[Federal Register Volume 84, Number 230 (Friday, November 29, 2019)]
[Rules and Regulations]
[Pages 65647-65666]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2019-25517]


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SMALL BUSINESS ADMINISTRATION

13 CFR Parts 121, 124, 125, 126, 127, 129, and 134

RIN 3245-AG86


National Defense Authorization Acts of 2016 and 2017, Recovery 
Improvements for Small Entities After Disaster Act of 2015, and Other 
Small Business Government Contracting

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 to implement several provisions of the 
National Defense Authorization Acts (NDAA) of 2016 and 2017 and the 
Recovery Improvements for Small Entities After Disaster Act of 2015 
(RISE Act), as well as to clarify existing regulations. This rule 
clarifies that contracting officers have the authority to request 
information in connection with a contractor's compliance with 
applicable limitations on subcontracting clauses; provides exclusions 
for purposes of compliance with the limitations on subcontracting for 
certain contracts performed outside of the United States, for 
environmental remediation contracts, and for information technology 
service acquisitions that require substantial cloud computing; requires 
a prime contractor with a commercial subcontracting plan to include 
indirect costs in its subcontracting goals; establishes that failure to 
provide timely subcontracting reports may constitute a material breach 
of the contract; clarifies the requirements for size and status 
recertification; and limits the scope of Procurement Center 
Representative (PCR) reviews of Department of Defense acquisitions 
performed outside of the United States and its territories. This rule 
also authorizes agencies to receive double credit for small business 
goaling achievements as announced in SBA's scorecard for local area 
small business set-asides in connection with a disaster. Finally, SBA 
is removing the kit assembler exception to the non-manufacturer rule.

DATES: This rule is effective on December 30, 2019.

FOR FURTHER INFORMATION CONTACT: Brenda Fernandez, Office of Policy, 
Planning and Liaison, 409 Third Street SW, Washington, DC 20416; (202) 
205-7337; [email protected].

SUPPLEMENTARY INFORMATION:

Introduction

    SBA published a proposed rule regarding these changes in the 
Federal Register on December 4, 2018 (83 FR 62516), inviting the public 
to submit comments on or before February 4, 2019. SBA received 
extensive responses on the proposed rule from 38 entities, which 
comprised almost 250 specific comments. One commenter requested 
additional time to submit comments. SBA declined to provide an 
extension of the comment period on grounds of administrative 
efficiency, since this rule implements statutory requirements and makes 
other changes of critical importance to small businesses. SBA's 
discussion below summarizes the proposed rule, the comments related to 
each section of the proposed rule, and SBA's responses.

Summary of Proposed Rule, Comments, and SBA's Responses

I. National Defense Authorization Act for Fiscal Year 2016, Public Law 
114-92, 129 Stat. 726, November 25, 2015 (NDAA of 2016)

Posting Notice of Substantial Bundling

    Section 863 of the NDAA of 2016 amended section 15(e)(3) of the 
Small Business Act (15 U.S.C. 644(e)(3)) to provide that if the head of 
a contracting agency determines that an acquisition plan involves a 
substantial bundling of contract requirements, the head of the 
contracting agency shall publish a notice of such determination on a 
public website within 7 days of making such determination. Section 863 
also amended section 44(c)(2) of the Small Business Act (15 U.S.C. 
657q(c)(2)) to provide that upon determining that a consolidation of 
contract requirements is necessary and justified, the Senior 
Procurement Executive (SPE) or Chief Acquisition Officer (CAO) shall 
publish a notice on a public website that such determination has been 
made. An agency may not issue the solicitation any earlier than 7 days 
after publication of the notice. The SPE or CAO must also publish the 
justification along with the solicitation. The requirement may be 
delegated. SBA proposed to amend Sec.  125.2(d) by adding new 
paragraphs (d)(1)(v) and (d)(7) to implement these changes. 
Specifically, SBA proposed that the notice be published on the 
contracting agency's website. SBA received three comments on these 
proposed new paragraphs and all three supported the proposal to require 
public notification of a consolidation determination. Based on agency 
comments, SBA is adopting a final rule that requires publication of the 
notice on the Government Point of Entry website because this will be a 
more efficient and effective mechanism to notify the public. Notice 
provided through one Government website, which already serves as the 
means for most procurement-related notices, will likely be viewed by a 
larger portion of the public than through an individual agency website.

II. National Defense Authorization Act for Fiscal Year 2017, Public Law 
114-328, 130 Stat. 2000, December 23, 2016 (NDAA of 2017)

Procurement Center Representative Reviews

    Section 1811 of the NDAA of 2017 amended section 15(l) of the Small 
Business Act (15 U.S.C. 644(l)) to provide that PCRs may review any 
acquisition, even those where the

[[Page 65648]]

acquisition is set aside, partially set aside, or reserved for small 
business. SBA's current rules provide that PCRs will review all 
acquisitions that are not set aside or reserved for small business. 
These rules were intended to focus limited resources on acquisitions 
that were not already going to small business, but were not intended to 
prohibit a PCR from reviewing any acquisition as part of the PCR's role 
as an advocate for small business. SBA proposed to amend Sec.  
125.2(b)(1)(i) to provide that PCRs may review any acquisition 
regardless of whether it is set aside, partially set aside, or reserved 
for small business or other socioeconomic categories. SBA believes that 
this change will enable PCRs to advocate for total set-asides or 
partial set-asides when appropriate and necessary. This provision 
merely gives to the SBA PCR the authority to review set-aside actions 
where he or she deems it appropriate. It is not the intent that this 
will be done in every case. In fact, SBA believes that such a review 
will not generally be done. Where a PCR seeks to review a set-aside 
action, the PCR will notify the contracting officer. SBA expects its 
review to generally be limited to the issue presented, and SBA does not 
believe this will adversely affect the acquisition timeline. SBA 
received two comments on this proposed change. One supported the change 
and one opposed it. The commenter who opposed the proposed rule based 
his opposition on the perception that PCRs favor 8(a) firms over other 
small businesses. SBA deduced from this comment that the commenter was 
concerned that a PCR looking at all acquisitions will not assess 
whether a particular acquisition is appropriate for all of SBA's 
government contracting programs, but will instead default to assuming 
it should be awarded to an 8(a) firm. SBA disagrees that PCRs favor one 
small business program over another. PCRs seek to ensure that 
contracting officers consider all of SBA's small business programs, and 
that the market research performed supports the contracting officer's 
decision to use a particular program. This final rule adopts the 
proposed change, as it clarifies SBA's current position that PCRs may 
review any acquisition, which promotes more awards to small businesses.
    Section 1811 of the NDAA of 2017 also amended section 15(l) of the 
Small Business Act to limit the scope of PCR review of solicitations 
for contracts or orders by or for the Department of Defense if the 
acquisition is conducted pursuant to the Arms Control Export Act (22 
U.S.C. 2762), is a humanitarian operation as defined in 10 U.S.C. 
401(e), is for a contingency operation as defined in 10 U.S.C. 
101(a)(13), is to be awarded pursuant to an agreement with the 
government of a foreign country in which Armed Forces of the United 
States are deployed, or where both the place of award and place of 
performance are outside of the United States and its territories. SBA 
proposed to amend Sec.  125.2(b)(1)(i) to implement these amendments. 
Under the proposed rule, PCRs would still be able to review 
acquisitions awarded in the United States and its territories but 
performed outside of the United States and its territories, or awarded 
outside of the United States and its territories for performance in the 
United States or its territories, if the acquisition is not a foreign 
military sales, or in connection with a contingency operation, 
humanitarian and civic assistance provided in conjunction with military 
operations, or status of forces agreement. The proposed rule clarified 
that SBA considers performance to be outside of the United States and 
its territories if the acquisition is awarded and performed or 
delivered outside of the United States and its territories. If the 
acquisition is awarded in the United States and its territories or some 
performance or delivery occurs in the United States and its 
territories, SBA considers that to be performed in the United States 
and its territories. SBA received one comment in support of the 
proposed change. SBA continues to believe that the proposed language 
properly captures the intent of the statutory provision. As such, SBA 
adopts the proposed change in this final rule.

Material Breach of Subcontracting Plan

    Section 1821 of the NDAA of 2017 amended section 8(d)(9) of the 
Small Business Act (15 U.S.C. 637(d)(9)) to provide that it shall be a 
material breach of a contract or subcontract when the contractor or 
subcontractor with a subcontracting plan fails to comply in good faith 
with the requirement to provide assurances that the offeror shall 
submit such periodic reports or cooperate in any studies or surveys as 
may be required by the Federal agency or the Administration in order to 
determine the extent of compliance by the offeror with the 
subcontracting plan. Such a breach may be considered in any past 
performance evaluation of the contractor. SBA proposed to revise Sec.  
125.3(d) to implement this provision.
    SBA also proposed revising Sec.  125.3(d) to reflect Section 1821's 
requirement that SBA must provide examples of activities that would be 
considered a failure to make a good faith effort to comply with a small 
business subcontracting plan. Good faith effort considers a totality of 
the contractor's actions to provide the maximum practicable opportunity 
to small businesses to participate as subcontractors (including those 
in the socio-economic small business areas), consistent with the 
information and assurances provided in the subcontracting plan. A 
failure to exert good faith effort is predicated upon evidence that an 
other than small Federal prime contractor, required to have a 
subcontracting plan with negotiated small business concern goals 
approved by a Federal contracting officer, has failed to attain these 
goals as outlined in the plan, and that this failure may be 
attributable to a lack of good faith effort by the other than small 
prime contractor. The term SBC for purposes of this rule includes all 
categories of small business, including small disadvantaged businesses, 
veteran-owned small businesses, service-disabled veteran-owned small 
businesses, women-owned small businesses, small businesses in 
historically underutilized business zones, Historically Black Colleges 
and Universities (HBCU/Minority Institutions (MI)) (NASA only) and any 
successor small business designations. A failure to exert good faith 
efforts must take into account all actions, or lack thereof, the 
contractor took to promote subcontracting opportunities to small 
businesses to the extent agreed upon in the approved subcontracting 
plan. SBA also proposed to reorganize this section to reflect these new 
examples in Sec.  125.3(d)(3)(ii).
    SBA received eight comments regarding the proposed changes to 
clarify what good faith means. Six comments supported the proposed 
change and two comments opposed it. The six comments in support 
expressed appreciation for SBA's attempt to implement the statutory 
requirement as clearly and thoroughly as possible. Additionally, 
commenters noted that the proposed changes will provide greater 
protection to small businesses by outlining explicitly what they can 
expect from a large business that is making a good faith effort to 
comply with a small business subcontracting plan. Commenters also noted 
that the proposed changes will help agencies hold large business prime 
contractors accountable if they breach their small business 
subcontracting plans.
    The two commenters opposing the proposed change expressed wariness 
about holding contractors to a precise

[[Page 65649]]

definition of good faith because other factors, besides those outlined 
in the proposed language, may affect a contractor's ability to meet its 
goals. While SBA understands these concerns, Congress's clear intent 
was that SBA implement a more robust and detailed definition of 
compliance. SBA does not intend, nor believe, that the expanded 
definition of good faith will be overly burdensome for contractors. In 
addition, the examples set forth in the rule are not intended to be 
inclusive. Factors beyond those identified in the rule may be 
considered in determining whether good faith efforts were made. One 
commenter specifically expressed concern that the examples would allow 
contractors to be found to have acted in bad faith without due process. 
SBA does not believe the proposed changes put contractors at risk of 
specious or capricious findings of bad faith. Contractors have the 
opportunity to correct substantiated findings of subcontracting 
compliance reviews, per the new Sec.  125.3(d)(3)(ii)(F). Further, 
contractors retain their right to rebut and appeal determinations of 
non-compliance that would result in liquidated damages, a breach of 
contract finding, or an adverse past performance assessment. Both 
commenters in opposition suggested that SBA use the FAR language on 
good faith rather than drafting their own regulations. SBA's proposed 
changes mirror the FAR's language but primarily seek to implement 
Congress's intent.
    SBA is making one change to the proposed rule in response to a 
comment noting that Sec.  125.3(d)(3)(ii)(H) incorrectly states that a 
failure of good faith may be found if a contractor does not get a 
contracting officer's approval prior to changing small business 
subcontractors. Prime contractors must provide contracting officers 
with a written explanation of why they are changing a small business 
subcontractor, but the regulations do not require a contracting 
officer's prior approval. SBA has revised the regulation to reflect 
this correction.
    The rule renumbers current Sec.  125.3(d)(3)(i-iii) as Sec.  
125.3(d)(3)(i)(A-C) to better organize this section for clarity and 
ease of understanding. The final rule includes examples of good faith 
in the revised Sec.  125.3(d)(3)(i), while examples of activities that 
would be considered a failure to make a good faith effort are included 
in the revised Sec.  125.3(d)(3)(ii).

