code and size standard is required
for subcontracts, since that forms the basis for the prime contractor's
claim that it awarded a subcontract to a small business or an other
than small business. The prime contractor must assign a NAICS code to
the solicitation, so that the subcontractor can make a size or
socioeconomic representation in connection with that offer for that
subcontract. Size or socioeconomic status is determined as of the date
of offer for the subcontract.
The proposed rule amended redesignated Sec. 125.3(c)(1)(vi)
(former Sec. 125.3(c)(1)(iii)) to provide that 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.
One commenter recommended that the rule refer to eSRS ``or the
successor system,'' arguing that eSRS is being replaced by SAM. In
response to the comment, SBA has added clarifying language to the
regulation.
One commenter recommended allowing 60 days to correct a report. SBA
disagrees. Thirty days should be sufficient. One of the reasons for the
Jobs Act was the belief that contracting officers and prime contractors
are not reporting or reviewing subcontracting accomplishments in a
timely manner.
One commenter recommended adding specific consequences for a prime
contractor's failure to submit timely or accurate required reports. SBA
does not concur. It is difficult to establish concrete, universally
applicable consequences for contracting officers and prime contractors.
SBA believes that compliance by the contracting officer or prime
contractor could be considered as part of the performance evaluation of
either party, at the discretion of the evaluator.
One commenter recommended adding a provision addressing the
frequency and nature of the subcontracting reports that must be
submitted to the contracting officer. SBA notes that these issues are
addressed in the FAR.
One commenter recommended fixing data input and error issues in the
eSRS system so the necessary data for enforcement can be available. In
response to this comment, SBA recommends that contracting agencies
include data quality as part of the performance evaluation of
employees.
One commenter recommended reviewing eSRS and the Federal Funding
Accountability and Transparency Act (FFATA) Subaward Reporting System
(FSRS) databases and eliminating duplicate reporting requirements. SBA
notes that FSRS is the reporting tool required by FFATA, and eSRS
serves a separate purpose--i.e., it is an electronic system for
reporting subcontracting plan compliance required by the Small Business
Act.
SBA received several comments on redesignated Sec.
125.3(c)(1)(viii) (former Sec. 125.3(c)(1)(v)), which requires pre-
award written notification to unsuccessful subcontractor offerors. SBA
notes that this is not a new requirement (see also Sec. 121.411(b)).
SBA is only moving this provision as a result of amending this section
to increase the subcontracting plan thresholds. One commenter argued
that this rule creates an unnecessary administrative burden. The
commenter noted that there is no specified tracking of compliance or
listed consequence for failure to meet this requirement. SBA again
notes that this notification is required by the current regulations.
Further, this requirement is the only means to trigger any self-
policing in the small business subcontracting community. The government
may review compliance with this requirement as part of a compliance
review.
Some commenters recommended clarifying the language: ``for which a
small business concern received a preference.'' One commenter noted
that the FAR neither allows nor requires prime contractors to give
small business preference on solicitations. Another commenter asked
whether this language referred only to when a small business receives
the award, or to all subcontracts set-aside for small businesses. This
language is in the existing regulations and refers to subcontract
competitions where consideration for award was limited based on size or
socioeconomic status.
Use of Subcontractor in Performance
The proposed rule added new Sec. 125.3(c)(3), providing that a
prime contractor must represent that it will make a good faith effort
to utilize the small business subcontractors used in preparing its bid
or proposal during contract performance. SBA proposed that a prime
contractor is deemed to have ``used'' a small business subcontractor in
preparing its bid or proposal when: (i) The offeror specifically
references a small business concern in a bid or proposal, (ii) the
offeror has entered into a written agreement with the small business
concern for purposes of performing the specific contract as a
subcontractor, or (iii) 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. Some commenters opposed the provision in general
terms, but as discussed previously, this provision is statutory and
must be implemented. Some commenters requested clarifying whether this
definition will be implemented in the FAR. SBA notes that this
provision will be implemented in the FAR.
One commenter argued that ``in the same amount and quality used in
preparing and submitting the bid or proposal'' is not feasible because
quantities often change. SBA disagrees. This language is directly in
the statute and is meant to address a specific problem. If the
subcontractor was ``used'' in preparing the offer as defined in the
regulation, then the prime contractor must provide the contracting
officer with a written explanation as to why the subcontractor was not
actually used in performance to the extent set forth in the offer. That
explanation would certainly include any information relating to
required quantities changing, so that the small business could not be
used in performance to the same extent as that set forth in the offer.
One commenter noted that the proposed language would not address
cases where a prime contractor issues a nominal subcontract but with
significant down-scoping of the original
[[Page 42395]]
proposed work share, which according to the commenter is common
practice. In response to this comment, SBA has amended Sec.
125.3(c)(3) by adding the term ``scope.''
One commenter argued that commitments to suppliers are never made
at time of proposal because an order may never be awarded, the supplier
may go out of business, the supplier may be removed due to quality or
delivery or other issues, or the supplier's quote may have expired
before an award is received. The commenter argued that due to FAR
competition requirements, many proposals are received and responded to
which do not become actual orders. The commenter recommended that the
government allow large businesses to place orders with small business
concerns and reimburse them. As SBA stated in the proposed rule,
responding to a request for a quote does not constitute use in
preparing the bid or offer. SBA has added this language to Sec.
125.3(c)(3). Further, the statute and regulation require the prime
contractor to notify the contracting officer with an explanation, which
could include all of those reasons (e.g., subcontractor out of
business, quality or delivery issues, etc.).
Some commenters recommended requiring a more formal bid listing
process requiring prime contractors to list in their bid the
subcontractors they would use, allowing for later substitution if
necessary. SBA considered requiring prime contractors to name
subcontractors, but SBA has heard from the public and industry that
selection of subcontractors in some industries does not occur until
after contract award and requiring the prime to name subcontractors
could result in a reduction of subcontracting opportunities.
Some commenters recommended requiring prime contractors to submit
formal requests to amend subcontracting plans, arguing that this would
assist in ensuring that prime contractors used the subcontractors named
in their proposals. SBA disagrees. Subcontracting plans generally do
not name specific small business concerns. Subcontracting plans simply
establish goals for each socioeconomic category.
Some commenters recommended requiring prime contractors to include
with their proposals fully executed subcontracts that are conditioned
on the prime contractor's receipt of contract award and that are
effective throughout the entire life of the contract. Other commenters
recommended requiring a contract as evidence that a contractor failed
to comply with proposed Sec. 125.3(c)(3). SBA disagrees. In some
industries, specific subcontracts are not solicited or awarded until
well after contract award. Thus, it is not possible to impose a
requirement that prime contractors include subcontracts in their
proposals government-wide. At the same time, limiting the rule's
applicability to situations where a formal subcontract has been
executed would severely hamper the scope and breadth of the statutory
provision. Further, it could have the effect of reducing prime
contractors' willingness to enter into subcontracts prior to offer,
which is clearly contrary to congressional intent.
