[Federal Register Volume 87, Number 242 (Monday, December 19, 2022)]
[Proposed Rules]
[Pages 77529-77532]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2022-27213]


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SMALL BUSINESS ADMINISTRATION

13 CFR Part 125

RIN 3245-AH28


National Defense Authorization Act of 2020, Credit for Lower Tier 
Subcontracting and Other Amendments

AGENCY: U.S. Small Business Administration.

ACTION: Proposed rule.

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SUMMARY: The U.S. Small Business Administration (SBA or Agency) is 
proposing to amend its regulations to implement provisions of the 
National Defense Authorization Act for Fiscal Year 2020. The proposal 
would permit a prime contractor with an individual subcontracting plan 
to apply credit for subcontracts to small businesses at lower tiers 
toward its subcontracting goals. To do so, the prime contractor would 
incorporate the lower-tier subcontracting performance into its 
subcontracting-plan goals.

DATES: Comments must be received on or before February 17, 2023.

ADDRESSES: You may submit comments, identified by RIN 3245-AH28, by any 
of the following methods:
     Federal eRulemaking Portal: https://www.regulations.gov. 
Follow the instructions for submitting comments.
     Email: Roman Ivey, Program Analyst, Office of Policy 
Planning and

[[Page 77530]]

Liaison, Small Business Administration, at [email protected].
    SBA will post all comments on https://www.regulations.gov. If you 
wish to submit confidential business information (CBI), as defined in 
the User Notice at https://www.regulations.gov, please submit the 
information to Roman Ivey, Small Business Administration at 
[email protected]. Highlight the information that you consider to be 
CBI and explain why you believe SBA should hold this information as 
confidential. SBA will review the information and make the final 
determination on whether it will publish the information.

FOR FURTHER INFORMATION CONTACT: Roman Ivey, Program Analyst, Office of 
Policy Planning and Liaison, Small Business Administration, at 
[email protected], (202) 401-1420. If you are deaf, hard of hearing, 
or have a speech disability, please dial 7-1-1 to access 
telecommunications relay services.

SUPPLEMENTARY INFORMATION:

Background

    The SBA proposes to revise its Small Business Subcontracting Plan 
regulations in 13 CFR 125.3 in response to changes made in section 870 
of the National Defense Authorization Act (NDAA) of 2020, Public Law 
116-92. Specifically, section 870 made changes to section 8(d) of the 
Small Business Act, 15 U.S.C. 637(d), regarding the requirements that 
apply to a Federal contractor seeking to obtain subcontracting credit 
on certain types of Federal contracts.
    Most Federal contracts require the awardee to enter into a 
subcontracting plan that includes percentage goals for using small 
businesses and subcategories of small businesses. Subcontracting plans 
apply to Federal contracts exceeding $750,000 ($1.5 million for 
construction), unless the awardee is a small business, the contract 
does not offer subcontracting opportunities, or the contract will be 
performed entirely outside the United States and its outlying areas. 
Prior to SBA's Final Rule published on December 23, 2016, 81 FR 94246, 
SBA's regulations permitted a prime contractor to count only its first-
tier subcontracts toward the goals in its subcontracting plan. The 
December 2016 Final Rule, however, mandated that prime contractors 
receive credit for lower-tier subcontracts under certain circumstances. 
Section 870 changed the criteria for receiving credit for lower-tier 
subcontracting, and this proposed rule implements those statutory 
changes.
    Section 870 made three changes to subcontracting plan requirements. 
First, a prime contractor may elect, in some instances, to receive 
credit toward its subcontracting plan for lower-tier subcontracts to 
small businesses. Second, agencies are prohibited from setting tier-
specific goals for prime contractors that use lower-tier credit. Third, 
subcontracting plans are required to recite the records that 
contractors will maintain to substantiate lower-tier credit.
    These changes require SBA to change some of the provisions set 
forth in the December 2016 Final Rule. Most importantly, relying on 
statutory language, the December 2016 Final Rule made it mandatory for 
contractors with individual subcontracting plans to take credit for 
lower-tier subcontract. Section 870, by contrast, removes the mandate 
and states that prime contractors ``may elect to receive credit'' for 
either first-tier subcontracts on their own, or subcontracts at any 
tier. Accordingly, SBA proposes to change the prior mandate to an 
election.
    Additionally, the December 2016 Final Rule allowed for contractors 
to receive credit for subcontracts awarded to small businesses below 
the first tier, but only where the contractor had two sets of 
subcontracting goals. A contractor was required to have a goal for 
small-business subcontracting at the first tier, and an additional goal 
for small business subcontracting at lower tiers. Section 870 prohibits 
agencies from setting tier-specific goals for prime contractors that 
use lower-tier credit. To address that statutory change, SBA proposes 
that prime contractors will only have one set of subcontracting goals. 
Prime contractors may elect under certain circumstances to have 
subcontracts awarded to small businesses at lower tiers counted toward 
this goal.
    This proposed rule also implements the requirement from section 870 
that contractors include in their subcontracting plans a statement of 
the types of records they will maintain to substantiate subcontracting 
credit.
    Section 870 further created a new subparagraph 8(d)(16)(B) in the 
Small Business Act, 15 U.S.C. 637(d)(16)(B), to require agencies to 
collect, report, and review data on compliance with subcontracting 
plans. The new subparagraph duplicates existing statutory language in 
section 8(d)(7) of the Small Business Act, 15 U.S.C. 637(d)(7), and has 
already been implemented in SBA's regulations at 13 CFR 125.6(f)(8). 
Therefore, no regulatory changes are necessary to implement new 
subparagraph 8(d)(16)(B).