III. Recovery Improvements for Small Entities After Disaster Act of 
2015, Public Law 114-88, 129 Stat. 686, November 25, 2015 (RISE Act)

    Section 2108 of the RISE Act authorizes SBA to establish 
contracting preferences for small business concerns located in disaster 
areas and provide agencies with double credit for awards to small 
business concerns located in disaster areas. To implement the changes 
made by section 2108 of the RISE Act, SBA proposed to add a new part 
129 to title 13 of the Code of Federal Regulations. SBA will implement 
section 2105, ``Use of Federal surplus property in disaster areas,'' in 
a separate rulemaking.
    Section 2108 of the RISE Act amends section 15 of the Small 
Business Act (15 U.S.C. 644) by adding a subsection (f), which 
authorizes procuring agencies to provide contracting preferences for 
small business concerns located in areas for which the President has 
declared a major disaster, during the period of the declaration. 
Section 2108 provides that this contracting preference shall be 
available for small business concerns located in disaster areas if the 
small business will perform the work required under the contract in the 
disaster area. Under Sec.  6.208 of Federal Acquisition Regulation 
(FAR), contracting officers may set aside solicitations to allow only 
offerors residing or doing business in the area affected by a major 
disaster. Under existing FAR 26.202-1, such local area set-asides may 
be further set aside for small business concerns. SBA proposed to use 
the existing FAR definitions to provide that an agency will receive 
credit for an ``emergency response contract'' awarded to a ``local 
firm'' that qualifies as a small business concern under the applicable 
size standard for a ``Major disaster or emergency area.'' FAR 26.201.
    Section 2108 also provides that if an agency awards a contract to a 
small business located in a disaster area through a contracting 
preference, the value of the contract shall be doubled for purposes of 
determining compliance with the small business contracting goals 
described in section 15(g)(1)(A) of the Small Business Act. Proposed 
Sec.  129.300 provided that agencies would receive double credit for 
awarding a contract through the use of a local small business or 
socioeconomic set-aside authorized by Sec.  129.200 (i.e., a set-aside 
restricted to SBCs, 8(a) Business Development (BD) Program 
Participants, Women-Owned Small Business (WOSB), Service-Disabled 
Veteran-Owned (SDVO) or HUBZone SBCs located in a disaster area). SBA 
believes that agencies will enter accurate data into the Federal 
Procurement Data System (FPDS). SBA will provide the extra credit 
through the agency scorecard process. Local area set-aside and small 
business contract designations already exist in FPDS, and 
implementation has already occurred in FY 2017.
    SBA received nine comments regarding the proposed addition of part 
129. Eight of the comments support the proposed amendments. They 
supported Congress's intent to encourage small business contracting in 
areas adversely affected by disasters and believed that SBA's proposed 
part 129 accomplished Congress's intent. One commenter stated that it 
would be confusing to discern which type of procurement goal credit is 
subject to double credit, especially if the information provided in the 
SBA Procurement Scorecard differs from that in the Federal Procurement 
Database System (FPDS) or from the information on https://www.usaspending.gov, which tracks Federal procurement spending. While 
the amount of procurement goal credit for such awards will differ in 
the SBA Procurement Scorecard as compared to FPDS, the same contract 
identification information will be present. FPDS will identify those 
awards that are subject to double credit because they were awarded to 
firms in a disaster area. Although SBA understands the commenter's 
concern that implementing this double credit may be confusing, SBA 
believes that it is constrained by the statue which requires this 
double credit. As such, the final rule adopts part 129 as proposed.

IV. Other Small Business Government Contracting Amendments

Clarification That the Non-Manufacturer 500 Employee Size Standard Does 
Not Apply to Information Technology Value Added Resellers

    On September 10, 2014, SBA proposed to eliminate the information 
technology value added reseller (ITVAR) exception to NAICS 541519, 
which had a size standard of 150 employees. 79 FR 53646. In the 
proposed rule, SBA specifically noted that elimination of the exception 
would result in these acquisitions, which are primarily for supplies, 
being subject to the non-manufacturer rule (NMR), which has a size 
standard of 500 employees. As a result of public comment, SBA altered 
the language in the ITVAR exception (13 CFR 121.201, footnote 18) to 
make it clear that the manufacturing performance or

[[Page 65650]]

limitations on subcontracting requirements and the NMR apply to 
acquisitions under the ITVAR exception, but retained the 150 employee 
size standard. 81 FR 4436 (January 26, 2016). By definition, 
contractors under the ITVAR exception are non-manufacturers, and it 
would make no sense for SBA to retain a 150-employee size standard if 
concerns could also qualify under the NMR 500 employee size standard. 
In a size appeal before the SBA Office of Hearings and Appeals, a firm 
tried to argue that the size standard under the ITVAR exception was the 
500 employee non-manufacturer size standard. Size Appeal of York 
Telecom Corporation, SBA No. SIZ-5742 (May 18, 2016). The appeal was 
denied. Id. In response, SBA proposed to amend Sec.  121.406(b)(1)(i) 
to clarify that the NMR size standard of 500 employees does not apply 
to acquisitions that have been assigned the ITVAR NAICS code 541519 
exception, footnote 18. The size standard for any acquisition under 
541519, footnote 18, is 150 employees for all offerors. SBA received 
six comments related to this proposed amendment: Five supported the 
clarification and one opposed it. The commenter opposed to the change 
suggested that SBA should increase the size standard for NAICS code 
541519 from 150 to 500 employees because an increased number of ITVARs 
would lead to cost savings and a reduction of the Federal deficit. SBA 
does not agree with this analysis and is adopting the amendment as 
proposed. SBA does not believe that a non-manufacturer with close to 
500 employees should be considered small.

Setting Aside an Order Under a Multiple Award Set-Aside Contract

    On October 2, 2013, SBA published a final rule implementing 15 
U.S.C. 644(r). 78 FR 61114. In that rule, SBA contemplated the set 
aside of orders for certain types of SBCs, such as HUBZone SBCs, 8(a) 
BD Program Participants, SDVO SBCs, or WOSBs. 78 FR 61114, 61124. SBA 
noted that at the time, the small business programs had major 
differences with respect to the application of the limitations on 
subcontracting and NMR requirements, and therefore it would be 
difficult for SBCs and agencies to determine the rules that applied to 
a particular order. SBA was also concerned about the possibility that 
SBCs could be deprived of an opportunity to compete for orders under a 
set-aside contract if an agency repeatedly set aside orders for other 
socioeconomic categories. Since that time, SBA has attempted to 
harmonize the application of the limitations on subcontracting and NMR 
requirements for each of the various types of small business contracts. 
The concerns identified in the 2013 final rule have since been 
addressed to enable fair and proper implementation of order set-asides. 
Specifically, on May 31, 2016, SBA published a final rule to 
standardize the limitations on subcontracting and NMR requirements 
across socioeconomic programs. 81 FR 34243. In addition, some agencies 
have pursued the strategy of allowing order set-asides against set-
aside multiple award contracts (MACs), including notification and 
incorporation of the clause at FAR 52.219-13, and agencies have 
reported that they have not encountered any industry concerns. In 
connection with this rule, SBA requested comment on whether SBA should 
allow agencies to set aside orders for a socioeconomic small business 
program (8(a), HUBZone, SDVO, WOSB) under a MAC that was awarded under 
a total small business set-aside. Because SBA believes that a change is 
appropriate at this time, SBA proposed to remove the term ``Full and 
Open'' from Sec.  125.2(e)(6) to specifically afford discretion to an 
agency to set-aside one or more particular orders for HUBZone SBCs, 
8(a) BD SBCs, SDVO SBCs or WOSBs, as appropriate, where the underlying 
MAC was initially set aside for small business. Set-asides under 
multiple award set-aside contracts may be implemented by agencies in 
different ways, including: (1) Establishing set-asides to socioeconomic 
programs at the order solicitation level under multiple award small 
business set-aside contracts, and (2) establishing socioeconomic set-
aside pools at the master contract solicitation level for a multiple 
award small business set-aside contract. SBA requested comments on any 
burden or adverse impact associated with each of these two approaches. 
In addition, SBA was specifically interested in whether these two 
approaches could impact the ability for all types of small businesses 
(e.g., 8(a), HUBZone, WOSB, SDVOSB) to compete and receive orders.
    SBA received twenty-two comments regarding this proposed change. 
Twelve of the comments support the proposed change and ten oppose the 
change. The comments that oppose the proposed amendment note that it is 
unfair to the original small business awardees of a MAC to allow 
socioeconomic small business program set-asides under those contracts 
where it was not originally contemplated. Additionally, those who 
oppose this proposed change note that allowing such set-asides under 
small business MACs will reduce the number of offerors for the orders 
that are set-aside for socioeconomic small business program 
participants. The comments in opposition also note that small 
businesses would be discouraged from bidding on MACs because they would 
have no way of knowing if any future orders would be set aside for 
their socioeconomic status. SBA believes these concerns should be 
assuaged by the fact that the rule would not affect already-awarded 
MACs, unless set-asides were already contemplated in the solicitation. 
Going forward, small businesses would know at the time of offer what 
kind of set-asides, if any, were available at the time of award and on 
future orders. SBA believes this type of forecasting and notification 
to offerors would also address the concerns of commenters opposed to 
the proposed change because they do not believe it is fair to the 
``original'' small businesses that submit offers on a MAC. The rule 
would apply only to future contracts and thus potential offerors will 
know in advance if it is worthwhile to submit an offer.
    SBA received one comment requesting clarification on whether a 
contracting officer can set aside orders for a contract if the contract 
was not set aside for small businesses. SBA's current regulation at 
Sec.  125.2(e)(6)(i) provides that contracting officers can ``set-aside 
orders against Multiple Award Contracts that were competed on a full 
and open basis.'' The proposed rule revised this provision to say that 
contracting officers can ``set aside orders against Multiple Award 
Contracts, including contracts that were set aside for small 
businesses.'' SBA is adopting the amendment as proposed.
    SBA received one comment regarding the two alternative approaches 
discussed in the proposed rule for implementing this change: Using 
small business pools or small business set-asides at the order level. 
The commenter supports both proposed approaches but notes that category 
management has a negative impact on small businesses. No comments were 
received which identify any burdens associated with either approach. 
SBA is adopting the amendment as proposed.

Recertification of Size and Status

    SBA's rules require recertification of size and status for all 
long-term (over 5 years) contracts. This includes indefinite delivery 
contracts under which orders will be placed at a future date and 
contracts that had not been set aside for small business but were 
awarded to a small business. Thus, SBA proposed to amend Sec. Sec.  
125.18(f),

[[Page 65651]]

126.601(i), and 127.503(h) to clarify that a concern must recertify its 
status on full and open contracts. In addition, SBA added a new 
paragraph to Sec. Sec.  124.521 and 124.1015 to reflect the status 
eligibility and recertification requirements for 8(a) participants and 
SDB concerns, which are already present in the SDVO, HUBZone, and WOSB 
regulations. This change provides greater consistency among the status 
recertification requirements for small business program contracts. One 
result of these changes is that a prime contractor relying on similarly 
situated entities (an SDVOSB prime with an SDVOSB subcontractor, for 
example) to meet the applicable performance requirements may not count 
the subcontractor towards its performance requirements if the 
subcontractor recertifies as an entity other than that which it had 
previously certified.
    SBA received 32 comments on the proposed change to certification 
requirements. Twenty-five opposed, three supported, and four sought 
clarification. Many of the comments that opposed this provision 
expressed concerns that the requirement would be overly burdensome and 
would add ``complexities to an already difficult compliance system.'' 
Several commenters specifically disagreed with the proposed change to 
the 8(a) and SDB certification requirements. One commenter noted it 
takes firms up to four years to demonstrate satisfactory past 
performance and thus by the time they were eligible for a contract, 
they would not be able to perform on any options. Several others 
pointed out that the 8(a) program is different from SBA's other 
government contracting programs. SBA recognizes these concerns but does 
not believe that this provision fails to acknowledge the unique 
features of the 8(a) program. Congress intended that 8(a) program 
participation be limited to nine years. SBA already permits long-term 
contracts to extend for up to five years past the completion of a 
Participant's program term in the 8(a) program. Allowing firms to work 
on options indefinitely would conflict with Congress's clear desire for 
8(a) Participants to leave the program and go on to successfully and 
independently participate in the government contracting arena. Further, 
SBA did not contemplate the proposed rules as a forced attempt to bring 
the 8(a) program requirements into alignment with the other programs, 
but rather as an opportunity to consider all the programs holistically. 
SBA respectfully disagrees with commenters who do not believe 
consistency between programs is a worthy goal. Consistency better 
enables small businesses and contracting officers to understand and 
comply with SBA's requirements, ensuring that eligible small businesses 
are equipped to bid on contracts that have been appropriately set 
aside. SBA is adopting the proposed changes as final.

Indirect Costs in Commercial Subcontracting Plans

    Other than small business concerns that have a commercial 
subcontracting plan report on performance through a summary subcontract 
report (SSR), and SBA's rules currently require that a contractor using 
a commercial subcontracting plan must include all indirect costs in its 
SSR. However, SBA's rules do not require contractors to include 
indirect costs in their commercial subcontracting plan goals, which 
leads to inconsistencies when comparing the SSR to the commercial 
subcontracting plan. SBA proposed to revise Sec.  125.3(c)(1)(iv) to 
require that prime contractors with commercial subcontracting plans 
must include indirect costs in the commercial subcontracting plan 
goals. This will allow agencies to negotiate more realistic commercial 
subcontracting plans and monitor performance through the SSR. SBA 
received one comment in support of this change and is adopting the 
proposed rule as final.

Subcontracting Compliance Reviews

    SBA proposed revisions to the nomenclature it uses regarding 
subcontracting compliance reviews in order to better align title 13 of 
the CFR with the FAR. Currently, the rating terminology differs between 
SBA's rating system under Sec.  125.3(f)(3) (for an SBA Compliance 
Review) and that used pursuant to FAR 42.1503 (for a past performance 
evaluation including small business subcontracting under FAR 52.219-9). 
SBA believes the difference in terminology leads to confusion for 
Government personnel and industry partners attempting to ascertain the 
value of a rating. As such, in Sec.  125.3(f)(3), SBA proposed to 
revise the terms used to rate firms from ``Outstanding,'' ``Highly 
Successful,'' or ``Acceptable'' to ``Exceptional,'' ``Very Good,'' and 
``Satisfactory,'' respectively. SBA received three comments in support 
of this change and, therefore, is adopting the proposed revisions as 
final.