One commenter argued that proposed Sec. 125.3(c)(3) should not be
triggered if a prime contractor awards the work to another small
business and is otherwise not in violation of any contract by doing so.
The commenter argued that the goal of the Jobs Act is to protect small
business in general, not specific small businesses. SBA disagrees, and
believes that the Jobs Act specifically intended to apply to and
protect individual small businesses. This statutory provision does not
reference whether or not the prime contractor is meeting its goals. The
statute was intended to address the complaints of small businesses that
expended significant time and resources to assist large businesses
prepare bids, quotes and proposals that assisted those large businesses
in being awarded a contract and then were not used in the performance
of that contract.
One commenter suggested that the rule not apply if a quote from a
small business is included in the bid or proposal as supporting
documentation for a budget item. SBA disagrees. This is the type of
behavior that the statute is intended to address. A prime contractor's
inclusion of a quote in a bid raises the expectation of the
subcontractor that its quote was used to win the award.
SBA received a number of comments recommending revisions to the
language of proposed Sec. 125.3(c)(3)(i)-(iii), which defined when an
offeror used a small business in preparing a bid or proposal.
One commenter recommended revising Sec. 125.3(c)(3)(i) to provide
that an offeror used a small business concern in preparing the bid or
proposal if ``the offeror indicates it has awarded or selected the
small business concern as a subcontractor to perform a portion of the
specific contract.'' SBA disagrees. If the prime refers to the
subcontractor in its proposal or bid in order to influence the award,
that is precisely the conduct this statutory provision was intended to
address, without limiting it to a further representation that a
subcontract has been awarded. If the prime feels it is necessary to
mention the subcontractor by name, the prime contractor must explain
why that firm is not used in performance.
One commenter requested clarification of whether ``bid or
proposal'' in Sec. 125.3(c)(3)(i) includes small businesses listed in
a subcontracting plan submitted with the bid or proposal. SBA has added
language stating that ``referenced in the bid or proposal'' includes
associated small business subcontracting plans, if applicable. SBA
notes that subcontracting plans are not necessarily required at the
time of bid or proposal and are often not required until the apparent
successful offeror has been identified.
One commenter argued that proposed Sec. 125.3(c)(3)(i) and
(c)(3)(iii) are unduly broad, suggesting that it is the subcontractor's
perception of future work, rather than a reasonable expectation on
behalf of both parties, that triggers the rule's requirements. SBA
disagrees and believes that the language of the proposed rule
adequately captures the intent of the statute.
One commenter recommended defining the terms ``agreement in
principle'' and ``intent or understanding'' in proposed Sec.
125.3(c)(3)(ii). These terms will have to be interpreted by contracting
officers and prime contractors on a case-by-case basis, as the
provision is applied to specific factual circumstances.
One commenter recommended revising proposed Sec. 125.3(c)(3)(ii)
to read: ``has a written agreement as to all material terms (including
price, work scope, schedule, etc.) with the small business to perform
as a subcontractor.'' As discussed in the proposed rule, the statute
applies where the subcontractor was ``used'' in preparing the bid or
proposal. Requiring the level of detail recommended by the commenter is
not consistent with statutory intent.
One commenter recommended revising proposed Sec. 125.3(c)(3)(ii)
by replacing ``agreement in principle'' with ``has made a written
commitment to.'' SBA believes that ``agreement in principle'' is more
consistent with statutory intent. Requiring written commitments might
actually have the unintended effect of driving prime contractors to not
enter into written agreements with subcontractors. Whether an agreement
in principle existed will be a fact-specific exercise for the
contracting officer to decide when evaluating prime contractor
performance.
[[Page 42396]]
Some commenters recommended revising proposed Sec.
125.3(c)(3)(iii) by replacing ``intent or understanding'' with a
written communication standard. Commenters suggested that
correspondence would be sufficient, and a signed contract would not be
necessary. SBA concurs with this comment and has amended the regulation
to clarify that evidence should be in writing.
The proposed rule added Sec. 125.3(c)(4), which implemented
Section 1322 of the Jobs Act. This provision 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.
SBA received eleven comments expressing concern that proposed Sec.
125.3(c)(4) does not go far enough. Some commenters argued that prime
contractors will not freely come forth and self-report. First, SBA
notes that this notice requirement is statutory. In addition, SBA notes
that the rule states that subcontractors can inform contracting
officers of violations of this requirement.
Based on a comment, SBA has amended proposed Sec. 125.3(c)(4) to
state that the ``prime contractor'' rather than the ``offeror'' must
provide the contracting officer with a written explanation as to why
the prime did not 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 scope, amount, and quality used in preparing and submitting
the bid or proposal.
In addition, SBA has amended proposed Sec. 125.3(c)(4) to clarify
that the prime contractor must submit the written notification to the
contracting officer prior to submitting to the Government the invoice
for final payment and contract close-out.
One commenter suggested requiring prime contractors to inform
subcontractors that subcontractors have the right to appeal to the
contracting officer when the proposed small business is not used. SBA
notes that the terms of the contract will determine the extent to which
the contracting officer has control over who the prime contractor uses
as a subcontractor. This statutory provision is intended only to
include the prime contractor's utilization of subcontractors used in
preparing the bid as part of the performance evaluation of the prime
contractor.
One commenter recommended mirroring the requirement of DFAR
252.219-7003(g), arguing that lack of consistency between the rules
will cause confusion. DFAR 252.219-7003(g) reads as follows: ``In those
subcontracting plans which specifically identify small businesses, the
Contractor shall notify the Administrative Contracting Officer of any
substitutions of firms that are not small business firms, for the small
business firms specifically identified in the subcontracting plan.
Notifications shall be in writing and shall occur within a reasonable
period of time after award of the subcontract. Contractor-specified
formats shall be acceptable.'' DFAR 252.219-7003(g) applies only when
the prime contractor identifies specific small business concerns in the
subcontracting plan, and no DFAR provision requires prime contractors
to identify specific subcontractors in subcontracting plans. SBA
believes that the language of the proposed rule more truly captures the
statutory intent of this requirement. In any event, SBA's final rule
will be implemented in the FAR and DFAR, and changes to those
regulations will be made as necessary to ensure consistency.
One commenter asked whether the rule will apply retroactively. The
general rule is that regulations apply to solicitations issued on or
after the effective date of the regulation. However, this rule will
have to be implemented in the FAR, and consideration will be given as
to whether any of these provisions need to apply to existing contracts.
One commenter recommended requiring the prime contractor to report
its intention not to use a designated subcontractor before the fact,
rather than after the fact. Reporting is required if a subcontractor is
not used in performance, and when that is triggered will depend on the
specific facts and circumstances. The purpose of the reporting is
primarily for purposes of evaluating the prime contractor's overall
performance, and not necessarily for the purpose of affecting actual
performance under the contract.
One commenter recommended prohibiting prime contractors from
terminating subcontractors and then performing the work on their own.