Section-By-Section Analysis

13 CFR 125.3(a)

    SBA proposes to change the threshold for a required subcontracting 
plan to $750,000. This would make the threshold consistent with the 
Federal Acquisition Regulation (FAR) subpart 19.7 and with other 
references to the threshold in section 125.3.

13 CFR 125.3(a)(1)(i)(C)

    SBA proposes to revise the language of 13 CFR 125.3(a)(1)(i)(C) to 
incorporate the two statutory changes from section 870 that differ from 
SBA's December 2016 rule: creating an election for using lower-tier 
subcontracting credit and prohibiting more than one set of goals.
    First, the proposed language makes lower-tier subcontracting credit 
discretionary, in some circumstances. A prime contractor may elect to 
take credit for lower-tier subcontractors only when the subcontracting 
plan applies to a single contract with one Federal agency. In other 
situations--i.e., where the plan applies to more than one contract or 
to a single contract with more than one agency--section 870 prohibits 
the prime contractor from receiving credit for lower-tier 
subcontracting. Commercial plans and comprehensive subcontracting plans 
therefore are not eligible to use lower-tier subcontracting credit. 
They must instead rely solely on first-tier subcontracts. Additionally, 
governmentwide contracts and multi-agency contracts are not permitted 
to use lower-tier subcontracting credit.
    Where a prime contractor elects to include lower-tier subcontracts 
towards its goal, the prime contractor would be credited with lower-
tier subcontracts that are reported under lower-tier subcontracting 
plans. This proposed rule does not require prime contractors to submit 
additional reports. Prime contractors would be required to report only 
their first-tier awards. Lower-tier subcontracting awards are required 
to be reported by the prime contractor's lower-tier subcontractors in 
accordance with their subcontracting plans and SBA's regulations. SBA 
believes that only having each subcontract at any tier reported once 
will help prevent duplicative counting of the same awards.
    Second, the proposed rule eliminates the prior provision that a 
prime contractor would have two sets of subcontracting goals--one for 
the first tier and one for lower tiers. Instead, SBA proposes that the 
prime contractor would incorporate the subcontracting-plan goals of its 
lower-tier

[[Page 77531]]

subcontractors into its individual-subcontracting-plan goals.