Independent Contractors--Employees/Subcontractors

    SBA's size regulations provide that SBA considers ``all individuals 
employed on a full-time, part-time, or other basis'' to be employees of 
the firm whose size is at issue. 13 CFR 121.106(a). ``This includes 
employees obtained from a temporary employee agency, professional 
employee organization, or leasing concern.'' Id. Further, ``SBA will 
consider the totality of the circumstances, including criteria used by 
the IRS for Federal income tax purposes, in determining whether 
individuals are employees of a concern.'' Id. In determining what it 
means to be employed on an ``other'' basis, SBA issued Size Policy 
Statement No. 1. 51 FR 6099 (February 20, 1986). The Size Policy 
Statement sets forth 11 criteria SBA will consider in determining 
whether an individual should be treated as an employee. If an 
individual meets one or more of the criteria, he or she may be treated 
as an employee. Pursuant to this guidance, an individual contractor 
paid through a 1099 may be properly treated as an employee for purposes 
of SBA's regulations (including SBA's regulations governing performance 
of work or limitations on subcontracting requirements). The reason for 
such treatment was to prevent a firm that exceeded an applicable 
employee-based size standard from ``firing'' a specific number of 
employees in order to get below the size standard, but to then hire 
them back or ``subcontract'' to them as independent contractors. SBA 
did not want to encourage firms to attempt to evade SBA's size 
regulations.
    Historically, SBA has said that if an individual qualifies as an 
``employee'' under part 121 of SBA's regulations for purposes of 
determining size, then SBA should consider that individual to be an 
employee of the firm for the performance of work (or now limitations on 
subcontracting) requirements of 13 CFR 125.6 (or 124.510). It would not 
be equitable to say that a given individual counts against a firm in 
determining size (because he/she is considered an ``employee'' of the 
firm) and then to say that that same individual also counts against the 
firm for the limitations on subcontracting requirements (because he/she 
is not considered an ``employee'' of the firm). Thus, for a contract 
that is assigned a NAICS code having an employee-based size standard, 
an independent contractor could be deemed an ``employee'' of the 
concern for which he/she is doing work. If such an individual is 
considered an employee for size purposes, he/she would also be 
considered an employee for limitations on subcontracting purposes.
    SBA's regulation at 13 CFR 125.6(e)(3) has caused some confusion as 
to how to properly treat independent contractors for purposes of the 
limitations on

[[Page 65652]]

subcontracting provisions. That provision provides that, ``Work 
performed by an independent contractor shall be considered a 
subcontract, and may count toward meeting the applicable limitations on 
subcontracting where the independent contractor qualifies as a 
similarly situated entity.'' (Emphasis added). This provision was meant 
to apply to service or construction contracts. For service contracts, 
work performed by an independent contractor would be considered a 
subcontract, so that a service contractor could not claim that a non-
similarly situated entity independent contractor should be considered 
an employee of the service contractor. For example, for a WOSB service 
contract, SBA did not want a WOSB prime contractor to pass performance 
of the contract to one or more independent contractors that would not 
themselves qualify as WOSBs. The provision identifies that an 
independent contractor could qualify as a ``similarly situated entity'' 
and meet the limitations on subcontracting that way, but would not 
permit a service contractor to effectively avoid meeting the 
limitations on subcontracting by claiming that independent contractors 
were in fact employees of the firm.
    The proposed rule revised Sec.  125.6(e)(3) to clarify SBA's intent 
regarding both contracts assigned a NAICS code with an employee-based 
size standard and those assigned a NAICS code with a receipts-based 
size standard. Under the proposed rule, where a contract is assigned a 
NAICS code with an employee-based size standard, an independent 
contractor would be deemed an employee of the firm under the terms of 
the Size Policy Statement. Where a contract is assigned a NAICS code 
with a receipts-based size standard, an independent contractor could 
not be considered an employee of the firm for which he or she is 
performing work, but, rather, would be deemed a subcontractor. In 
either case, as a subcontractor, an independent contractor may be 
considered a ``similarly situated entity'' and work performed by the 
independent contractor would then count toward meeting the applicable 
limitation on subcontracting.
    SBA received thirteen comments on the proposed change. Ten opposed, 
two sought clarification, and one was supportive. The comments in 
opposition all expressed concern that the proposed rule was confusing, 
and that SBA's intent was unclear and could be viewed as contradictory. 
Several pointed out that small businesses would need to devote 
unnecessary time and effort towards assessing whether an independent 
contractor counted as an employee or a subcontractor for a procurement. 
One commenter pointed out the difficulty for businesses performing 
contracts under both employee-based and revenue-based NAICS codes. SBA 
recognizes these concerns and concludes that it would be needlessly 
time-consuming and difficult for small businesses, especially those 
performing under multiple NAICS codes, to apply the rule consistently. 
SBA agrees with the commenters who pointed out that looking to Sec.  
121.106(a), which lays out the analysis of whether an individual is an 
employee or a sub-contractor, makes sense for all NAICS codes and 
contracts. As such, SBA has revised the proposed rule to clarify that 
contractors should apply the analysis in Sec.  121.106(a) to determine 
whether independent contractors are employees or subcontractors, and 
that in situations where the independent contractor is a subcontractor, 
their work may be counted toward the applicable limitation on 
subcontracting if they are a similarly situated entity.

Limitation on Subcontracting Compliance

    Congress has expressed its strong support for small business 
government contracting, and has provided agencies with numerous tools 
to set aside acquisitions for exclusive competition among, or in some 
cases award contracts on a sole source basis to, SBCs, 8(a) BD Program 
Participants, HUBZone SBCs, WOSBs, Economically Disadvantaged Women-
Owned (EDWOSB) SBCs, and SDVO SBCs. 15 U.S.C. 631(a), 637(a), (m), 
644(a), (j), 657a, 657f. As a condition of these preferences, small 
businesses are limited in their ability to subcontract to other than 
small business concerns, so that small businesses perform a certain 
percentage of the work. These limitations on subcontracting appear in 
solicitations and contract clauses for small business set-aside and 
sole-source awards. As with all contract administration, it is the 
responsibility of the contracting officer to monitor compliance with 
the terms and conditions of a contract. (FAR 1.602-2, including the 
limitations on subcontracting clause). SBA proposed language to clarify 
that contracting officers have the discretion to request information 
from contractors to demonstrate compliance with limitations on 
subcontracting clauses. The Government Accountability Office (GAO) has 
noted in reports that contracting officers have not been monitoring 
compliance with the limitations on subcontracting. ``Contract 
Management: Increased Use of Alaska Native Corporations' Special 8(a) 
Provisions Calls for Tailored Oversight,'' GAO-06-399, April 2006; 
``8(a) Subcontracting Limitations: Continued Noncompliance with 
Monitoring Requirements Signals Need for Regulatory Change,'' GAO-14-
706, September 2014; and ``Federal Contracting: Monitoring and 
Oversight of Tribal 8(a) Firms Need Attention,'' GAO-12-84, January 
2012. The type of information that small business prime contractors may 
be requested to provide to demonstrate compliance with the limitations 
on subcontracting could be copies of subcontracts for a particular 
procurement or an email that lists the amount that the prime contractor 
has paid to its subcontractors for a particular procurement and whether 
those subcontractors are similarly situated entities. In addition, SBA 
proposed to require information demonstrating compliance with the 
applicable limitations on subcontracting from all prime contractors 
performing set-aside and sole source contracts awarded through SBA's 
small business programs when the prime contractor intends to rely on 
similarly situated subcontractors to comply with the limitations on 
subcontracting. 79 FR 77955 (December 29, 2014). SBA did not adopt such 
a requirement in the final rule but indicated that it intended to seek 
comment on this issue. 81 FR 34243 (May 31, 2016).
    SBA proposed adding new Sec.  125.6(e)(4) to clarify that 
contracting officers may request information regarding limitations on 
subcontracting compliance, and to clarify that it is not required for 
every contract. SBA requested comment on whether all small business 
prime contractors performing set-aside or sole source contracts should 
be required to demonstrate compliance with limitations on 
subcontracting to the contracting officer, and if so, how often should 
this be required, such as annually or quarterly.
    SBA received 17 comments with a range of suggestions. Nine 
commenters opposed regular mandatory reporting requirements. Five 
comments supported a requirement that contractors must demonstrate 
limitations on subcontracting compliance annually. One commenter 
thought compliance should be demonstrated once per base period. Another 
suggested once during the base period, once during each subsequent 
option period, and at completion. A third suggested that contracting 
officers should ask for evidence of compliance if they believe ``there 
is reason for additional evidence

[[Page 65653]]

to be submitted.'' Comments about what type of evidence would suffice 
similarly ranged among several options. Two commenters suggested using 
the same type of evidence required for mentor-prot[eacute]g[eacute] 
joint venture performance of work requirements. Two others suggested 
copies of subcontracting agreements or a list of subcontractors paid 
that note which subcontractors are similarly situated. Several 
commenters, both those in favor of a mandatory reporting rule and those 
opposed, thought if and when such evidence was required, contracting 
officers should have discretion to request the documents they deem 
relevant. On balance, SBA agrees that contracting officers are best 
positioned to assess if, how, and when additional scrutiny of 
contractors' limitations on subcontracting compliance would be helpful. 
As such, the final rule does not require limitations on subcontracting 
compliance reporting but, rather, indicates that contracting officers 
have the discretion to request demonstration of compliance at any point 
during performance or upon completion of a contract. The rule includes 
examples of what documentation could adequately demonstrate compliance 
but is not intended to be an exhaustive list.

Exclusions From the Limitations on Subcontracting

    SBA's limitations on subcontracting regulations provide that for a 
set-aside service contract, the prime contractor must agree that it 
will not pay more than 50% of the amount paid from the Government to 
firms that are not similarly situated. 13 CFR 125.6(a)(1). Unlike 
supply and construction contracts, where materials are excluded, no 
costs are specifically excluded under a service contract, other than 
for mixed contracts where the non-service portion, such as incidental 
supplies, are excluded. SBA has received several requests from industry 
for exclusions related to specific types of contracts, and one related 
to all industries. Some have advocated that certain other direct costs, 
such as airline tickets and hotel costs, be excluded from the 
calculation of the amount paid under the contract. In addition, in 
certain types of contracts or industries, there are factors that may 
complicate compliance with the limitations on subcontracting, 
potentially hindering agencies from setting aside acquisitions for 
small business concerns.
    For example, for certain contracts performed outside of the United 
States, contractors must use non-U.S. local organizations or 
independent contractors to perform consulting services regarding a 
particular foreign country. These individuals are not located in the 
United States, do not reside in the United States, and are not likely 
to be employees of a United States small business concern. SBA proposed 
to clarify how to determine whether work performed by certain required 
contractors should be considered. Specifically, SBA proposed that work 
performed by an independent contractor under a contract that was 
awarded pursuant to the Foreign Assistance Act of 1961 could be 
excluded from determining limitations on subcontracting compliance. 22 
U.S.C. 2151 et seq. SBA received one comment on this provision. The 
commenter disagreed with the proposed language in Sec.  125.6(a)(1) 
because it allowed but did not mandate that work performed by 
individuals on contracts outside the United States pursuant to the 
Foreign Assistance Act of 1961 could be excluded from determining 
limitations on subcontracting compliance. The commenter suggested using 
language indicating that such exclusion is mandatory. In addition, the 
commenter noted that not all work performed outside the United States 
for which some portion of local performance is required is done under 
the Foreign Assistance Act of 1961. SBA agrees that any work required 
to be done by local foreign contractors should be excluded from any 
limitations on subcontracting determination (i.e., should be excluded 
from the ``total value of the contract'' in determining whether a small 
business did not subcontract more than the limitations on 
subcontracting percentage) and has changed the text of Sec.  
125.6(a)(1) to reflect that.
    In the environmental remediation industry (NAICS 562910), a large 
part of the cost of the contract is tied to the transportation and 
disposal of hazardous, toxic, and radiological waste. According to some 
SBCs in this industry that have contacted SBA, given the fact that 
these services are highly regulated and capital intensive, these 
particular transportation services can generally be performed only by 
other than small business concerns. For example, all the disposal 
facilities in the United States are large businesses, and most 
railroads and shipping companies that transport hazardous waste are 
other than small business concerns. This rule proposed to exclude 
transportation and disposal services from the limitations on 
subcontracting compliance determination where small business concerns 
cannot provide the disposal or transportation services. Similarly, 
where the Government acquires media services from small business 
concerns, the placement of the content in the media may require large 
payments to the other than small business concerns, even though that is 
not the principal purpose of the acquisition. SBA proposed to exclude 
these media purchases from the limitations on subcontracting 
determination.
    In a prior rulemaking, SBA determined that remote hosting on 
servers or networks, or cloud computing, should be considered a service 
and therefore the NMR would not apply. 13 CFR 121.1203(d)(3). Due to 
the costs and scale involved, cloud computing is generally provided by 
other than small business concerns. SBA proposed to exclude cloud 
computing from the limitations on subcontracting calculation, where the 
small business concern will perform other services that are the primary 
purpose of the acquisition. Of course, where cloud computing itself is 
the primary purpose of the procurement, the limitations on 
subcontracting could not be met by a small business, and, therefore, 
such a procurement should not be set aside or reserved for small 
business.
    Of the 17 comments received regarding excluding direct costs to the 
extent they are not the principal purpose of the acquisition, nearly 
all supported SBA's intent behind the proposed rule. Eleven commenters 
supported the proposed language without additional change. Four 
commenters supported the categories SBA included in the proposed rule, 
but opposed the rule on the basis that it was not broad enough and 
requested that SBA exclude all other direct costs from limitations on 
subcontracting compliance calculations. SBA does not believe that all 
direct costs should be excluded from the limitations on subcontracting 
determination. In addition, SBA does not believe that the statutory 
language would support such a change.
    Based on the positive feedback from industry, the final rule at 
125.6(a)(1) adopts the language that specifies that the above-mentioned 
industries are excluded from limitations on subcontracting compliance 
calculations. The regulatory text provides that direct costs may be 
excluded to the extent they are not the principal purpose of the 
acquisition and small business concerns do not provide the service, 
``such as'' in the four identified industries (airline travel, work 
performed by a transportation or disposal entity under a contract 
assigned the environmental remediation NAICS code (562910), cloud 
computing services, or mass

[[Page 65654]]

media purchases). The regulatory text is not meant to be inclusive. It 
allows a small business in another industry in a similar situation to 
the four identified to also demonstrate that certain direct costs 
should be excluded because they are not the principal purpose of the 
acquisition and small business concerns do not provide the service.
    One commenter requested clarification as to whether SBA intended 
for only services to be excluded. As discussed, supply and construction 
contracts already have industry-specific exclusions, so this provision 
is intended to bridge a gap that SBA saw regarding service contracts.