The commenter suggested requiring that small business subcontracts may
only be terminated for cause, and the prime contractor must make a good
faith effort to replace the subcontractor with another small business
subcontractor, all of which is subject to the contracting officer's
approval. In addition, the commenter suggested that if a small business
subcontractor is acquired by a large firm, the prime contractor must
replace the subcontractor with a new small business subcontractor
within six months. These comments go well beyond statutory intent. The
statute did not intend for the contracting officer to intercede in the
private contractual relationships of commercial concerns.
One commenter recommended that the requirement should apply to all
contracts. By statute, this requirement applies to all contracts
requiring subcontracting plans. SBA believes that this was clear in the
rule as proposed, and, as such, no further change is needed.
Some commenters opposed the requirement, arguing that suppliers are
sometimes unable to fulfill requirements. SBA notes that this can be
explained in the notice to the contracting officer.
Some commenters requested that SBA establish a threshold at which
this reporting requirement would be triggered. Commenters also
requested that SBA establish a timeframe for reporting. The statute
does not create a threshold or a timeframe. SBA maintains that it will
be incumbent upon the prime contractor to understand its subcontractors
and proactively notify the contracting officer when the prime
contractor has reason to believe that the relationship with the
subcontractor met the definition. As for timeframe, it is difficult to
set a timeframe because until the contract is completed, there is
always theoretically a possibility that the prime contractor will use
the subcontractor to the extent initially anticipated. Thus, it will be
up to the prime contractor to come forward and notify the contracting
officer when the prime contractor knows that the use of the
subcontractor met the definition and that it will not use the
subcontractor in performance in the same scope, amount, and quality as
used in preparing and submitting the bid or proposal. However, SBA has
added a requirement that the notice take place prior to submission of
the final invoice for contract closeout.
Some commenters argued that the notification requirement will be a
disincentive for prime contractors from specifically including small
business concerns in their proposals, which limits small businesses'
ability to participate in the development of proposals and gain
valuable insight into how prime contractors approach proposals in
general. SBA understands this concern, but the requirement is
statutory. Obviously, small business subcontractors felt that statutory
action was needed to address some prime
[[Page 42397]]
contractor mistreatment of some small business subcontractors.
Some commenters requested an exemption from the requirements in
Sec. 125.3(c)(4) and (c)(5) for non-profit research institutions,
arguing that reporting and oversight were an onerous burden for these
groups. In the alternative, one commenter recommended requiring such
organizations to provide notice and justification only in annual
reports. SBA does not adopt this comment. Nonprofits are not exempt
under the statute and are not exempt from these reporting requirements.
Some commenters argued that contract awards attained via ``bait &
switch'' should be vacated. SBA disagrees. In SBA's view, the intent
was to use this information for purposes of evaluating performance. The
statutory intent was not to require terminations whenever this
provision was violated. Contracting officers have the discretion to
consider such information for purposes of considering continued
performance or exercising options, but SBA does not believe that
mandating such action in all cases would be practical.
Late or Reduced Payment
The proposed rule added Sec. 125.3(c)(5), which implemented
Section 1334 of the Jobs Act. This provision 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. SBA proposed that the prime
contractor shall include the reason for the reduction in payment or
failure to pay a subcontractor in the written notice.
SBA received over twenty comments on proposed Sec. 125.3(c)(5).
The commenters were split between those who suggested there be concrete
consequences for prime contractors giving reduced or delayed payments,
and those who argued that ``unjustified'' is not clearly defined,
leaving prime contractors in a position to have to report in situations
where the subcontractor is actually at fault.
In response to several comments, SBA has amended the language of
Sec. 125.3(c)(5) to clarify that this requirement applies only to
small business subcontractors. The statutory provision pertains to
contracts where a small business subcontracting plan is required, and
such plans do not contain a goal for large business subcontractors.
Some commenters argued that the requirement should not apply when a
prime contractor has attached only a quote for the purchase of goods or
services in a bid, arguing that a quote is only a projection of cost
and may change due to market conditions. In response to these comments,
SBA has amended Sec. 125.3(c)(5) to state that the reduced price
applies only if the prime contractor awarded a subcontract.
One commenter suggested implementing a requirement similar to the
requirement for agencies that are delinquent in reimbursing
contractors. SBA notes that this information will be used for past
performance evaluation purposes. A different statute governs payment to
prime contractors.
One commenter recommended that the requirement should be extended
to lower tier subcontractors that do not pay their subcontractors. SBA
does not concur. The statute specifically refers to prime contractors
and the contracting officer's ability to consider late payment in
measuring prime contractor performance. There is lack of privity and
authority between the government and lower tier subcontractors to
extend the requirement as suggested.
Some commenters recommended that each invoice submitted by the
prime contractor include a report of payments to be made to each
subcontractor, listing the name of the subcontractor and the amount
owed. SBA does not adopt this comment. This is not required by statute
and would increase the recordkeeping and reporting requirements of
prime contractors.
Some commenters opposed proposed Sec. 125.3(c)(5) as too far-
reaching. Some commenters argued that the requirement should apply only
to late payments, not reduced payments. Other commenters recommended
implementing the requirement on a contract-by-contract basis, based on
the contracting officer's review of past performance. SBA does not
concur. The statute specifically includes reduced payments and applies
to all covered contracts.
Some commenters argued that federal construction contractors are
already subject to more stringent requirements under the FAR, including
sanctions under Title 18 of the United States Code for making false
claims. SBA notes that the requirements that apply in the construction
arena do not apply government-wide, while these provisions apply to all
contracts. However, the more stringent construction requirements still
apply.
Some commenters requested clarification of the definition of
``unjustified'' late or reduced payment. Some commenters suggested that
the definition should not include situations where the prime contractor
acted in good faith and pointed out that budget cuts, agency
reorganization, and similar situations are common reasons for reduced
payment. Some commenters argued that a prime contractor often has
legitimate reasons (substandard performance, improper billing,
performance of unauthorized work, etc.) for late or lower payment. One
commenter recommended that SBA clarify that the reporting obligation
should not apply if the late/reduced payment was the byproduct of a
government change to requirements. One commenter recommended allowing
prime contractors to appeal a determination that a reduction is
``unjustified.'' SBA believes that the facts of a specific case should
determine whether a late or reduced payment was justified or not. A
prime contractor must communicate the reasons for making a late or
reduced payment to the relevant contracting officer as part of its
required notification. A contracting officer will then use his or her
best judgment in determining whether the late or reduced payment was
justified.
One commenter recommended clarifying what constitutes a ``payment''
to the prime contractor under different contract types. SBA notes that
the opportunity for defining these terms will occur when these
provisions are implemented in the FAR.
Some commenters suggested that reports be protected if they contain
proprietary and/or classified information. One commenter recommended
adding a provision that would exclude prime contractors from having to
include in a report on the reasons for reduced or delayed payment where
such information: (1) Is exempt from FOIA disclosure; (2) constitutes
``contractor bid or proposal information'' under the Procurement
Integrity Act; or (3) is protected under the Privacy Act or other
relevant law. SBA maintains that the reasons should be provided to the
contracting officer--as required by statute--and the relevant
information disclosure laws would apply to the reports. It is not up to
prime contractors to interpret and apply information disclosure laws.