13 CFR 125.3(c)

    SBA proposes to create a new 13 CFR 125.3(c)(1)(xii) to incorporate 
the new recordkeeping requirements on contractors with subcontracting 
plans. Specifically, prime contractors are required to maintain records 
of the procedures used to substantiate the credit they elect to receive 
for lower-tier subcontracting under 13 CFR 125.3(a)(1)(i)(C).
    Compliance with Executive Orders 12866, 13563, 12988, 13175, and 
13132, the Paperwork Reduction Act (44 U.S.C. Ch. 35), the Regulatory 
Flexibility Act (5 U.S.C. 601-612), and the Congressional Review Act (5 
U.S.C. 801-808).

Executive Order 12866

    The Office of Management and Budget (OMB) has determined that this 
proposed rule is not a significant regulatory action for the purposes 
of Executive Order 12866.

Executive Order 13563

    SBA previously solicited comments from the public on a proposal to 
provide credit for lower-tier subcontracting. 80 FR 60300. Those 
comments were considered for this rulemaking. Additionally, as part of 
its ongoing efforts to engage stakeholders in the development of its 
regulations, SBA has solicited comments and suggestions from procuring 
agencies on how to best implement section 870. SBA has incorporated 
those comments and suggestions to the extent feasible. SBA intends to 
incorporate, where feasible, public input into the final rule.

Executive Order 12988

    For purposes of Executive Order 12988, SBA has drafted this 
proposed rule, to the extent practicable, in accordance with the 
standards set forth in section 3(a) and 3(b)(2) of that Executive 
Order, to minimize litigation, eliminate ambiguity, and reduce burden. 
This rule has no preemptive or retroactive effect.

Executive Order 13175

    This proposed rule does not have tribal implications under 
Executive Order 13175, Consultation and Coordination with Indian Tribal 
Governments, because it would not have a substantial direct effect on 
one or more Indian tribes, on the relationship between the Federal 
Government and Indian tribes, or on the distribution of power and 
responsibilities between the Federal Government and Indian tribes.

Executive Order 13132

    For the purpose of Executive Order 13132, SBA has determined that 
this proposed 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 layers of government. Therefore, SBA has determined that this 
proposed rule has no federalism implications warranting preparation of 
a federalism assessment.

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

    This rule, if adopted in final form, would update the requirements 
for small business subcontracting plans to add a requirement for prime 
contractors to include in their subcontracting plans a statement of the 
types of records they will maintain to substantiate subcontracting 
credit. The FAR rule implementing this requirement will account for 
this information collection, and clearance for the information 
collection will be obtained by the FAR Council.

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

    According to the Regulatory Flexibility Act (RFA), 5 U.S.C. 601, 
when an agency issues a rulemaking, it must prepare a regulatory 
flexibility analysis to address the impact of the rule on small 
entities. However, section 605 of the RFA allows an agency to certify a 
rule, in lieu of preparing an analysis, if the rulemaking is not 
expected to have a significant economic impact on a substantial number 
of small entities. The RFA defines ``small entity'' to include ``small 
businesses,'' ``small organizations,'' and ``small governmental 
jurisdictions.'' This proposed rule concerns various aspects of SBA's 
contracting programs. As such, the rule relates to small business 
concerns, but would not affect ``small organizations'' or ``small 
governmental jurisdictions'' because those programs generally apply 
only to ``business concerns'' as defined by SBA regulations, in other 
words, to small businesses organized for profit. ``Small 
organizations'' or ``small governmental jurisdictions'' are non-profits 
or governmental entities and do not generally qualify as ``business 
concerns'' within the meaning of SBA's regulations.
    There are approximately 350,000 concerns registered as small 
business concerns in the System for Award Management (SAM) that could 
potentially be impacted by the implementation of section 870. However, 
SBA cannot say with any certainty how many will be impacted because we 
do not know how many of these concerns participate in government 
contracting as subcontractors. A firm is required to register in SAM in 
order to participate in Federal contracting as a prime contractor, but 
not for purposes of subcontracting. Therefore, there are no known 
compliance or other costs imposed by the proposed rule on small 
business concerns.
    In sum, the proposed amendments would not have a disparate impact 
on small businesses and would increase their opportunities to 
participate in Federal Government contracting as subcontractors without 
imposing any additional costs. For the reasons discussed, SBA certifies 
that this proposed rule would not have a significant economic impact on 
a substantial number of small business concerns.