Subcontracting to a Small Business Under a Socioeconomic Program Set-
Aside

    In the context of socioeconomic set-aside or sole-source service 
contracts, the ostensible subcontractor rule applies when a small 
business is unduly reliant on an other than small business 
subcontractor, or when the other than small subcontractor will perform 
primary and vital parts of the contract. In such cases, assuming that 
an exception to joint venture affiliation does not apply, SBA will 
treat the small business prime contractor and its subcontractor as 
joint venturers. If the subcontractor is other than small, the prime 
contractor is ineligible for award due to this affiliation. SBA has 
become aware of service contract set-asides for the SDVO, HUBZone, 8(a) 
or WOSB programs where the prime contractor subcontracts most or all of 
the actual performance to a small business that is small for the 
applicable NAICS code but not eligible to compete for award of the 
prime contract and thus not a similarly situated entity as that term is 
defined at Sec.  125.1.
    Under SBA's joint venture rules, 13 CFR 121.103(h)(3)(i)), a joint 
venture can qualify as small if each member of the joint venture is 
small. In the scenario described above, the size regulation would not 
prevent the joint venture from being eligible for the contract (i.e., 
where both parties to a joint venture are small, the joint venture 
itself is small). There is no existing regulatory mechanism for an 
unsuccessful offeror, the SBA, or a contracting officer to protest a 
socioeconomic set-aside or sole-source award to a prime contractor that 
is unduly reliant on a small, but not similarly situated entity, 
subcontractor. The underlying premise that ostensible subcontractors 
and their prime contractors should be treated as joint ventures is 
still SBA's policy. Firms that are performing contracts in a manner 
more consistent with a joint venture than a prime/sub relationship 
should follow the requirements of SBA's regulations regarding 
socioeconomic joint ventures.
    The performance of a set-aside or sole source service contract by a 
small business concern that is not eligible to compete for the prime 
contract is contrary to the intent and purpose of the statutory 
authorities for socioeconomic category set-aside and sole source 
procurements. Thus, SBA proposed language at Sec. Sec.  
124.503(c)(1)(v), 124.507(b)(2), 125.18(f), 125.29(c), 126.601(i), 
126.801(a), 127.504(c), and 127.602 to allow SBA to make a 
determination concerning a small business program participant's 
overreliance on a non-similarly situated subcontractor as part of an 
eligibility or status protest determination. SBA's intent was to 
evaluate these contractor relationships under the established 
ostensible subcontractor test. If SBA finds that the subcontractor is 
an ostensible subcontractor, SBA will treat the arrangement between the 
contractors as a joint venture that does not comply with the formal 
requirements necessary to receive and perform the socioeconomic program 
set-aside or sole-source award as a joint venture.
    SBA received 32 comments on the proposed change to the rules on 
subcontracting to a small business under a socioeconomic set-aside. 
Several commenters opposed the change because they believed that 
subcontracting to a small business, even if it is not a similarly 
situated entity, still benefits the small business community. While SBA 
encourages benefits that accrue to the small business community as a 
whole, Congress's clear intent in authorizing separate and distinct 
Government contracting programs was to bolster specific socioeconomic 
groups' ability to successfully compete for and perform on Government 
contracts. SBA would be subverting Congress's intent if it focused on 
rules that benefit the overall small business community at the expense 
of the groups identified by Congress as meriting focus. As such, SBA 
continues to believe that it is constrained by statute to ensure that 
the eligible prime contractor together with one or more other similarly 
situated small businesses is performing the primary and vital 
requirements of a contract by meeting the applicable limitation of 
subcontracting percentage.
    Other commenters protested on the basis that requiring small 
business prime contractors to ensure that their subcontractors are 
similarly situated entities would be overly burdensome. Again, SBA 
appreciates this concern, but it does not outweigh SBA's mandate to 
protect the interests of participants in its Government contracting 
programs.
    Another commenter recommended that instead of applying the 
ostensible subcontractor standard in this context, SBA should merely 
require that the 8(a)/HUBZone/WOSB/SDVOSB contractor be able to 
demonstrate that it, together with any similarly situated entity, will 
meet the limitations on subcontracting provisions. SBA agrees that if 
the awardee together with similarly situated entities will meet the 
limitations on subcontracting provisions, SBA would not have to look 
further to determine who is doing the primary and vital parts of a 
contract. The final rule adopts the proposed language recognizing that 
where a subcontractor that is not similarly situated performs primary 
and vital requirements of a set-aside or sole-source service contract 
or order, or where a prime contractor is unduly reliant on a small 
business that is not similarly situated to perform the set-aside 
service or sole-source contract or order, the prime contractor is not 
eligible for award of an SDVO, WOSB, HUBZone or 8(a) contract. However, 
the final rule also specifies that SBA will not find that a prime 
contractor is unduly reliant on one or more non-similarly situated 
subcontracts where the prime contractor can demonstrate that it, 
together with any similarly situated entity, will meet the limitations 
on subcontracting provisions set forth in Sec.  125.6.
    Finally, one commenter recommended a comparable change to Sec.  
134.1003 with respect to protests of SDVO eligibility for contracts 
awarded by the Department of Veterans Affairs (VA). Specifically, the 
commenter believed that similar treatment should be afforded to a firm 
that was verified as an SDVO small business by VA's Center for 
Verification and Evaluation (CVE), received a VA contract that was 
restricted to CVE-verified SDVO small business concerns, and then 
subcontracted primary and vital portions of the contract to a non-CVE-
verified business concern, whether or not small. SBA agrees, and has 
added a new paragraph to Sec.  134.1003 that would authorize a protest 
challenging whether the prime contractor is unusually reliant on a 
subcontractor that is not CVE verified, or a protest alleging that such 
subcontractor is performing the primary and vital requirements of a VA 
procurement contract.

[[Page 65655]]

Kit Assemblers

    SBA proposed to remove specific rules related to kit assemblers and 
the NMR, which are currently contained at 13 CFR 121.406(c). The 
existing kit assembler rule requires that 50 percent of the total value 
of the items in the kit must be manufactured by small business 
concerns, but excludes items manufactured by other than small business 
concerns if the contracting officer specifies the item for the kit. 
This rule has led to confusion concerning how to calculate total value, 
and whether a waiver of the non-manufacturer rule can or must be 
requested in order to supply items manufactured by other than small 
concerns. If the majority of items in a kit are made by small business 
concerns, then the acquisition can be set aside for small business 
without the need to request a waiver. If the majority of items in a kit 
are not made by small business concerns, then an individual or class 
waiver of one or more of the items is necessary for the acquisition to 
be set aside for small business concerns for acquisitions above the 
simplified acquisition threshold or for all other socioeconomic set-
asides, regardless of value. In connection with this rule, SBA proposed 
to delete the kit assembler exception and instead apply the multiple 
item rule in Sec.  121.406(e) to kit assembler acquisitions. Like all 
other acquisitions, the NMR will not apply to small business set-asides 
with a value at or below the simplified acquisition threshold. SBA 
received four comments on this proposed change, evenly split between 
those opposed and those in support. The comments opposed did so because 
they believe kit assemblers should be excluded from the limitations on 
subcontracting compliance calculation, along with the other identified 
groups in the proposed rule at Sec.  125.6. The proposed rule did not 
contemplate exclusions beyond those already identified. The commenters 
supporting the change believe that applying the multiple item rule in 
Sec.  121.406(e) to kit assemblers makes sense and makes a separate 
rule for kit assemblers unnecessary. The rule adopts the proposed 
language as final.

Clarification on Size Determinations

    SBA proposed to remove language that has caused confusion on when 
size is determined. The general rule is that size is determined at the 
time of initial offer including price, with the understanding that 
there are some exceptions such as architecture and engineering 
procurements, and certain unpriced indefinite delivery indefinite 
quantity (IDIQ) contracts. However, Sec.  121.404(a) also contains the 
parenthetical, ``(or other formal response to the solicitation).'' Some 
parties have misread this to mean formal responses that are after the 
initial offer, such as final proposal revisions. The clear intent of 
SBA's general rule is to give both firms and the Government certainty 
that size will be determined at the time of the initial response, 
including price. Offer covers bids and proposals, and SBA recognizes 
that in simplified acquisitions the initial response may be acceptance 
of the Government's offer. Thus, SBA proposed adding a paragraph at 
Sec.  121.404(a)(1)(iv), to articulate an exception to the general rule 
for when size is determined. When an agency uses an IDIQ multiple award 
contract that does not require offers for the contract to include 
price, size will be determined on the date of initial offer for the 
IDIQ contract, which may not include price. This proposed change 
reflects the statutory change found at section 825 of the National 
Defense Authorization Act for Fiscal Year 2017, 114 Public Law 328, 
(December 23, 2016), and section 876 of the John S. McCain National 
Defense Authorization Act for Fiscal Year 2019, 115 Public Law 232, 
(August 13, 2018). SBA also amended 121.404(g)(5) to reflect the 
proposed change to 121.103(h)(4) (removing ``and therefore 
affiliates'').
    SBA received 13 comments on the proposed changes to Sec.  121.404. 
Three of these opposed the changes, but all three referenced SBA's 
current rule requiring recertification at the time of a merger or 
acquisition at Sec.  121.404(g)(2)(i). SBA did not propose to revise 
that provision. Of the ten comments that pertained to the proposed 
changes, all ten were supportive of the changes. Commenters appreciated 
the clarification and believe that the proposed language will reduce 
confusion and uncertainty for small businesses. SBA is adopting the 
proposed language as final.
    SBA proposed to amend Sec.  121.103(h)(4) to clarify that when two 
or more small businesses either form a joint venture or are treated as 
joint venturers due to their relationship as prime and subcontractor, 
the joint venture exception to affiliation found at Sec.  
121.103(h)(3)(i) applies if both firms are considered small for the 
size standard associated with the procurement. SBA proposed to remove 
the phrase ``and therefore affiliates'' from the ostensible 
subcontractor rule at Sec.  121.103(h)(4) to clarify this point. To 
allow affiliation between firms that are considered joint venturers 
because of their ostensible subcontracting relationship, even when each 
firm is individually small for the size standard associated with the 
procurement, would negate the purpose of Sec.  121.103(h)(3)(i), which 
explicitly provides an exception to affiliation for such joint 
ventures.
    The purpose of the ostensible subcontractor rule is to treat the 
relationship between a prime contractor and its subcontractor as a 
joint venture where the subcontractor performs primary and vital work 
for the procurement. SBA's current joint venture rules do not aggregate 
the partners to a joint venture in determining the size of the joint 
venture, but rather permit a joint venture to qualify as small as long 
as each partner to the joint venture is individually small. Thus, a 
rule that equates a prime-sub relationship to that of a joint venture 
because the subcontractor is performing primary and vital work and then 
affiliates the two parties (i.e., requiring them to aggregate their 
revenues or employees) is inconsistent with the joint venture size 
rules themselves. The phrase ``and therefore affiliates'' that SBA 
proposed to delete was a holdover from previous regulations that 
aggregated the receipts or employees of joint venture partners when 
determining whether a joint venture qualified as a small business. When 
SBA changed its size regulations to broaden the exclusion from 
affiliation for small business to allow two or more small businesses to 
joint venture for any procurement without being affiliated (i.e., the 
joint venture would be considered small provided each of the joint 
venture partners individually qualified as small and SBA would not 
aggregate the receipts or employees of joint venture partners), SBA 
amended Sec.  121.103(h)(3), but did not make a correspondingly similar 
change in Sec.  121.103(h)(4). See 81 FR 34243, 34258 (May 31, 2016).
    All 12 comments on Sec.  121.103(h)(4) expressed confusion at the 
current disconnect between the ostensible subcontractor rule at Sec.  
121.103(h)(4) and the exception to affiliation for joint venture 
language at Sec.  121.103(h)(3)(i). Commenters supported a 
clarification. SBA believes removing ``and therefore affiliates'' from 
Sec.  121.103(h)(4) will clear up this confusion and is adopting the 
proposed change as final.

Clarification Where One Acceptable Offer Is Received on a Set-Aside

    SBA proposed to add new Sec.  125.2(a)(2) to clarify that a 
contracting officer may make an award under a small business or 
socioeconomic set-aside where only one acceptable offer is received. 
The decision to conduct a set-

[[Page 65656]]

aside is grounded in the contracting officer's expectation based on 
market research that he or she will obtain two or more fair market 
price offers from capable small business concerns. Pursuant to the FAR, 
the contracting officer must perform market research before issuing a 
solicitation to determine whether there are small businesses (including 
8(a), HUBZone, SDVO SBCs, WOSBs) that can perform the requirement. 48 
CFR 10.001(a)(2); 19.202-2. A contracting officer's ``rule of two'' 
determination is prospective. Whether there appear to be at least two 
small businesses that can perform a procurement at a fair price is an 
analysis that is done during acquisition planning and prior to the 
issuance of a solicitation. As long as the market research leads a 
contracting officer to conclude that the agency will receive acceptable 
offers from at least two small business concerns and award will be made 
at a fair market price, the ``rule of two'' is satisfied, no matter how 
many offers are actually received or how many offers remain after 
evaluations are conducted, a competitive range is established, or 
offerors are eliminated in some other fashion.
    The FAR currently addresses small business set-asides below 
$150,000, and provides, ``If the contracting officer receives only one 
acceptable offer from a responsible small business concern in response 
to a set-aside, the contracting officer should make an award to that 
firm.'' FAR 19.502-2(a). There is no reason this policy should not 
apply to all set-asides above or below $150,000. The contracting 
officer must determine that an offeror is responsible, and price is 
fair and reasonable before awarding any contract. FAR 9.103(a); 9.104-
1; 14.408-2; and 15.304(c)(1). It would be inefficient and detrimental 
to the Government and offerors to arbitrarily prevent an award where a 
competition was conducted but only one offer was received. Such a 
policy would unreasonably prolong the procurement process, requiring a 
procuring agency to cancel one solicitation and re-procure using 
another where only one small business offer is received, and could 
cause contracting officers to limit the use of set-asides. SBA received 
no comments opposing this proposed change and adopts it as final in 
this rule.