Some commenters requested clarification of ``reduced price.'' In
response to these comments, SBA has amended Sec. 125.3(c)(5) to
clarify that ``reduced price'' means the price is less than the amount
initially agreed to in a written, binding contractual document.
Several commenters requested clarification of the term ``upon
completion of the responsibilities.'' Specifically, one commenter asked
[[Page 42398]]
whether the rule applies to payment reductions on progress payments.
Another commenter asked whether the obligation of a contractor to
report a reduced payment to a subcontractor applies to every payment
made by the prime contractor or applies only at the completion of the
entire subcontract. In response to these comments, SBA has amended
Sec. 125.3(c)(5) to state that the completion of responsibilities
means that the subcontractor is entitled to payment under the terms of
the subcontract.
Some commenters made recommendations for uniform payment terms for
subcontracts. Such recommendations go beyond statutory intent and are
beyond the scope of this rule.
One commenter recommended holding a public meeting where industry
representatives from both large and small business may voice concerns.
SBA held meetings in several cities to receive input on the proposed
rule as part of its Jobs Act tour, and received significant written
comments on the proposed rule. As such, SBA believes that additional
public forums are unnecessary to fully understand the public concerns
regarding the implementation of this rule. In addition, the public will
have another opportunity to comment when this rule is incorporated in
the FAR.
One commenter requested that SBA reduce the late payment definition
from 90 days to 30 days. SBA does not adopt this comment. For purposes
of this statutory reporting requirement, the statute defines late as
being 90 days past due. This final rule continues to adopt the
statutory definition.
One commenter recommended requiring agencies to publish actual
payments to small business subcontractors. SBA does not adopt this
comment. This requirement would be overly burdensome, and prime
contractors as well as subcontractors may not want such information to
be public. There is no clear public benefit from publicizing such
information.
In response to comments, SBA has added new Sec. 125.3(c)(6) to
this final rule, which provides that if at the conclusion of a
contract, the prime contractor did not meet all of the small business
subcontracting goals in the subcontracting plan, the prime contractor
shall provide the contracting officer with a written explanation as to
why it did not meet the goals of the plan so that the contracting
officer can evaluate whether the prime contractor acted in good faith
as set forth in Sec. 125.3(d)(3).
One commenter opposed proposed Sec. 125.3(d)(5), arguing that
payments to subcontractors may vary month to month under normal
circumstances. The commenter also argued that subcontractors have
existing legal means to receive payments due. Again, SBA notes that the
requirement of proposed Sec. 125.3(d)(5) is required by statute. In
some circumstances, subcontractors do not have the resources to
litigate claims, or may not want to exercise rights out of fear of not
receiving future work.
One commenter recommended clarification of the differing language
in proposed Sec. 125.3(c)(5) (``more than 90 days past due'') and
proposed Sec. 125.3(d)(5) (``more than 90 days late''). The commenter
recommended changing both to ``more than 90 days past the contractual
due date.'' SBA has changed the language in both provisions to ``90
days past due under the terms of the subcontract.''
Contracting Officer Responsibilities
The proposed rule revised Sec. 125.3(d) to clarify that the
contracting officer is responsible for monitoring and evaluating the
prime contractor's small business subcontracting plan compliance and
reporting.
SBA received a number of comments expressing concern that over-
extended contracting officers will not actually be able to monitor a
prime contractor's compliance with the subcontracting plan on an
ongoing basis as described in proposed Sec. 125.3(d). SBA disagrees.
Contracting officers are already required to monitor and evaluate prime
contractors' compliance with subcontracting plans. The intent of this
rule is simply to more clearly define the contracting officers'
responsibilities.
Some commenters recommended Office of Small and Disadvantaged
Business Utilization (OSDBU) participation in subcontracting plan
compliance and enforcement. SBA disagrees. A subcontracting plan is a
material part of a contract, and only the contracting officer has the
authority to monitor contract performance. OSDBUs are not in the
acquisition chain of command and have no authority to order a
contracting officer to accept or reject a subcontracting plan or take
some other enforcement action. Certainly, individual contracting
officers may decide that OSDBUs can assist with subcontracting plan
monitoring and enforcement, but SBA cannot impose a rule government-
wide that gives OSDBUs authority over contracts.
Some commenters recommended requiring that the contracting officers
in the field be responsible for monitoring compliance with
subcontracting plans. SBA does not adopt this comment. The rule states
the contracting officer is responsible, and if there is more than one
contracting officer involved in a particular contract, the contracting
agency must determine which contracting officer is responsible.
One commenter recommended the use of federal audit agencies to
ensure that prime contractors comply with subcontracting requirements.
Agencies may use audit agencies to assist in compliance, but SBA cannot
mandate such a requirement in all cases. Audit agencies face resource
challenges as well. SBA and the Defense Contract Management Agency
(DCMA) do conduct subcontracting compliance reviews each year.
One commenter recommended requiring subcontracting program review
once every two years if a prime contractor has active contracts with
subcontracting plans. SBA does not adopt this comment. The contracting
officer is responsible for reviewing, monitoring and evaluating a prime
contractor's subcontracting plan performance with regard to each
contract. In addition, compliance reviews conducted by SBA and DCMA
occur as dictated by resource availability.
The proposed rule added new Sec. 125.3(d)(1), which requires
contracting officers to ensure that contractors submit their
subcontracting reports into eSRS within 30 days after the report ending
date. Some commenters recommended transparent monitoring to improve
accountability of prime contractors. SBA notes that the eSRS system is
a reporting system that enables a prime contractor to report to the
contracting officer. Public access is beyond the scope of this rule,
and access to the system is not controlled by SBA.
The proposed rule added Sec. 125.3(d)(2), which requires the
contracting officer to review every prime contractor's report within 60
days of the report ending date and accept or reject the report. One
commenter recommended requiring contracting officers to give a reason
for rejecting a report in order to ensure clarity and quick responses.
SBA concurs and has amended proposed Sec. 125.3(d)(2) to provide that
the contracting officer should give an explanation for rejecting a
report, since the eSRS system is already capable of doing this.
One commenter suggested that the language regarding conducting an
SSR review should include ``or designated Agency representative,''
arguing that
[[Page 42399]]
most agencies have an OSBP associate director review and accept SSRs.
SBA recognizes that agencies usually have a person other than a
contracting officer review the summary reports, since a summary report
frequently contains achievements on multiple contracts with multiple
contacting officers. However, the purpose of this rule is to clarify
the responsibilities of the contracting officer.
One commenter recommended including language regarding the
timeframe for a contracting officer to review all resubmitted reports.
SBA notes that the same timeframes apply that apply to the submission
of the original report.
The proposed rule amended redesignated Sec. 125.3(d)(3) (former
Sec. 125.3(d)) to clarify that a contracting officer must evaluate
whether a prime contractor made a good faith effort to comply with its
small business subcontracting plan. The proposed rule maintained the
current definition of when a prime contractor has made a good faith
effort to comply with its small business subcontracting plan
(redesignated Sec. 125.3(d)(3)(i)-(iii), former Sec. 125.3(d)(1)-
(3)).