Congressional Review Act (5 U.S.C. 801-808)

    The Congressional Review Act, 5 U.S.C. 801 et seq., as amended by 
the Small Business Regulatory Enforcement Fairness Act of 1996, 
generally provides that before a ``major rule'' may take effect, the 
agency promulgating the rule must submit a rule report, which includes 
a copy of the rule, to each House of the Congress and to the 
Comptroller General of the United States. SBA will submit a report 
containing this rulemaking and other required information to the U.S. 
Senate, the U.S. House of Representatives, and the Comptroller General 
of the United States. A major rule cannot take effect until 60 days 
after it is published in the Federal Register. This rulemaking has been 
reviewed and determined by OMB not to be a ``major rule'' under 5 
U.S.C. 804(2).

List of Subjects in 13 CFR Part 125

    Government contracts, Government procurement, Reporting and 
recordkeeping requirements, Small businesses, Small business 
subcontracting.

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

PART 125--GOVERNMENT CONTRACTING PROGRAMS

0
1. The authority citation for 13 CFR part 125 is revised to read as 
follows:


[[Page 77532]]


    Authority:  15 U.S.C. 632(p), (q), 634(b)(6), 637, 644, 657f, 
657q, 657r, and 657s; 38 U.S.C. 501 and 8127.

0
2. Amend Sec.  125.3 by:
0
a. Removing the number ``$650,000'' in paragraph (a) introductory text 
and adding in its place the number ``$750,000'';
0
b. Revising paragraph (a)(1)(i)(C);
0
c. Removing the word ``and'' after the semicolon at the end of 
paragraph (c)(1)(xi);
0
d. Redesignating paragraph (c)(1)(xii) as paragraph (c)(1)(xiii); and
0
e. Adding a new paragraph (c)(1)(xii).
    The revision and addition read as follows:


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

    (a) * * *
    (1) * * *
    (i) * * *
    (C) Where the subcontracting goals pertain only to a single 
contract with one Federal agency, the contractor may elect to receive 
credit for small business concerns performing as first-tier 
subcontractors or subcontractors at any tier pursuant to the 
subcontracting plans required under paragraph (c) of this section in an 
amount equal to the dollar value of work awarded to such small business 
concerns. The election must be recorded in the subcontracting plan. If 
the contractor elects to receive credit for subcontractors at any tier, 
the following requirements apply:
    (1) The prime contractor must incorporate the subcontracting-plan 
goals of their lower-tier subcontractors in its individual-
subcontracting-plan goals.
    (2) To receive credit for their subcontracting, lower-tier 
subcontractors must have their own individual subcontracting plans.
    (3) The prime contractor and any subcontractor with a 
subcontracting plan are responsible for reporting on subcontracting 
performance under their contracts or subcontracts at their first tier. 
This reporting method applies to both individual subcontracting reports 
and summary subcontracting reports.
    (4) The prime contractor's performance under its individual 
subcontracting plan will be calculated by aggregating the prime 
contractor's first-tier subcontracting achievements with the 
achievements of the prime contractor's lower-tier subcontractors that 
have flow-down subcontracting plans.
    (5) If the subcontracting goals pertain to more than one contract 
with one or more Federal agencies, or to one contract with more than 
one Federal agency, the prime contractor shall only receive credit for 
first tier subcontractors that are small business concerns. This 
restriction applies to all commercial plans, all comprehensive 
subcontracting plans with the Department of Defense, governmentwide 
contracts, and multi-agency contracts.
* * * * *
    (c) * * *
    (1) * * *
    (xii) The prime contractor must provide a written statement of the 
types of records it will maintain to demonstrate that procedures have 
been adopted to substantiate the subcontracting credit that the prime 
contractor elects under paragraph (a)(1)(i)(C) of this section; and
* * * * *

Isabella Casillas Guzman,
Administrator.
[FR Doc. 2022-27213 Filed 12-16-22; 8:45 am]
BILLING CODE 8026-09-P