Compliance With Executive Orders 12866, 13563, 12988, 13132, 13771, the 
Unfunded Mandates Reform Act of 1995, 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 
rule is a ``significant'' regulatory action for purposes of Executive 
Order 12866. The benefits to small business from this rule far outweigh 
any associated costs. The rule makes several other changes needed to 
clarify ambiguities in or remedy perceived problems with the current 
regulations. These changes should make SBA's regulations easier for 
SBCs to use and understand. The change to Sec.  121.404 clarifies when 
size for a Government contract is determined, which will reduce 
confusion for small business concerns. The change to Sec.  121.406 
clarifies that the size standard for information technology value added 
resellers is 150 employees, again to eliminate confusion among small 
business concerns. The changes to Sec.  125.2(a) will benefit small 
business by clarifying that a contracting officer can award a contract 
to a small business under a set-aside if only one offer is received. 
The changes to Sec.  125.2(b) implement section 1811 of the NDAA of 
2017 and govern what acquisitions PCRs can review and would not impact 
small business concerns. The changes to Sec.  125.2(d) implement 
section 863 of the NDAA of 2016 and direct contracting officers on how 
to notify the public about consolidation and substantial bundling and 
will not impact small business concerns. The changes to Sec.  125.2(e) 
authorize agencies to set aside orders for socioeconomic programs where 
the contract was set aside for small business and will benefit firms 
that qualify for those set-asides. The changes to Sec.  125.3 implement 
section 1821 of the NDAA of 2017 by providing examples of a failure to 
make a good faith effort to comply with small business subcontracting 
plans, and will benefit small businesses by providing such examples so 
that contracting officers can hold other than small prime contractors 
accountable for failing to make a good faith effort to comply with 
their small business subcontracting plan. The changes to Sec.  125.3 
also implement section 1821 by providing that the contracting officer 
should evaluate whether an other than small business complied with the 
requirement to report on small business subcontracting plan 
performance. The changes to Sec.  125.6(a) will benefit small business 
concerns by allowing small businesses to exclude certain costs from the 
calculation of the limitations on subcontracting. Without these 
changes, some agencies will not be able to set contracts aside for 
small business, because certain costs attributable to other than small 
concerns are too high. The changes to Sec.  125.6 also help small 
businesses by clarifying the difference between an employee and an 
independent contractor. The changes to Sec.  125.6 will impose some 
requirements on small business concerns to demonstrate compliance with 
the limitations on subcontracting, but only to the extent the 
information is not already in the possession of the government. 
Contractors may have this information readily available since it 
pertains to contract performance and subcontracting of that 
performance. These information requests are not mandatory, as the 
contracting officer simply has the discretion to request such 
information. Contracting officers already have the authority to request 
information on performance, and this change simply clarifies that the 
authority exists. Finally, the benefits to small business concerns of 
this rule substantially outweigh any minor costs imposed by the 
exercise of existing contracting authority. The addition of part 129 
implements section 2108 of the RISE Act and benefits small businesses 
by providing agencies with an incentive to set aside contracts for 
small business concerns located in a disaster area. Accordingly, the 
next section contains SBA's Regulatory Impact Analysis. However, this 
is not a major rule 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 rule implements section 863 of the National Defense 
Authorization Act of 2016, Public Law 114-92, 129 Stat. 726 (15 U.S.C. 
644(e)(3)); section 2108 of the Recovery Improvements for Small 
Entities After Disaster Act of 2015 (RISE Act), Public Law 114-88, 129 
Stat. 686 (15 U.S.C. 644(f)); and sections 1811 and 1821 of the 
National Defense Authorization Act of 2017, Public Law 114-328, 130 
Stat. 2000 (15 U.S.C. 637(d), 644(l)). In addition, it makes several 
other changes needed to clarify ambiguities in or remedy perceived 
problems with the current regulations. These changes should make SBA's 
regulations easier to use and understand. With respect to contractors 
demonstrating compliance with the limitations on subcontracting, for 
decades the general rule has been that

[[Page 65657]]

on a set-aside contract, a small business or socioeconomic small 
business must generally perform some of the work (services, 
construction, or manufacturing). This helps ensure that the benefits of 
a small business set-aside contract flow to the recipients whom 
Congress intends to help by creating the set-aside authority. If 
performance of a set-aside contract is passed through to other than 
small business concerns, there may not be a need for set-asides in the 
first place, and the Government may be paying more for a good or 
service without any value added. These limitations on subcontracting 
appear as a clause in a set-aside contract and help to ensure that the 
intended beneficiaries of set-aside contracts are receiving those 
benefits. The contracting officer is responsible for monitoring 
compliance with clauses in a contract. FAR 1.602. Nothing in SBA's 
regulations or the FAR prohibits a contracting officer from requesting 
documents demonstrating compliance with the limitations on 
subcontracting clause. It is SBA's view that such authority exists, but 
that the authority is not clear or express. Without clarifying the 
authority or process, some contracting officers simply are not 
monitoring compliance. The result is that there may be increased fraud, 
waste, and abuse in the performance of contracts that are set aside for 
small business concerns, because subcontractors that are not eligible 
to receive the prime contract may be performing more work than section 
46 of the Small Business Act (15 U.S.C. 657s), SBA regulations at 13 
CFR 125.6, and FAR clause 52.219-14 permit. This type of fraud 
frustrates the policy goals associated with awarding contracts set 
aside for small business concerns.
    In this rule, SBA clarifies that the contracting officer may 
request information to demonstrate a contractor's compliance with the 
limitations on subcontracting clause. SBA also clarifies that it is 
within the contracting officer's discretion to request such a showing 
of compliance, because in some cases it will not be necessary, such as 
when a small business performs the contract itself without the use of 
subcontractors or when information regarding compliance is already 
available to the Government. Through this rule, SBA intends to deter 
and reduce potential fraud, waste, and abuse, due to noncompliance with 
the limitations on subcontracting. Additionally, clarifying a 
contracting officer's authority to request that a small business 
concern demonstrate compliance with the limitations on subcontracting 
is consistent with recommendations made by the U.S. Government 
Accountability Office (GAO) in several reports: ``Contract Management: 
Increased Use of Alaska Native Corporations' Special 8(a) Provisions 
Calls for Tailored Oversight,'' GAO-06-399, April 2006; ``8(a) 
Subcontracting Limitations: Continued Noncompliance with Monitoring 
Requirements Signals Need for Regulatory Change,'' GAO-14-706, 
September 2014; and ``Federal Contracting: Monitoring and Oversight of 
Tribal 8(a) Firms Need Attention,'' GAO-12-84, January 2012.
2. What are the potential benefits and costs of this regulatory action?
    The majority of the changes in this rule will have de minimis costs 
and qualitative benefits that are difficult to quantity: Protecting the 
integrity of the small business procurement system. The rule will 
provide exceptions to the limitations on subcontracting in certain 
service contracts where small businesses must use the services of other 
than small subcontractors in substantial amounts in order to fully 
perform a set-aside service contract. This will help small business by 
making acquisitions available for small business set-asides that would 
not otherwise be available. Many of the other clarifications in this 
rule will benefit small businesses by reducing confusion in the 
marketplace, but this benefit is difficult to quantify. The provision 
allowing agencies to receive double credit toward their small business 
procurement goals for awards to local small business concerns in the 
event of a disaster is intended to benefit local small businesses and 
provide employment and revenue to concerns located in an area 
devastated by a disaster. While the authority for contracting 
preferences for businesses located in a disaster area already exists in 
FAR subpart 26.2, small businesses located in these areas may receive a 
greater benefit under this rule due to the incentive for the procuring 
agency to receive double credit toward its small business procurement 
goals by utilizing this authority.
    We believe that, pursuant to FAR 1.602-2, contracting officers 
already possess the authority to request information from a contractor 
concerning compliance with a clause in the contract at issue. In 
addition, on some contracts, compliance can already be reviewed or 
monitored by reviewing invoices. This rule clarifies that contracting 
officers have the authority to request information in connection with a 
contractor's compliance with applicable limitations on subcontracting 
clauses. Approximately 53,000 firms received approximately 185,000 
sole-source or set-aside awards in FY 2018. SBA is clarifying that a 
contracting officer may request information regarding compliance with 
prime contractors' limitations on subcontracting. In some cases, this 
information may not be necessary based on the nature of the contract 
and the invoices submitted. SBA estimates that less than ten percent of 
small business concerns and contracts will be subject to a request for 
this information (5,300 small business concerns and 18,500 contracts), 
and compliance should take on average less than an hour. Small 
businesses that do not issue subcontracts will not have anything to 
report. Small businesses may be able to easily report on any 
subcontracts, as information on subcontracting and paying 
subcontractors is routinely compiled as part of the normal accounting 
procedures for any business concern. Accounting or contract management 
personnel should be able to determine whether the firm issued any 
subcontracts in connection with the prime contract. SBA estimates an 
overall annual cost of approximately $815,110 for small businesses to 
provide information on compliance with the limitations on 
subcontracting, as requested by the contracting officer. The difference 
between this figure and the $600,120 figure cited in the rule reflects 
an adjustment in the hourly wage rate included as part of the 
calculation of the overall annual cost. After adding approximately 30% 
to the hourly wage rate to account for the cost of benefits, SBA 
arrived at $815,110 as more accurately reflecting the estimated overall 
annual cost.
    This rule will require an other than small prime contractor with a 
commercial subcontracting plan to include indirect costs in its 
subcontracting goals. Based on data from the Electronic Subcontracting 
Reporting System (eSRS), in FY 2018, approximately 1200 firms had 
commercial subcontracting plans. SBA estimates that approximately 95% 
of those 1200 firms include indirect costs in their subcontracting 
goals. Thus, this rule will impact approximately 60 firms. The burden 
will be de minimis, as the accounting or contract manager will know the 
firm's indirect costs. The benefit of requiring that indirect costs be 
included in subcontracting goals where a commercial subcontracting plan 
is utilized, is that it will increase the small business subcontracting 
goal and thus increase the amount of funds the prime

[[Page 65658]]

contractor will subcontract to small business concerns. Increasing the 
value and number of awards to small business concerns provides 
financial benefits to those firms, who may hire more staff and invest 
in more resources to support the increased demand. Furthermore, 
increasing the number and value of awards to small business concerns 
has macroeconomic and qualitative benefits to the national economy 
because small businesses are the foundation of the country's economic 
success.
    This rule will establish that failure to provide timely 
subcontracting reports may constitute a material breach of the 
contract. These reports are already required by law at 13 CFR 125.3(a). 
This rule will make failure to provide the report a material breach of 
the contract, which could subject other than small business concerns to 
liquidated damages. SBA is not aware of any case where a firm has been 
subject to liquidated damages for failure to comply with a 
subcontracting plan. Thus, any costs will be de minimis. The benefit of 
this rule is that it will assist SBA and contracting officers with 
oversight of prime contractor compliance with subcontracting plans and 
should result in increased compliance with subcontracting plans.
    This final rule requires recertification of status on full and open 
contracts. SBA intended for recertification to occur whenever an agency 
receives credit for an award towards it goals, and this rule is merely 
a clarification that socioeconomic recertification is required on all 
contracts, including full and open contracts. We estimate that 
approximately 150 firms a year recertify on full and open contracts. 
This will only impact firms that are acquired, merged, or where there 
is a novation or the firm grows to be other than small on a long-term 
contract. Agencies have goals for the award of prime contractor dollars 
to small and socioeconomic concerns. The purpose of recertification is 
to ensure that an agency does not receive small business credit for an 
award to an other than small concern.
    This rule will limit the scope of PCR reviews of Department of 
Defense acquisitions performed outside of the United States and its 
territories. This applies to the Government and will not impose costs 
or burdens on the public.
    This rule will remove the kit assembler exception to the non-
manufacturer rule. This clarification requires agencies to request a 
waiver of the non-manufacturer rule for kits, in accordance with 
existing regulations. This will reduce confusion by having only one 
non-manufacturer rule procedure for purposes of multi-item 
procurements.
3. What are the alternatives to this rule?
    Many of the provisions contained in this rule are required to 
implement statutory provisions, thus there are no apparent alternatives 
for these regulations. With respect to the provision clarifying that 
contracting officers may request information on compliance with the 
limitations on subcontracting, SBA considered whether prime contractors 
should be required to provide this information on compliance with the 
limitations on subcontracting on all set-aside or sole source 
contracts. However, SBA believed that would unnecessarily burden small 
businesses, if compliance is already readily apparent to the 
contracting officer based on the type of contract, invoicing, or 
observation. We estimate the alternative considered, having all small 
businesses provide information on compliance, would have an annual cost 
of $1,867,040. SBA decided to clarify instead that the contracting 
officer has the discretion to request such information to the extent 
such information is not already available. This will enable the 
contracting officer to request this information as he or she sees fit, 
to ensure that the benefits of the small business programs are flowing 
to the intended recipients.

Executive Order 13563

    As far as practicable or relevant, SBA considered the requirements 
below in developing this rule.
1. Did the agency use the best available techniques to quantify 
anticipated present and future costs when responding to E.O. 12866 
(e.g., identifying changing future compliance costs that might result 
from technological innovation or anticipated behavioral changes)?
    To the extent possible, the Agency utilized the most recent data 
available in the Federal Procurement Data System--Next Generation, 
System for Award Management and Electronic Subcontracting Reporting 
System.
2. Public participation: Did the agency: (a) Afford the public a 
meaningful opportunity to comment through the internet on any proposed 
regulation, with a comment period that should generally consist of not 
less than 60 days; (b) provide for an ``open exchange'' of information 
among government officials, experts, stakeholders, and the public; (c) 
provide timely online access to the rulemaking docket on 
Regulations.gov; and (d) seek the views of those who are likely to be 
affected by rulemaking, even before issuing a notice of proposed 
rulemaking?
    SBA published a proposed rule with a 60-day comment period, and the 
proposed rulemaking was posted on www.regulations.gov to allow the 
public to comment meaningfully on its provisions. In addition, the 
proposed rule was discussed with the Small Business Procurement 
Advisory Council, which consists of the Directors of the Office of 
Small and Disadvantaged Business Utilization. SBA also submitted the 
rule to multiple agencies with representatives on the FAR Acquisition 
Small Business Team prior to submitting the rule to OMB for interagency 
review. SBA received almost 250 specific comments to the proposed rule, 
which SBA considered in drafting this final rule.
3. Flexibility: Did the agency identify and consider regulatory 
approaches that reduce burdens and maintain flexibility and freedom of 
choice for the public?
    Yes, this rule implements statutory provisions and clarifies 
certain SBA regulations, as requested by agencies and stakeholders. In 
addition, SBA clarifies that contracting officers may request 
information from their contractors to determine whether the contractor 
is complying with the limitations on subcontracting. This information 
may already be provided as part of invoicing under certain contracts, 
and in any event, the information should be readily provided by the 
contractor, as it simply pertains to what extent the prime contractor 
is subcontracting work under the contract. Clarifying that the 
contracting officer has the authority to request this information, 
instead of requiring all small businesses to submit reports, 
significantly reduces cost and burden.

Executive Order 12988

    This action meets applicable standards set forth in section 3(a) 
and 3(b)(2) of Executive Order 12988, Civil Justice Reform, to minimize 
litigation, eliminate ambiguity, and reduce

[[Page 65659]]

burden. This action does not have any retroactive or preemptive effect.

Executive Order 13132

    SBA has determined that this rule 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 levels of government.

Executive Order 13771

    This rule is expected to be an Executive Order 13771 regulatory 
action. Details on the estimated costs of this rule can be found in the 
rule's regulatory impact analysis.

Unfunded Mandates Reform Act of 1995

    This rule will not result in an unfunded mandate that will result 
in expenditures by State governments of $100 million or more (adjusted 
annually for inflation since 1995).