One commenter suggested that prime contractors that have not met
subcontracting plan goals should be prohibited from receiving an option
award until the prime contractor can show compliance. SBA disagrees.
This could result in the government being deprived of vital goods or
services and would severely hamper mission effectiveness.
Several commenters requested clarification of the actions
contracting officers could take in response to a contractor's failure
to meet its subcontracting goals. One commenter recommended that the
government instruct contracting officers that compliance with a
subcontract plan constitutes a material element of contract
performance, with instruction to issue show cause notices and default
terminations to prime contractors who fail to comply with
subcontracting plans. SBA notes that the statute and the FAR provide
that a subcontracting plan is a material part of a contract and provide
for the possibility of liquidated damages, as well as the other actions
noted by the commenter. However, these actions cannot be required by
rule in all cases.
The proposed rule added new Sec. 125.3(d)(4), which provides that
the contracting officer must evaluate the prime contractor's written
explanation concerning its failure to use a small business concern in
the performance of a contract when that small business concern was used
to prepare the bid or proposal.
One commenter recommended requiring the contracting officer to
document a justification for awarding to a prime contractor with a
history of not meeting subcontracting plan goals. SBA notes that
contracting officers are required to consider subcontracting plan past
performance in negotiated acquisitions. Further, SBA's regulations
permit contracting officers to use other subcontracting-related
evaluation factors.
SBA received significant negative comment on proposed Sec.
125.3(d)(6), which provided that the contracting officer must 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. Although requested, SBA did
not receive any comments explaining how this process should work or has
worked in practice. Consequently, SBA has decided not to implement this
provision in this final rule.
Proposed Sec. 125.3(d)(7) required the contracting officer to
record the identity of a prime contractor with a history of unjustified
untimely payments to subcontractors in the Federal Awardee Performance
and Integrity Information System (FAPIIS) or any successor system. This
requirement is statutorily mandated. SBA received several comments
supporting proposed Sec. 125.3(d)(7) (changed to Sec. 125.3(d)(6) in
this final rule) but requesting that it go further in punishing non-
compliant prime contractors. One commenter recommended a repository of
names of prime contractors who have treated subcontractors poorly. SBA
notes that the statutory requirement is FAPIIS.
One commenter asked whether these rules would override or interfere
with already existing regulations concerning payment of subcontractors
in the construction industry. These rules are in addition to, and do
not supersede, other laws and regulations that apply to construction
contracts, such as the requirement that the prime contractor certify in
an invoice that all subcontractors have been paid or will be paid after
payment. The commenter also asked whether information entered into
FAPIIS concerning a prime contractor that has a history of unjustified
late or reduced payment of subcontractors would be available to the
public. That question is beyond the scope of this rule and SBA's
knowledge. The commenter should inquire with GSA, the government agency
responsible for FAPIIS.
The proposed rule added Sec. 125.3(d)(8), providing that the
contracting officer must require prime contractors to update their
subcontracting plans whenever an option is exercised, as currently
required by FAR 19.705-2(e). SBA received five comments expressing
concerns that the additional reporting requirements at the time of
option exercise would be burdensome.
One commenter argued that this requirement would be an
administrative redundancy. The commenter argued that some agencies
already call out for small business subcontracting plans to have
subcontracting goals for individual option years. The commenter argued
that there may be a lack of foreseeability when a contractor submits a
proposal that a subcontracting plan may be required. The commenter
argued that if a prime contractor is awarded an option continuing
existing services, the prime contractor will already have
subcontractors in place (mobilized and executing the work), which may
not be small business concerns. The commenter argued that replacing the
existing subcontractors would result in additional costs and
operational inefficiency. SBA disagrees. The existing requirement in
the FAR, which we are simply adding to SBA's regulations, requires the
plan to be updated as necessary. All of the factors that the commenter
articulates can be considered when deciding whether to change any of
the percentages for an option period.
One commenter argued that if existing work is won through a
recompete, then the new contract should have precedence over the old
contract terms, subcontracting plan, personnel staffing, and other
contract-related issues. SBA notes that new contracts should have new
subcontracting plans, based on the subcontracting opportunities for the
new contract.
One commenter argued that pursuant to FAR 19.704(c), a
subcontracting plan is supposed to contain separate goals for the base
contract and each option individually. The commenter argued that any
updated subcontracting goals can be by a confirming correspondence and
subsequent reporting. In the final rule, SBA has amended this provision
(now contained in Sec. 125.3(d)(7)) to state that the contracting
officer has the discretion to require an updated subcontracting plan.
One commenter recommended that updates for options and
modifications be considered as a new subcontracting requirement from
the date of the
[[Page 42400]]
modification or the date the option is invoked, requiring a
subcontracting plan only for the new portion of the work and only if
that new work, standing alone, exceeds the applicable threshold. The
commenter argued that this approach is consistent with FAR
19.702(a)(1). SBA has added a new Sec. 125.3(d)(10) to clarify that
the rule will apply to the subcontracting opportunities from that point
forward and will not have retroactive effect. The ISR and SF-294
require that achievements be cumulative from the inception of the
contract, and the accompanying instructions require that goals be
rolled into the report as options are exercised. For example, if the
base contract contained a small business goal of $10 million and each
option contained a small business goal of $2 million, the small
business goal for the entire contract in option year one would be $12
million. This ensures that the contracting officer is doing an
``apples-to-apples'' comparison when he compares achievements against
goals.
SBA received six comments on proposed Sec. 125.3(d)(9) (now Sec.
125.3(d)(8)), under which the contracting officer must require a
subcontracting plan if a modification causes the overall value of 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. Commenters
expressed concern about having to add a subcontracting plan if a
modification to the contract raises the value above the subcontract
threshold since this eventuality might occur when a substantial portion
of the work has already been completed, and commitments have already
been made on an ongoing basis. In response, SBA notes that plans are
only required to the extent that subcontracting opportunities exist.
SBA received several comments on proposed Sec. 125.3(d)(10) (now
Sec. 125.3(d)(9)), which allows a contracting officer to require a
subcontracting plan if a prime contractor's size status changes from
small to other than small as a result of a size recertification. Some
commenters recommended requiring the contracting officer to require a
subcontracting plan rather than making it discretionary. SBA disagrees.
This is not required by statute. Further, it may be impractical to
require a subcontracting plan at or near the end of performance, or
after all subcontracting opportunities have passed. Thus, SBA maintains
that it should be left to the discretion of the contracting officer.
Compliance Reviews
SBA received several comments addressing Sec. 125.3(f) in general.
One commenter recommended more third-party monitoring of prime
contractors, with verification by affected subcontractors. SBA does not
concur. Compliance with these provisions will be evaluated as part of
the compliance reviews conducted by SBA, DCMA, Office of Naval
Research, DLA Energy, and possibly other government agencies in the
future; there are no other resources available. Another commenter
recommended that contracting officers be required to respond to
compliance review audits. SBA notes that a copy is sent to the
contracting officer. Another commenter recommended that SBA perform
more compliance reviews. SBA conducts as many as possible consistent
with its resources and other priorities. One commenter argued that the
compliance review requirements are potentially burdensome for prime
contractors and difficult to obtain from other than small
subcontractors. SBA disagrees. These requirements already exist.