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

    Small businesses, such as 8(a) BD Program Participants, HUBZone 
SBCs, WOSBs, Economically Disadvantaged Women-Owned (EDWOSBCs), and 
SDVO SBCs, are eligible to receive set-aside or sole source contracts. 
15 U.S.C. 631(a), 637(a), (m), 644(a), (j), 657a, 657f. As a condition 
of these preferences, and to help ensure that small businesses actually 
perform a certain percentage of the work on a contract, the recipients 
of set-aside or sole source contracts are limited in their ability to 
subcontract to other than small business concerns by the limitations on 
subcontracting clauses in the particular contract. See, 48 CFR 52.219-
3, 52.219-4, 52.219-7, 52.219-14, 52.219-18, 52.219-27, 52.219-29, 
52.219-30. Contracting officers are responsible for ensuring contractor 
compliance with the terms of a contract (FAR 1.602-2). This rule will 
provide express authority for contracting officers to request 
information on contractors' compliance with the limitations on 
subcontracting requirements. SBA did not receive any comments on this 
information collection.
    SBA sought review and approval from OMB for this information 
collection, as discussed in the proposed rule. SBA received a Notice of 
Office of Management and Budget Action on June 10, 2019, certifying OMB 
pre-approval of the information collection. SBA is not making any 
substantive changes to the information collection described in the 
proposed rule and submitted to OMB. The information collection is 
titled ``Compliance with the Limitations on Subcontracting'' and has 
been assigned OMB Control Number 3245-400.
    A summary description of the reporting requirement, description of 
respondents, and estimate of the annual burden is provided below. 
Included in the estimate is the time for reviewing requirements, 
gathering and maintaining the data needed, and submitting the report to 
the contracting officer.
    Title: Compliance with the Limitations on Subcontracting.
    OMB Control Number: 3245-0400.
    Summary Description of Compliance Information: In order to show 
that it is in compliance with the limitations on subcontracting terms 
that are included in its set-aside or sole source contract, a small 
business concern may be required to submit certain information to the 
contracting officer. The specific information relevant to a particular 
contract will be identified by the contracting officer but could 
include, where applicable, identification of subcontractor, dollar 
amount of subcontract, and costs to be excluded from the limitations on 
subcontracting calculation (e.g., for contracts for supplies, 
materials).
    Description of and Estimated Number of Respondents: Small business 
concerns that are awarded set-aside or sole source contracts. Based on 
FPDS data, SBA estimates that approximately 53,000 concerns receive 
approximately 185,000 small business sole source or set-aside awards in 
a fiscal year and that no more than ten percent (5,300) of concerns 
will be asked to provide information on compliance with the limitations 
on subcontracting for no more than ten percent (18,500) of the awards 
that have been received.
    Estimated Annual Responses: 18,500.
    Estimated Response Time per Respondent: 1 hour.
    Total Estimated Annual Hour Burden: 18,500.
    Estimated Costs Based on Respondent's Salary: $44.06/hour (based on 
2018 Median Pay for accountants and auditors, Bureau of Labor 
Statistics, plus an additional 30% to account for cost of benefits, as 
discussed in the Regulatory Impact Assessment).
    Total Estimated Hour Annual Cost Burden: 18,500 hours x $44.06/hour 
= $815,110.

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

    Under the Regulatory Flexibility Act (RFA), this rule may have a 
significant on a substantial number of small businesses. Immediately 
below, SBA sets forth a final regulatory flexibility analysis (FRFA) 
addressing the impact of the rule in accordance with section 603, title 
5, of the United States Code. The FRFA examines the objectives and 
legal basis for this rule; the kind and number of small entities that 
may be affected; the projected recordkeeping, reporting, and other 
requirements; whether there are any Federal rules that may duplicate, 
overlap, or conflict with this final rule; and whether there are any 
significant alternatives to this final rule.
1. What are the need for and objective of the rule?
    The rule implements section 863 of the National Defense 
Authorization Act of 2016, Public Law 114-92, 129 Stat. 726 (15 U.S.C. 
644(e)(3)); section 2108 of the Recovery Improvements for Small 
Entities After Disaster Act of 2015 (RISE Act), Public Law 114-88, 129 
Stat. 686 (15 U.S.C. 644(f)); and sections 1811 and 1821 of the 
National Defense Authorization Act of 2017, Public Law 114-328, 130 
Stat. 2000 (15 U.S.C. 637(d), 644(l)). In addition, the rule makes 
several other changes needed to clarify ambiguities in or remedy 
perceived problems with the current regulations. These changes should 
make SBA's regulations easier to use and understand. The rule will make 
it easier for agencies to award set-aside contracts to SBCs. Failure to 
promulgate this rule could result in a loss of set-aside opportunities 
for SBCs.
    The change to Sec.  121.404 clarifies when size for a Government 
contract is determined, which will reduce confusion for small business 
concerns. The change to Sec.  121.406 clarifies that the size standard 
for information technology value added resellers is 150 employees, 
again to eliminate confusion among small business concerns. The changes 
to Sec.  125.2(a) will benefit small business by clarifying that a 
contracting officer can award a contract to a small business under a 
set-aside if only one offer is received. The changes to Sec.  125.2(b) 
implement section 1811 of the NDAA 2017 and govern what acquisitions 
PCRs can review and would not impact small business concerns. The 
changes to Sec.  125.2(d) implement section 863 of the NDAA of 2016 and 
direct contracting officers on how to notify the public about 
consolidation and substantial bundling and will not impact small 
business concerns. The changes to Sec.  125.2(e) authorize agencies to 
set aside orders for socioeconomic programs where the contract was set 
aside for small business and will benefit firms that qualify for those 
set-asides. The changes to Sec.  125.3 implement section 1821 of the 
NDAA of

[[Page 65660]]

2017 by providing examples of a failure to make a good faith effort to 
comply with small business subcontracting plans, and will benefit small 
businesses by providing such examples so that contracting officers can 
hold other than small prime contractors accountable for failing to make 
a good faith effort to comply with their small business subcontracting 
plan. The changes to Sec.  125.3 also implement section 1821 by 
providing that the contracting officer should evaluate whether an other 
than small business complied with the requirement to report on small 
business subcontracting plan performance. The changes to Sec.  125.6(a) 
will benefit small business concerns by allowing small businesses to 
exclude certain costs from the calculation of the limitations on 
subcontracting. Without these changes, some agencies will not be able 
to set contracts aside for small business, because certain costs 
attributable to other than small concerns are too high. The changes to 
Sec.  125.6 also help small businesses by clarifying the difference 
between an employee and an independent contractor. The changes to Sec.  
125.6 will impose some information production requirements on small 
business concerns, but only to the extent the information is not 
already in the possession of the Government. Further, this information 
is readily available since it pertains to contract performance and 
subcontracting of that performance. These reports are not mandatory, as 
the contracting officer simply has the discretion to request such 
reports. Contracting officers already have the authority to request 
information demonstrating performance, and this change simply clarifies 
that the authority exists. Finally, the benefits to small business 
concerns of this rule substantially outweigh any minor costs imposed by 
the reporting authority. The addition of part 129 implements section 
2108 of the RISE Act and benefits small businesses by providing 
agencies with an incentive to set aside contracts for small business 
concerns located in a disaster area.
    With respect to the limitation on subcontracting to an ineligible 
small business under a socioeconomic set-aside (the new 13 CFR 
124.507(b)(2)(vi), 125.29(c), 126.601(i), and 127.504(c)), the rule 
will impact very few firms. The vast majority of small business prime 
contractors self-perform the required percentage of work, or will 
subcontract to a similarly situated entity, as is allowed under FAR 
52.219-3 (Notice of HUBZone Set-Aside or Sole Source Award), 52-219-27 
(Notice of Service-Disabled Veteran-Owned Small Business Set-Aside), 
and as will be allowed when SBA's rules on similarly situated entities 
(13 CFR 125.6) are implemented in the FAR. The benefits that will flow 
to the intended beneficiaries of a socio-economic set-aside far 
outweigh any impact on firms that have no intention of performing the 
contract or are not eligible to bid on that contract.
2. What are SBA's description and estimate of the number of small 
entities to which the rule will apply?
    The rule will be applicable to all small business concerns 
participating in the Federal procurement market that seek to perform 
Government prime contracts or to perform subcontracts awarded by other 
than small concerns. SBA estimates that there are approximately 320,000 
firms identified as small business concerns in the Dynamic Small 
Business Search database.
3. What are the projected reporting, recordkeeping, and other 
compliance requirements of the rule and an estimate of the classes of 
small entities which will be subject to the requirements?
    The rule does not impose new recordkeeping requirements. 
Contractors already keep records on contract performance and 
subcontracting. Information may be required, but only to the extent the 
information is not available through invoices or existing progress 
reports. The rule clarifies that contracting officers may request 
access to information in connection with a contractor's compliance with 
applicable limitations on subcontracting clauses. Approximately 53,000 
firms received sole source or set-aside awards in FY 2018. SBA is 
clarifying that a contracting officer may request information to ensure 
compliance with the limitations on subcontracting clause, and in some 
cases this information may not be necessary based on the nature of the 
contract and the invoices submitted. We estimate that less than ten 
percent of contracts would be subject to a request to provide this 
information (18,500), and compliance should take less than an hour for 
each of those contracts. Accounting or contract management personnel 
should be able to determine whether the firm issued any subcontracts in 
connection with the prime contract. We estimate an overall annual cost 
of approximately $815,110. As discussed above in the Regulatory Impact 
Analysis, this figure differs from the figure included in the IRFA to 
reflect the increased hourly rate that is included as part of the cost 
analysis.
4. What are the relevant Federal rules which may duplicate, overlap or 
conflict with the rule?
    We are not aware of any rules that duplicate, overlap or conflict 
with this rule. The FAR will have to be amended to implement portions 
of this rule. That will be done through a separate rulemaking.
5. What alternatives will allow the Agency to accomplish its regulatory 
objectives while minimizing the impact on small entities?
    Many of the changes are required to implement statute and impose 
requirements on contracting personnel, agencies or other than small 
concerns, and do not impact small business concerns. Further, many of 
the changes will benefit small business concerns by clarifying areas 
where there is confusion and by making it easier for agencies to set 
aside contracts and orders for small business and small socioeconomic 
concerns. As an alternative, SBA considered whether prime contractors 
should be required to provide information on compliance with the 
limitations on subcontracting on all set-aside or sole source 
contracts. However, that may unnecessarily burden small businesses, if 
compliance is already readily apparent to the contracting officer based 
on the type of contract, invoicing, or observation.

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 124

    Administrative practice and procedure, Government procurement, 
Government property, Small businesses.

13 CFR Part 125

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

13 CFR Part 126

    Administrative practice and procedure, Government procurement, 
Reporting and recordkeeping requirements, Small businesses.

13 CFR Part 127

    Government contracts, Reporting and recordkeeping requirements, 
Small businesses.

[[Page 65661]]

13 CFR Part 129

    Administrative practice and procedure, Government contracts, 
Government procurement, Small businesses.

    Accordingly, for the reasons stated in the preamble, SBA amends 13 
CFR parts 121, 124, 125, 126, and 127 and adds 13 CFR part 129 as 
follows:

PART 121--SMALL BUSINESS SIZE REGULATIONS

0
1. The authority citation for part 121 continues to read as follows:

    Authority: 15 U.S.C. 632, 634(b)(6), 662, and 694a(9).


0
2. Amend Sec.  121.103 by revising the first sentence of paragraph 
(h)(4) to read as follows:


Sec.  121.103  How does SBA determine affiliation?

* * * * *
    (h) * * *
    (4) A contractor and its ostensible subcontractor are treated as 
joint venturers for size determination purposes. * * *
* * * * *

0
3. Amend Sec.  121.404 by revising paragraph (a) introductory text, 
adding paragraph (a)(1)(iv), and revising paragraph (g)(5) to read as 
follows:


Sec.  121.404  When is the size status of a business concern 
determined?

    (a) SBA determines the size status of a concern, including its 
affiliates, as of the date the concern submits a written self-
certification that it is small to the procuring activity as part of its 
initial offer or response which includes price.
    (1) * * *
    (iv) For an indefinite delivery, indefinite quantity (IDIQ), 
Multiple Award Contract, where concerns are not required to submit 
price as part of the offer for the IDIQ contract, size will be 
determined as of the date of initial offer, which may not include 
price.
* * * * *
    (g) * * *
    (5) If during contract performance a subcontractor that is not a 
similarly situated entity performs primary and vital requirements of a 
contract, the contractor and its ostensible subcontractor will be 
treated as joint venturers. See Sec.  121.103(h)(4).
* * * * *

0
4. Amend Sec.  121.406 by:
0
a. Revising paragraph (b)(1)(i);
0
b. Removing paragraph (c); and
0
c. Redesignating paragraphs (d) through (f) as paragraphs (c) through 
(e) respectively.
    The revision reads as follows:


Sec.  121.406  How does a small business concern qualify to provide 
manufactured products or other supply items under a small business set-
aside, service-disabled veteran-owned small business, HUBZone, WOSB or 
EDWOSB, or 8(a) contract?

* * * * *
    (b) * * *
    (1) * * *
    (i) Does not exceed 500 employees (or 150 employees for the 
Information Technology Value Added Reseller exception to NAICS Code 
541519, which is found at Sec.  121.201, footnote 18);
* * * * *

PART 124--8(a) BUSINESS DEVELOPMENT/SMALL DISADVANTAGED BUSINESS 
STATUS DETERMINATIONS

0
5. The authority citation for part 124 continues to read as follows:

    Authority: 15 U.S.C. 634(b)(6), 636(j), 637(a), 637(d), 644 and 
Pub. L. 99-661, Pub. L. 100-656, sec. 1207, Pub. L. 101-37, Pub. L. 
101-574, section 8021, Pub. L. 108-87, and 42 U.S.C. 9815.


0
6. Amend Sec.  124.503 by revising paragraphs (c)(1)(iii) and (iv) and 
adding paragraph (c)(1)(v) to read as follows:


Sec.  124.503  How does SBA accept a procurement for award through the 
8(a) BD program?

* * * * *
    (c) * * *
    (1) * * *
    (iii) The Participant is small for the size standard corresponding 
to the NAICS code assigned to the requirement by the procuring activity 
contracting officer;
    (iv) The Participant has submitted required financial statements to 
SBA; and
    (v) The Participant can demonstrate that it, together with any 
similarly situated entity, will meet the limitations on subcontracting 
provisions set forth in Sec.  124.510.
* * * * *

0
7. Amend Sec.  124.507 by:
0
a. Removing the word ``and'' at the end of paragraph (b)(2)(iv);
0
b. Removing the period at the end of paragraph (b)(2)(v) and adding in 
its place ``; and''; and
0
c. Adding paragraph (b)(2)(vi).
    The addition reads as follows:


Sec.  124.507  What procedures apply to competitive 8(a) procurements?