Without monitoring or spot checking, there is no incentive to properly
administer subcontracting plans or to ensure that prime contractors are
meeting their goals.
SBA received one comment on proposed Sec. 125.3(f)(2)(i), which
provided that a compliance review must include an analysis as to
whether the prime contractor has assigned the correct NAICS code and
corresponding size standard to the subcontract, and whether the
subcontractor qualifies under the size or socioeconomic status claimed.
The commenter recommended further clarification of proposed Sec.
125.3(f)(2)(i). SBA notes that every subcontract must be assigned a
NAICS code and size standard; otherwise there is no basis for a claim
that a subcontract went to a small business. Thus, a compliance review
must verify that that prime contractors or subcontractors are not
improperly claiming to be small and using inappropriate NAICS codes and
size standards.
SBA received several comments on proposed Sec. 125.3(f)(2)(iii),
which provided that a compliance review must include an analysis of
whether the prime contractor is monitoring its other than small
subcontractors with respect to their subcontracting plans, determining
achievement of their subcontracting goals, and reviewing their ISRs or
other reports.
Some commenters requested additional guidelines for monitoring. SBA
notes that the prime contractor is responsible for making sure that the
subcontracting plan requirements flow down to subcontractors and for
monitoring subcontractor performance. Some commenters recommended
clarifying the definition of the term ``monitor.'' One commenter argued
that prime contractors do not have the same abilities to do so with
respect to subcontractors as the government does with respect to prime
contractors. Whether or not prime contractors have the same ability to
monitor performance of subcontractors as the government does for
primes, the government has no ability to monitor a prime contractor's
subcontractors. As such, this function must be the responsibility of
prime contractors. SBA notes that this includes monitoring whether the
relevant clauses are being included in subcontracts and whether goals
are being met.
One commenter that opposed proposed Sec. 125.3(f)(2)(iii) argued
that prime contractors never before had to monitor other than small
subcontractors' subcontracting plan compliance. This is incorrect. The
FAR currently requires prime contractors to ensure that subcontractors
issue subcontracting plans and issue reports.
Subcontracting Consideration in Source Selection
The proposed rule added new Sec. 125.3(g)(1), under which SBA
proposed to give agencies the discretion to consider subcontracting in
source selection.
One commenter recommended that the FAR be amended to include
subcontracting consideration in source selection. SBA notes that the
rule will be implemented in the FAR after SBA's regulations are
finalized.
SBA received six comments on proposed Sec. 125.3(g)(1) requesting
the inclusion of past prime contractor performance as an evaluation
factor in source selection. SBA has agreed to amend its rule to make it
clear that in addition to considering subcontracting plan compliance
under a past performance factor, a contracting officer can also create
an evaluation factor or subfactor specifically for purposes of
considering subcontracting plan past performance.
One commenter recommended clarification of the circumstances under
which the evaluation factor would apply. SBA notes that it applies only
in full and open competition with value above the threshold, and it
will apply at the discretion of the contracting officer.
One commenter recommended that government contractor past
performance databases should be required to quantify successful
compliance with
[[Page 42401]]
subcontracting plans. The commenter argued that this will assist source
selection boards in determining the credibility of a concern's proposed
subcontracting plan and past performance on a per-contract basis. SBA
notes that like other aspects of the solicitation, the contracting
officer will establish the parameters of the evaluation factor and what
information should be submitted.
One commenter argued that this particular provision in the proposed
rule will largely benefit small businesses that pursue contracts as
Federal prime contractors and does not benefit (and in fact may have a
detrimental impact on) small businesses that pursue work as Federal
subcontractors. The commenter recommended an equivalent evaluation to
assure that the awarded prime contractor--large or small--is providing
maximum practicable opportunity to small business concerns at all
levels of subcontracting. SBA disagrees. It is unclear how this
proposal will harm small businesses. This proposal establishes an
evaluation factor for small business subcontracting and ensures that a
small business competing for a larger contract in full and open
competition is not at a disadvantage, since small businesses are not
required to have small business subcontracting plans. Small businesses
will benefit either way--at the prime level or at the subcontracting
level, depending on who wins the competition.
In response to several comments, SBA has redesignated proposed
Sec. 125.3(g)(2) (former Sec. 125.3(g)) as Sec. 125.3(g)(3) in this
final rule and added a new paragraph (g)(2), providing that a
contracting officer may include an evaluation factor in a solicitation
which evaluates an other than small business concern's commitment to
pay small business subcontractors within a specific number of days
after receipt of payment from the Government.
Multi-agency, Federal Supply Schedule, Multiple Award Schedule and
Governmentwide Acquisition IDIQ Contracts
The proposed rule added new Sec. 125.3(h), which addresses
subcontracting plans in connection with multiple award Multi-agency,
Federal Supply Schedule, Multiple Award Schedule and Governmentwide
acquisition indefinite delivery, indefinite quantity (IDIQ) contracts.
Under proposed Sec. 125.3(h)(1), SBA proposed that the contractor will
report small business subcontracting achievement for individual orders
to the contracting officer for the ordering or funding agency on an
annual basis. SBA requested comments on whether the reporting
requirement should apply to all orders or only apply to orders above a
certain threshold.
SBA received eleven comments on proposed Sec. 125.3(h)(1)
expressing concerns that the additional reporting requirements for
individual orders would be overly burdensome. Several commenters
suggested creating a threshold level that would trigger the order-by-
order reporting requirement. Some commenters recommended requiring
reporting at the contract level or individual order level, but not
both. Some commenters argued that the requirement should apply only to
individual orders that are above a certain threshold. One commenter
argued that on IDIQ contracts, a contractor may not know how many or
which subcontractors are needed until the government issues task
orders. Some commenters expressed concern about the additional burden
imposed on large businesses or additional costs that might result from
the requirement to report task-order subcontracting. Some commenters
argued that contracting officers are already overburdened and that they
should be spending time reviewing contracts rather than reports. One
commenter who opposed the added reporting requirement argued that it is
not required by statute. One commenter who supported the requirement
recommended that all orders be reported with no minimum threshold to
ensure maximum transparency.
Based on the comments received, SBA has decided that as a matter of
policy the funding agency of an order should receive credit towards its
small business subcontracting goals for orders awarded under another
agency's contract. This policy is consistent with SBA's long-standing
policy with respect to prime contracts, where the funding agency
receives the credit towards its prime contracting goals for orders
awarded under another agency's contract. The policy promotes
transparency and accountability for prime contractors, and is
consistent with the Small Business Jobs Act provisions concerning
compliance, oversight and review of subcontracting plans. The
requirement to report to the ordering agency on an annual basis will
not be overly burdensome, as the new provision only applies where the
funding agency and the contracting agency are not the same agency, and
prime contractors already must report this information to the
contracting agency. The contracting agency will still be responsible
for the subcontracting plan for the underlying IDIQ contract. SBA
recognizes that electronic reporting systems and the FAR will have to
be revised before 125.3(i) can be implemented or utilized by ordering
agencies or prime contractors. To ensure data integrity, SBA does make
clear in this final rule that only one procuring agency may receive
credit towards it subcontracting goals for a particular contracting
action.