* * * * *
    (b) * * *
    (2) * * *
    (vi) Can demonstrate that it, together with any similarly situated 
entity, will meet the limitations on subcontracting provisions set 
forth in Sec.  124.510.
* * * * *

0
8. Amend Sec.  124.521 by adding paragraph (e) to read as follows:


Sec.  124.521  What are the requirements for representing 8(a) status, 
and what are the penalties for misrepresentation?

* * * * *
    (e) Recertification. (1) Generally, a concern that is an eligible 
8(a) Participant at the time of initial offer or response, which 
includes price, for an 8(a) contract, including a Multiple Award 
Contract, is considered an 8(a) Participant throughout the life of that 
contract. For an indefinite delivery, indefinite quantity (IDIQ), 
Multiple Award 8(a) Contract, where concerns are not required to submit 
price as part of the offer for the contract, a concern that is an 
eligible 8(a) Participant at the time of initial offer, which may not 
include price, is considered an 8(a) Participant throughout the life of 
that contract. This means that if an 8(a) Participant is qualified at 
the time of initial offer for a Multiple Award 8(a) Contract, then it 
will be considered an 8(a) Participant for each order issued against 
the contract, unless a contracting officer requests a new 8(a) 
eligibility determination in connection with a specific order. Where a 
concern later fails to qualify as an 8(a) Participant, the procuring 
agency may exercise options and still count the award as an award to a 
Small Disadvantaged Business (SDB).
    (i) Where an 8(a) contract is novated to another business concern, 
or where the concern performing the 8(a) contract is acquired by, 
acquires, or merges with another concern and contract novation is not 
required, the concern must comply with the process outlined at 
Sec. Sec.  124.105(i) and 124.515.
    (ii) Where an 8(a) Participant that was initially awarded a non-
8(a) contract that is subsequently novated to another business concern, 
the concern that will continue performance on the contract must certify 
its SDB status to the procuring agency, or inform the procuring agency 
that it does not qualify as an SDB, within 30 days of the novation 
approval. If the concern is not an SDB, the agency can no longer count 
the options or orders issued pursuant to the contract, from that point 
forward, towards its SDB goals.
    (iii) Where an 8(a) Participant receives a non-8(a) contract, and 
that Participant acquires, is acquired by, or merges with another 
concern and contract novation is not required, the concern must, within 
30 days of the transaction becoming final, recertify its SDB status

[[Page 65662]]

to the procuring agency, or inform the procuring agency that it no 
longer qualifies as an SDB. If the contractor is no longer a current 
8(a) Participant, the contractor is not eligible for orders limited to 
8(a) awardees. If the contractor is not an SDB, the agency can no 
longer count the options or orders issued pursuant to the contract, 
from that point forward, towards its SDB goals. The agency and the 
contractor must immediately revise all applicable Federal contract 
databases for which they directly certify information to reflect the 
new status.
    (2) For the purposes of 8(a) contracts (including Multiple Award 
Contracts) with durations of more than five years (including options), 
a contracting officer must verify in DSBS whether a business concern 
continues to be an eligible 8(a) Participant no more than 120 days 
prior to the end of the fifth year of the contract, and no more than 
120 days prior to exercising any option. Where a concern fails to 
qualify as an eligible 8(a) Participant during the 120 days prior to 
the end of the fifth year of the contract, the option shall not be 
exercised.
    (3) Recertification does not change the terms and conditions of the 
contract. The limitations on subcontracting, nonmanufacturer and 
subcontracting plan requirements in effect at the time of contract 
award remain in effect throughout the life of the contract.
    (4) Where the contracting officer explicitly requires concerns to 
qualify as eligible 8(a) Participants in response to a solicitation for 
an order, SBA will determine eligibility as of the date the concern 
submits its self-representation as part of its response to the 
solicitation for the order.
    (5) A concern's status will be determined at the time of a response 
to a solicitation for a basic ordering agreement (BOA), basic agreement 
(BA), or blanket purchase agreement (BPA) and each order issued 
pursuant to the BOA, BA, or BPA.

0
9. Amend Sec.  124.1015 by adding paragraph (f) to read as follows:


Sec.  124.1015  What are the requirements for representing SDB status, 
and what are the penalties for misrepresentation?

* * * * *
    (f) Recertification. (1) Generally, a concern that represents 
itself and qualifies as an SDB at the time of initial offer (or other 
formal response to a solicitation), which includes price, including a 
Multiple Award Contract, is considered an SDB throughout the life of 
that contract. For an indefinite delivery indefinite quantity (IDIQ), 
Multiple Award Contract, where concerns are not required to submit 
price as part of their offer for the contract, a concern that 
represents itself and qualifies as an SDB at the time of initial offer, 
which may not include price, is considered an SDB throughout the life 
of that contract. This means that if an SDB is qualified at the time of 
initial offer for a Multiple Award Contract, then it will be considered 
an SDB for each order issued against the contract, unless a contracting 
officer requests a new SDB certification in connection with a specific 
order. Where a concern later fails to qualify as an SDB, the procuring 
agency may exercise options and still count the award as an award to an 
SDB. However, the following exceptions apply:
    (i) Where a contract is novated to another business concern, the 
concern that will continue performance on the contract must certify its 
status as an SDB to the procuring agency, or inform the procuring 
agency that it does not qualify as an SDB, within 30 days of the 
novation approval. If the concern is not an SDB, the agency can no 
longer count the options or orders issued pursuant to the contract, 
from that point forward, towards its SDB goals.
    (ii) Where a concern that is performing a contract acquires, is 
acquired by, or merges with another concern and contract novation is 
not required, the concern must, within 30 days of the transaction 
becoming final, recertify its SDB status to the procuring agency, or 
inform the procuring agency that it no longer qualifies as an SDB. If 
the contractor is not an SDB, the agency can no longer count the 
options or orders issued pursuant to the contract, from that point 
forward, towards its SDB goals. The agency and the contractor must 
immediately revise all applicable Federal contract databases for which 
they directly certify information to reflect the new status.
    (2) For the purposes of contracts (including Multiple Award 
Contracts) with durations of more than five years (including options), 
a contracting officer must request that a business concern recertify 
its SDB status no more than 120 days prior to the end of the fifth year 
of the contract, and no more than 120 days prior to exercising any 
option.
    (3) A business concern that did not certify itself as an SDB, 
either initially or prior to an option being exercised, may recertify 
itself as an SDB for a subsequent option period if it meets the 
eligibility requirements at that time.
    (4) Recertification does not change the terms and conditions of the 
contract. The limitations on subcontracting, nonmanufacturer and 
subcontracting plan requirements in effect at the time of contract 
award remain in effect throughout the life of the contract.
    (5) Where the contracting officer explicitly requires concerns to 
recertify their status in response to a solicitation for an order, SBA 
will determine eligibility as of the date the concern submits its self-
representation as part of its response to the solicitation for the 
order.
    (6) A concern's status may be determined at the time of a response 
to a solicitation for an Agreement and each order issued pursuant to 
the Agreement.

PART 125--GOVERNMENT CONTRACTING PROGRAMS

0
10. 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, 657(f), 
and 657r.

0
11. Amend Sec.  125.2 by:
0
a. Revising paragraph (a);
0
b. In paragraph (b)(1)(i)(A):
0
i. Revising the second sentence; and
0
ii. Adding a sentence at the end of the paragraph;
0
c. Adding paragraph (d)(1)(v);
0
d. Redesignating paragraph (d)(7) as paragraph (d)(8);
0
e. Adding new paragraph (d)(7); and
0
f. Revising the paragraph (e)(6) subject heading and paragraph 
(e)(6)(i).
    The revisions and additions read as follows:


Sec.  125.2  What are SBA's and the procuring agency's responsibilities 
when providing contracting assistance to small businesses?

    (a)(1) General. The objective of the SBA's contracting programs is 
to assist small business concerns, including 8(a) BD Participants, 
HUBZone small business concerns, Service-Disabled Veteran-Owned Small 
Business Concerns, Women-Owned Small Businesses and Economically 
Disadvantaged Women-Owned Small Businesses, in obtaining a fair share 
of Federal Government prime contracts, subcontracts, orders, and 
property sales. Therefore, these regulations apply to all types of 
Federal Government contracts, including Multiple Award Contracts, and 
contracts for architectural and engineering services, research, 
development, test and evaluation. Small business concerns must receive 
any award (including orders, and orders placed against Multiple Award 
Contracts) or contract, part of any such award or contract, any 
contract for the sale of Government property, or any contract resulting 
from a reverse auction, regardless of the place of performance, which 
SBA and the procuring or disposal agency determine to be in the 
interest of:

[[Page 65663]]

    (i) Maintaining or mobilizing the Nation's full productive 
capacity;
    (ii) War or national defense programs;
    (iii) Assuring that a fair proportion of the total purchases and 
contracts for property, services and construction for the Government in 
each industry category are placed with small business concerns; or
    (iv) Assuring that a fair proportion of the total sales of 
Government property is made to small business concerns.
    (2) One acceptable offer. If the contracting officer receives only 
one acceptable offer from a responsible small business concern in 
response to any small or socioeconomic set-aside, the contracting 
officer should make an award to that firm.
    (b) * * *
    (1) * * *
    (i) * * *
    (A) * * * At the SBA's discretion, PCRs may review any acquisition 
to determine whether a set-aside or sole-source award to a small 
business under one of SBA's programs is appropriate and to identify 
alternative strategies to maximize the participation of small 
businesses in the procurement. * * * Unless the contracting agency 
requests a review, PCRs will not review an acquisition by or on behalf 
of the Department of Defense if the acquisition is conducted for a 
foreign government pursuant to section 22 of the Arms Control Export 
Act (22 U.S.C. 2762), is humanitarian or civic assistance provided in 
conjunction with military operations as defined in 10 U.S.C. 401(e), is 
for a contingency operation as defined in 10 U.S.C. 101(a)(13), is to 
be awarded pursuant to an agreement with the government of a foreign 
country in which Armed Forces of the United States are deployed, or 
where both the place of award and place of performance are entirely 
outside of the United States and its territories.
* * * * *
    (d) * * *
    (1) * * *
    (v) Not later than 7 days after making a determination that an 
acquisition strategy involving a consolidation of contract requirements 
is necessary and justified under subparagraph (d)(1)(i) of this 
section, the Senior Procurement Executive (SPE) or Chief Acquisition 
Officer (CAO), or designee, shall publish a notice on the Government 
Point of Entry (GPE) that such determination has been made. Any 
solicitation for a procurement related to the acquisition strategy 
shall not be issued earlier than 7 days after such notice is published. 
Along with the publication of the solicitation, the SPE or CAO (or 
designee) must publish in the GPE the justification for the 
determination, which shall include the information in paragraphs 
(d)(1)(i)(A) through (E) of this section.
* * * * *
    (7) Notification to public of rationale for substantial bundling. 
If the head of a contracting agency determines that an acquisition plan 
for a procurement involves a substantial bundling of contract 
requirements, the head of a contracting agency shall publish a notice 
on the GPE that such determination has been made not later than 7 days 
after making such determination. Any solicitation for a procurement 
related to the acquisition plan may not be published earlier than 7 
days after such notice is published. Along with the publication of the 
solicitation, the head of a contracting agency shall publish in the GPE 
a justification for the determination, which shall include the 
following information:
    (i) The specific benefits anticipated to be derived from the 
bundling of contract requirements and a determination that such 
benefits justify the bundling;
    (ii) An identification of any alternative contracting approaches 
that would involve a lesser degree of bundling of contract 
requirements;
    (iii) An assessment of the specific impediments to participation by 
small business concerns as prime contractors that result from the 
bundling of contract requirements; and
    (iv) The specific actions designed to maximize participation of 
small business concerns as subcontractors (including suppliers) at 
various tiers under the contract or contracts that are awarded to meet 
the requirements.
* * * * *
    (e) * * *
    (6) Set-aside of orders against Multiple Award Contracts. (i) 
Notwithstanding the fair opportunity requirements set forth in 10 
U.S.C. 2304c and 41 U.S.C. 253j, the contracting officer has the 
authority to set aside orders against Multiple Award Contracts, 
including contracts that were set aside for small business. This 
includes order set-asides for 8(a) Participants, HUBZone SBCs, SDVO 
SBCs, and WOSBs (and where appropriate EDWOSBs).
* * * * *

0
12. Amend Sec.  125.3 by:
0
a. Revising the last sentence of paragraph (c)(1)(iv);
0
b. Revising paragraph (d)(3);
0
c. Adding paragraph (d)(11); and
0
d. Revising the first sentence of paragraph (f)(3).
    The revisions and addition read as follows:


Sec.  125.3  What types of subcontracting assistance are available to 
small businesses?

* * * * *
    (c) * * *
    (1) * * *
    (iv) * * * A contractor authorized to use a commercial 
subcontracting plan must include all indirect costs in its 
subcontracting goals and in its SSR;
* * * * *
    (d) * * *
    (3) Evaluating whether the prime contractor made a good faith 
effort to comply with its small business subcontracting plan.
    (i) 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:
    (A) The contractor performed one or more of the actions described 
in paragraph (b) of this section, as appropriate for the procurement;
    (B) 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
    (C) The contractor fulfilled all of the requirements of its 
subcontracting plan.
    (ii) Examples of activities reflective of a failure to make a good 
faith effort to comply with a subcontracting plan include, but are not 
limited, to:
    (A) Failure to submit the acceptable individual or summary 
subcontracting reports in eSRS by the report due dates or as provided 
by other agency regulations within prescribed time frames;
    (B) Failure to pay small business concern subcontractors in 
accordance with the terms of the contract with the prime;
    (C) Failure to designate and maintain a company official to 
administer the subcontracting program and monitor and enforce 
compliance with the plan;
    (D) Failure to maintain records or otherwise demonstrate procedures 
adopted to comply with the plan including subcontracting flow-down 
requirements;
    (E) Adoption of company policies or documented procedures that have 
as their objectives the frustration of the objectives of the plan;
    (F) Failure to correct substantiated findings from federal 
subcontracting compliance reviews or participate in subcontracting plan 
management training offered by the government;

[[Page 65664]]

    (G) Failure to conduct market research identifying potential small 
business concern subcontractors through all reasonable means including 
outreach, industry days, or the use of federal database marketing 
systems such as SBA's Dynamic Small Business Search (DSBS) or SUBNet 
Systems or any successor federal systems;
    (H) Failure to comply with regulations requiring submission of a 
written explanation to the contracting officer to change small business 
concern subcontractors that were used in preparing offers; or
    (I) Falsifying records of subcontracting awards to SBCs.
* * * * *
    (11) Evaluating whether the contractor or subcontractor complied in 
good faith with the requirement to provide periodic reports and 
cooperate in any studies or surveys as may be required by the Federal 
agency or the Administration in order to determine the extent of 
compliance by the contractor or subcontractor with the subcontracting 
plan. The contractor or subcontractor's failure to comply with this 
requirement in good faith shall be a material breach of such contract 
or subcontract and may be considered in any past performance evaluation 
of the contractor.
* * * * *
    (f) * * *
    (3) Upon completion of the review and evaluation of a contractor's 
performance and efforts to achieve the requirements in its 
subcontracting plans, the contractor's performance will be assigned one 
of the following ratings: Exceptional, Very Good, Satisfactory, 
Marginal or Unsatisfactory. * * *
* * * * *

0
13. Amend Sec.  125.6 by:
0
a. Adding two sentences at the end of paragraph (a)(1);
0
b. Adding a sentence at the end of paragraph (c) introductory text;
0
c. Revising paragraph (e)(3); and
0
d. Adding paragraph (e)(4).
    The additions and revision read as follows:


Sec.  125.6  What are the prime contractor's limitations on 
subcontracting?