One commenter requested clarification regarding the applicability
of proposed Sec. 125.3(h)(1) to Blanket Purchase Agreements (BPAs) and
Basic Ordering Agreements (BOAs). In the final rule, SBA has clarified
that the contracting officer may establish subcontracting plans for
BPAs and BOAs as well as orders. However, the annual reporting
requirement for subcontracting credit purposes applies to orders issued
under the BPA or BOA.
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
final 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 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 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 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 regulations
will benefit small business subcontractors by clarifying the
responsibilities of the contracting officer in monitoring small
business
[[Page 42402]]
subcontracting plan compliance. The regulations will benefit small
business subcontractors by specifically authorizing procuring agencies
to consider proposed small business subcontracting when evaluating
offers.
The 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 regulation will benefit the
contracting agency because the agency will not have to establish or
monitor subcontracting plans for the contract. The 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 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 have to be altered to allow funding agencies
to receive credit towards their small business subcontracting goals.
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. FAPIIS 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
regulations set forth in this final rule are required to implement
statutory provisions, and the Jobs Act requires promulgation of a
policy on subcontracting compliance, a requirement that prime
contractors notify the contracting officer when payment to a
subcontractor is late, and a requirement that prime contractors notify
the contracting officer when the prime contractor uses a subcontractor
to prepare an offer but does not use the subcontractor in performance.
The alternative to the 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 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. Where feasible, SBA incorporated public input into the rule. The
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
rule concerning orders will provide contracting agencies with
transparency by providing data concerning small business subcontracting
for particular orders. Overall, these regulations minimize the burden
resulting from these statutory provisions. SBA amended 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 final
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 would impose new government-wide reporting requirements
on large prime contractors. The Jobs Act requires such contractors to
notify in writing contracting officers at the applicable procuring
agency 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 FAR.
Regulatory Flexibility Act, 5 U.S.C. 601-612
SBA has determined that this final rule 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 a Regulatory Flexibility Act (RFA) analysis
addressing the regulatory provisions.
RFA
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 RFA 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 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 regulations
[[Page 42403]]
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. The regulations allow
contracting officers to establish subcontracting plans and require
other than small prime contractors to report data on small business
subcontracting in connection with certain orders under existing
contracts.
(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 rules. 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
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 final rule will not directly negatively affect any small
business concern, because it applies to other than small concerns and
contracting officers. The final 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 final 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 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 rule imposes new information collection,
recordkeeping or compliance requirements, these requirements 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 final rule. The final 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 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 regulations implementing Sections 1322 and 1334 of the
Jobs Act primarily apply to other than small concerns. As discussed
above, the 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 set forth above, SBA amends parts 121 and 125 of
title 13 of the Code of Federal Regulations as follows:
PART 121--SMALL BUSINESS SIZE REGULATIONS
0
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), 662, and 694a(9).
0
2. Amend Sec. 121.404(g)(3)(ii) by adding the following sentence at
the end of the paragraph:
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 prime contractor's size status changes from
small to other than small as a result of a size recertification.
* * * * *
0
3. Amend Sec. 121.411 as follows:
0
a. Revise paragraph (a); and
0
b. Redesignate paragraphs (b) and (c) as paragraphs (c) and (d) and add
new paragraph (b).
121.411 What are the size procedures for SBA's Section 8(d)
Subcontracting Program?
(a) Prime contractors may rely on the information contained in the
System for Award Management (SAM) (or any successor system or
equivalent database maintained or sanctioned by SBA) as an accurate
representation of a concern's size and ownership characteristics for
purposes of maintaining a small business source list.
(b) Even if a concern is on a small business source list, it must
still qualify and self-certify as a small business at the time it
submits its offer as a section 8(d) subcontractor. Prime contractors
may accept a subcontractor's electronic self-certifications as to size,
if the subcontract contains a clause which provides that the
subcontractor verifies by submission of the offer that the size or
socioeconomic representations and certifications made in SAM (or any
successor system) are current, accurate and complete as of the date of
the offer for the subcontract. Prime contractors or subcontractors may
not require the use of SAM (or any successor system) for purposes of
representing size or socioeconomic status in connection with a
subcontract.
* * * * *
PART 125--GOVERNMENT CONTRACTING PROGRAMS
0
4. 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.
0
5. Amend Sec. 125.3 as follows:
0
a. Revise paragraph (a);
0
c. Revise paragraphs (b)(1) and (b)(3)(ii);
0
d. Revise paragraph (c)(1) introductory text;
0
e. Revise paragraphs (c)(1)(iii)-(vi);
[[Page 42404]]
0
f. Add new paragraphs (c)(1)(vii)-(ix);
0
g. Redesignate paragraph (c)(3) as (c)(7) and add new paragraphs
(c)(3), (c)(4), (c)(5) and (c)(6);
0
h. Revise paragraph (d);
0
i. Revise paragraph (e)(3);
0
j. Revise paragraphs (f)(1) and (f)(2);
0
k. Revise paragraph (g); and
0
l. Add new paragraph (h).
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).
(i) Subcontract award data 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, except as follows:
(A) The contractor or subcontractor has been designated to receive
a small business or small disadvantaged business credit from an ANC or
Indian Tribe; or
(B) Purchases from a corporation, company, or subdivision that is
an affiliate of the prime contractor or subcontractor are not included
in the subcontracting base. Subcontracts by first-tier affiliates shall
be treated as subcontracts of the prime.
(ii) 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 U.S. Department of State
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.
(iii) 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); utilities such as electricity, water, sewer, and other
services purchased from a municipality or solely authorized by the
municipality to provide those services in a particular geographical
region; 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.
Exclusions from the subcontracting base include but are not limited to
those listed above.
(2) Subcontracting goals required under paragraph (c) of this
section 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) of
this section 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.
* * * * *
(3) * * *
(ii) Conducting market research to identify small business
subcontractors and suppliers through all reasonable means, such as
performing online searches via the System for Award Management (SAM)
(or any successor system), 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;
* * * * *
(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 the following:
* * * * *
(iii) The contractor may not prohibit a subcontractor from
discussing any material matter pertaining to payment or utilization
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 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) The contractor must assign each subcontract the NAICS code and
corresponding size standard that best describes the principal purpose
of the subcontract (see Sec. 121.410). The prime contractor may rely
on subcontractor self-certifications made in SAM (or any successor
system), if the subcontract contains a clause which provides that the
subcontractor verifies by submission of the offer that the size or
socioeconomic representations and certifications in SAM (or any
successor system) are current, accurate and
[[Page 42405]]
complete as of the date of the offer for the subcontract. A prime
contractor or subcontractor may not require the use of SAM (or any
successor system) for purposes of representing size or socioeconomic
status in connection with a subcontract;
(vi) The contractor must submit timely and accurate ISRs and SSRs
in eSRS (or any successor system), or if information for a particular
procurement cannot be entered into eSRS (or any successor system),
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;
(vii) The contractor must cooperate 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;
(viii) The contractor must provide 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, the contractor may provide 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 and should do so whenever practical.