    (a) * * *
    (1) * * * Other direct costs may be excluded to the extent they are 
not the principal purpose of the acquisition and small business 
concerns do not provide the service, such as airline travel, work 
performed by a transportation or disposal entity under a contract 
assigned the environmental remediation NAICS code (562910), cloud 
computing services, or mass media purchases. In addition, work 
performed overseas on awards made pursuant to the Foreign Assistance 
Act of 1961 or work required to be performed by a local contractor, is 
excluded.
* * * * *
    (c) * * * A prime contractor may no longer count a similarly 
situated entity towards compliance with the limitations on 
subcontracting where the subcontractor ceases to qualify as small or 
under the relevant socioeconomic status.
* * * * *
    (e) * * *
    (3) For contracts where an independent contractor is not otherwise 
treated as an employee of the concern for which he/she is performing 
work for size purposes under Sec.  121.106(a) of this chapter, work 
performed by the independent contractor shall be considered a 
subcontract. Such work will count toward meeting the applicable 
limitation on subcontracting where the independent contractor qualifies 
as a similarly situated entity.
    (4) Contracting officers may, at their discretion, require the 
contractor to demonstrate its compliance with the limitations on 
subcontracting at any time during performance and upon completion of a 
contract if the information regarding such compliance is not already 
available to the contracting officer. Evidence of compliance includes, 
but is not limited to, invoices, copies of subcontracts, or a list of 
the value of tasks performed.
* * * * *

0
14. Amend Sec.  125.18 by:
0
a. In paragraph (e)(1)(i), removing the phrase ``an SDVO contract'' and 
adding in its place the phrase ``a contract'';
0
b. In paragraph (e)(1)(ii), removing the phrase ``an SDVO SBC 
contract'' and adding in its place the phrase ``a contract''; and
0
c. Adding paragraph (f).
    The addition reads as follows:


Sec.  125.18  What requirements must an SDVO SBC meet to submit an 
offer on a contract?

* * * * *
    (f) Ostensible subcontractor. Where a subcontractor that is not 
similarly situated performs primary and vital requirements of a set-
aside or sole-source service contract or order, or where a prime 
contractor is unduly reliant on a small business that is not similarly 
situated to perform the set-aside or sole source service contract or 
order, the prime contractor is not eligible for award of an SDVO 
contract.
    (1) When the subcontractor is small for the size standard assigned 
to the procurement, this issue may be grounds for an SDVO status 
protest, as described in subpart D of this part. When the subcontractor 
is other than small, or alleged to be other than small for the size 
standard assigned to the procurement, this issue may be grounds for a 
size protest subject to the ostensible subcontractor rule, as described 
at Sec.  121.103(h)(4) of this chapter.
    (2) SBA will find that a prime SDVO contractor is performing the 
primary and vital requirements of a contract or order and is not unduly 
reliant on one or more non-similarly situated subcontracts where the 
prime contractor can demonstrate that it, together with any similarly 
situated entity, will meet the limitations on subcontracting provisions 
set forth in Sec.  125.6.

0
15. Amend Sec.  125.29 by adding paragraph (c) to read as follows:


Sec.  125.29  What are the grounds for filing an SDVO SBC protest?

* * * * *
    (c) Ostensible subcontractor. In cases where the prime contractor 
appears unduly reliant on a small, non-similarly situated entity 
subcontractor or where the small non-similarly situated entity is 
performing the primary and vital requirements of the contract, the 
Director, Office of Government Contracting will consider a protest only 
if the protester presents credible evidence of the alleged undue 
reliance or credible evidence that the primary and vital requirements 
will be performed by the subcontractor.

PART 126--HUBZONE PROGRAM

0
 16. The authority citation for part 126 is revised to read as follows:

    Authority: 15 U.S.C. 632(a), 632(j), 632(p), 644 and 657a; Pub. 
L. 111-240, 24 Stat. 2504.


0
17. Amend Sec.  126.601 by:
0
a. In paragraph (h)(1)(i), removing the phrase ``HUBZone contract (or a 
HUBZone contract awarded through full and open competition based on the 
HUBZone price evaluation preference)'' and adding in its place the word 
``contract'';
0
b. In paragraph (h)(1)(ii), removing the phrase ``HUBZone contract'' 
and adding in its place the word ``contract''; and
0
c. Adding paragraph (i).
    The addition reads as follows:


Sec.  126.601  What additional requirements must a qualified HUBZone 
SBC meet to bid on a contract?

* * * * *
    (i) Ostensible subcontractor. Where a subcontractor that is not 
similarly situated performs primary and vital

[[Page 65665]]

requirements of a set-aside service contract, or where a prime 
contractor is unduly reliant on a small business that is not similarly 
situated to perform the set-aside service contract, the prime 
contractor is not eligible for award of a HUBZone contract.
    (1) When the subcontractor is small for the size standard assigned 
to the procurement, this issue may be grounds for a HUBZone status 
protest, as described in subpart H of this part. When the subcontractor 
is alleged to be other than small for the size standard assigned to the 
procurement, this issue may be grounds for a size protest under the 
ostensible subcontractor rule, as described at Sec.  121.103(h)(4) of 
this chapter.
    (2) SBA will find that a prime HUBZone contractor is performing the 
primary and vital requirements of a contract or order and is not unduly 
reliant on one or more non-similarly situated subcontracts where the 
prime contractor can demonstrate that it, together with any similarly 
situated entity, will meet the limitations on subcontracting provisions 
set forth in Sec.  125.6.

0
18. Amend Sec.  126.801 by adding a new fourth sentence to paragraph 
(a) to read as follows:


Sec.  126.801  How does one file a HUBZone status protest?

    (a) * * * SBA will also consider a protest challenging whether a 
HUBZone prime contractor is unduly reliant on a small, non-similarly 
situated entity subcontractor or if such subcontractor performs the 
primary and vital requirements of the contract. * * *
* * * * *

PART 127--WOMEN-OWNED SMALL BUSINESS FEDERAL CONTRACT PROGRAM

0
 19. The authority citation for part 127 continues to read as follows:

    Authority: 15 U.S.C. 632, 634(b)(6), 637(m), 644 and 657r.


Sec.  127.503  [Amended]

0
20. Amend Sec.  127.503 by removing the phrase ``WOSB/EDWOSB contract'' 
wherever it appears and adding in its place the word ``contract'' in 
paragraphs (h)(1)(i) and (ii).

0
 21. Amend Sec.  127.504 by adding paragraph (c) to read as follows:


Sec.  127.504  What additional requirements must a concern satisfy to 
submit an offer on an EDWOSB or WOSB requirement?

* * * * *
    (c) Ostensible subcontractor. Where a subcontractor that is not 
similarly situated performs primary and vital requirements of a set-
aside service contract, or where a prime contractor is unduly reliant 
on a small business that is not similarly situated to perform the set-
aside service contract, the prime contractor is not eligible for award 
of a WOSB or EDWOSB contract.
    (1) When the subcontractor is small for the size standard assigned 
to the procurement, this issue may be grounds for a WOSB or EDWOSB 
status protest, as described in subpart F of this part. When the 
subcontractor is other than small or alleged to be other than small for 
the size standard assigned to the procurement, this issue may be a 
ground for a size protest, as described at Sec.  121.103(h)(4) of this 
chapter.
    (2) SBA will find that a prime WOSB or EDWOSB contractor is 
performing the primary and vital requirements of a contract or order 
and is not unduly reliant on one or more non-similarly situated 
subcontracts where the prime contractor can demonstrate that it, 
together with any similarly situated entity, will meet the limitations 
on subcontracting provisions set forth in Sec.  125.6.

0
 22. Amend Sec.  127.602 by revising the second sentence and adding a 
third sentence to read as follows:


Sec.  127.602  What are the grounds for filing an EDWOSB or WOSB status 
protest?

    * * * SBA will also consider a protest challenging the status of a 
concern as an EDWOSB or WOSB if the contracting officer has protested 
because the WOSB or EDWOSB apparent successful offeror has failed to 
provide all of the required documents, as set forth in Sec.  127.300. 
In addition, when sufficient credible evidence is presented, SBA will 
consider a protest challenging whether the prime contractor is 
unusually reliant on a small, non-similarly situated entity 
subcontractor, as defined in Sec.  125.1 of this chapter, or a protest 
alleging that such subcontractor is performing the primary and vital 
requirements of a set-aside or sole-source WOSB or EDWOSB contract.

0
23. Add part 129 to read as follows:

PART 129--CONTRACTS FOR SMALL BUSINESSES LOCATED IN DISASTER AREAS

Sec.
129.100 What definitions are important in this part?
129.200 What contracting preferences are available for small 
business concerns located in disaster areas?
129.300 What small business goaling credit do agencies receive for 
awarding an emergency response contract to a small business concern 
under this part?
129.400 What are the applicable performance requirements?
129.500 What are the penalties of misrepresentation of size or 
status?

    Authority: 15 U.S.C. 636(j)(13)(F)(ii), 644(f).


Sec.  129.100  What definitions are important in this part?

    For the purposes of this part:
    Concern located in a disaster area is a firm that during the last 
twelve months--
    (1)(i) Had its main operating office in the area; and
    (ii) Generated at least half of the firm's gross revenues and 
employed at least half of its permanent employees in the area.
    (2) If the firm does not meet the criteria in paragraph (1) of this 
definition, factors to be considered in determining whether a firm 
resides or primarily does business in the disaster area include--
    (i) Physical location(s) of the firm's permanent office(s) and date 
any office in the disaster area(s) was established;
    (ii) Current state licenses;
    (iii) Record of past work in the disaster area(s) (e.g., how much 
and for how long);
    (iv) Contractual history the firm has had with subcontractors and/
or suppliers in the disaster area;
    (v) Percentage of the firm's gross revenues attributable to work 
performed in the disaster area;
    (vi) Number of permanent employees the firm employs in the disaster 
area;
    (vii) Membership in local and state organizations in the disaster 
area; and
    (viii) Other evidence that establishes the firm resides or 
primarily does business in the disaster area. For example, sole 
proprietorships may submit utility bills and bank statements.
    Disaster area means the area for which the President has declared a 
major disaster under section 401 of the Robert T. Stafford Disaster 
Relief and Assistance Act (42 U.S.C. 5170), during the period of the 
declaration.
    Emergency response contract means a contract with private entities 
that supports assistance activities in a disaster area, such as debris 
cleanup, distribution of supplies, or reconstruction.


Sec.  129.200  What contracting preferences are available for small 
business concerns located in disaster areas?

    Contracting officers may set aside solicitations for emergency 
response contracts to allow only small businesses located in the 
disaster area to compete.

[[Page 65666]]

Sec.  129.300  What small business goaling credit do agencies receive 
for awarding an emergency response contract to a small business concern 
under this part?

    If an agency awards an emergency response contract to a local small 
business concern through the use of a local area set-aside that is also 
set aside under a small business or socioeconomic set-aside (8(a), 
HUBZone, SDVO, WOSB, EDWOSB), the value of the contract shall be 
doubled for purposes of determining compliance with the goals for 
procurement contracts under section 15(g)(1)(A) of the Small Business 
Act (15 U.S.C. 644(g)(1)(A)). The procuring agency shall enter the 
actual contract value, not the doubled contract value in the required 
contract reporting systems, and appropriately code the contract action 
to receive the credit. SBA will provide the double credit as part of 
the Scorecard process.


Sec.  129.400  What are the applicable performance requirements?

    The performance requirements of Sec.  125.6 of this chapter apply 
to small and socioeconomic set-asides under this part. A similarly 
situated entity as that term is used in Sec.  125.6 of this chapter 
must qualify as a concern located in a disaster area.


Sec.  129.500  What are the penalties of misrepresentation of size or 
status?

    The penalties relevant to the particular size or socioeconomic 
status representation under 13 CFR 121.108, 125.32, 126.900, and 
127.700 are applicable to set-asides under this part.

PART 134--RULES OF PROCEDURE GOVERNING CASES BEFORE THE OFFICE OF 
HEARINGS AND APPEALS

0
24. The authority citation for part 134 continues to read as follows:

    Authority:  5 U.S.C. 504; 15 U.S.C. 632, 634(b)(6), 634(i), 
637(a), 648(l), 656(i), and 687(c); 38 U.S.C. 8127(f); E.O. 12549, 
51 FR 6370, 3 CFR, 1986 Comp., p. 189.
    Subpart J issued under 38 U.S.C. 8127(f)(8)(B).
    Subpart K issued under 38 U.S.C. 8127(f)(8)(A).


0
25. Amend Sec.  134.1003 by redesignating paragraph (c) as paragraph 
(d) and by adding new paragraph (c) to read as follows:


Sec.  134.1003  Grounds for filing a CVE Protest.

* * * * *
    (c) Unusual reliance. SBA will consider a protest challenging 
whether the prime contractor is unusually reliant on a subcontractor 
that is not CVE verified, or a protest alleging that such subcontractor 
is performing the primary and vital requirements of a VA procurement 
contract.
* * * * *

    Dated: November 19, 2019.
Christopher Pilkerton,
Acting Administrator.
[FR Doc. 2019-25517 Filed 11-27-19; 8:45 am]
BILLING CODE 8025-01-P