* * * * *
(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 scope, amount, and quality used in preparing and
submitting the bid or proposal. Merely responding to a request for a
quote does not constitute use in preparing a bid or offer. 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 or associated small business
subcontracting plan;
(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 written evidence (including email) of 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 a prime contractor fails to acquire articles, equipment,
supplies, services or materials or obtain the performance of
construction work as described in (c)(3), the prime contractor must
provide the contracting officer with a written explanation. This
written explanation must be submitted to the contracting officer prior
to the submission of the invoice for final payment and contract close-
out.
(5) A prime contractor shall notify the contracting officer in
writing if upon completion of the responsibilities of the small
business subcontractor (i.e., the subcontractor is entitled to payment
under the terms of the subcontract), the prime contractor pays a
reduced price to a small business subcontractor for goods and services
provided for the contract or the payment to a small business
subcontractor is more than 90 days past due under the terms of the
subcontract for goods and services provided for the contract and for
which the Federal agency has paid the prime contractor. ``Reduced
price'' means a price that is less than the price agreed upon in a
written, binding contractual document. The prime contractor shall
include the reason for the reduction in payment to or failure to pay a
small business subcontractor in any written notice.
(6) If at the conclusion of a contract the prime contractor did not
meet all of the small business subcontracting goals in the
subcontracting plan, the prime contractor shall provide the contracting
officer with a written explanation as to why it did not meet the goals
of the plan so that the contracting officer can evaluate whether the
prime contractor acted in good faith as set forth in paragraph (d)(3)
of this section.
(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 any successor system) 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 ISRs, and where applicable, SSRs, in eSRS (or any
successor system) 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 either accepting or rejecting the reports in
accordance with the Federal Acquisition Regulation (FAR) provisions set
forth in 48 CFR subpart 19.7, 52.219-9, and the eSRS instructions
(www.esrs.gov). The authority to acknowledge or reject SSRs for
commercial plans resides with the contracting officer who approved the
commercial plan. If a report is rejected, the contracting officer must
provide an explanation for the rejection to allow prime contractors the
opportunity to respond specifically to perceived deficiencies.
(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 over-achieved 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 in the same scope, amount, and quality used in
preparing and submitting the bid or proposal, and considering that
information when rating the contractor for past performance purposes.
(5) Evaluating the prime contractor's written explanation
concerning its payment of a reduced price to a small business
subcontractor for goods and services upon completion of the
responsibilities of the subcontractor or its payment to a subcontractor
more than 90 days past due under the terms
[[Page 42406]]
of the subcontract for goods and services provided for the contract and
for which the Federal agency has paid the prime contractor, and
considering that information when rating the contractor for past
performance purposes.
(6) 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.
(7) In his or her discretion, requiring the prime contractor (other
than a prime contractor with a commercial plan) to update its
subcontracting plan when an option is exercised.
(8) Requiring 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 and to the extent that subcontracting
opportunities exist.
(9) In his or her discretion, requiring a subcontracting plan if a
prime contractor's size status changes from small to other than small
as a result of a size recertification.
(10) Where a subcontracting plan is amended in connection with an
option, or added as a result of a recertification or modification, the
changes to any existing plan are for prospective subcontracting
opportunities and do not apply retroactively. However, since
achievements must be reported on the ISR (or the SF-294, if applicable)
on a cumulative basis from the inception of the contract, the
contractor's achievements prior to the modification or option will be
factored into its overall achievement on the contract from inception.
(e) * * *
(3) Instructing large prime contractors on identifying small
business concerns by means of SAM (or any successor system), SUB-Net,
Business Matchmaking events, and other resources and tools;
* * * * *
(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 prime
contractor's most recent ISR (or SF-294, if applicable) or SSR. A
compliance review includes:
(i) 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) Validation of the prime contractor's methodology for
completing its subcontracting reports; and
(iii) Consideration of whether the prime contractor is monitoring
its other than small subcontractors with regard to their subcontracting
plans, determining achievement of their proposed subcontracting goals,
and reviewing their subcontractors' ISRs (or SF-294s, if applicable).
* * * * *
(g) Subcontracting consideration in source selection. (1) A
contracting officer may include an evaluation factor in a solicitation
which evaluates:
(i) An offeror's proposed approach to small business subcontracting
participation in the subject procurement;
(ii) The extent to which the offeror has met its small business
subcontracting plan goals on previous covered contracts; and/or
(iii) The extent to which the offeror timely paid its small
business subcontractors under covered contracts.
(2) A contracting officer may include an evaluation factor in a
solicitation which evaluates an offeror's commitment to pay small
business subcontractors within a specific number of days after receipt
of payment from the Government for goods and services previously
rendered by the small business subcontractor.
(i) The contracting officer will comparatively evaluate the
proposed timelines.
(ii) Such a commitment shall become a material part of the
contract.
(iii) The contracting officer must consider the contractor's
compliance with the commitment in evaluating performance, including for
purposes of contract continuation (such as exercising options).
(3) A small business concern submitting an offer shall receive the
maximum score, credit or rating under an evaluation factor described in
paragraph (g) of this section without having to submit any information
in connection with this factor.
(4) A contracting officer shall include a significant evaluation
factor for the criteria described in paragraphs (g)(2)(i) and
(g)(2)(ii) of this section in a bundled contract or order as defined in
Sec. 125.2.
(5) Paragraph (g) of this section may apply to solicitations for
orders against multiple award contracts, (including a Federal Supply
Schedule or Multiple Award Schedule contract, a Government-wide
acquisition contract (GWAC), or a multi-agency contract (MAC)), blanket
purchase agreements or basic ordering agreements.
(h) Multiple award contracts. (1) Except where a prime contractor
has a commercial plan, the contracting officer shall require a
subcontracting plan for each multiple award indefinite delivery,
indefinite quantity contract (including Multiple Award Schedule), where
the estimated value of the contract exceeds the subcontracting plan
thresholds in paragraph (a) of this section and the contract has
subcontracting opportunities.
(2) Contractors shall submit small business subcontracting reports
for individual orders to the contracting agency on an annual basis.
(3) The agency funding the order shall receive credit towards its
small business subcontracting goals. More than one agency may not
receive credit towards its subcontracting goals for a particular
subcontract.
(4) The agency funding the order may in its discretion establish
small business subcontracting goals for individual orders, blanket
purchase agreements or basic ordering agreements.
Dated: June 25, 2013.
Karen G. Mills,
Administrator.
[FR Doc. 2013-16967 Filed 7-15-13; 8:45 am]
BILLING CODE 8025-01-P