[Federal Register Volume 88, Number 195 (Wednesday, October 11, 2023)]
[Rules and Regulations]
[Pages 70339-70343]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2023-22466]


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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: Final rule.

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SUMMARY: The U.S. Small Business Administration (SBA) is amending its 
regulations to implement provisions of the National Defense 
Authorization Act (NDAA) for Fiscal Year (FY) 2020. The final rule will 
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: This rule is effective on November 13, 2023.

FOR FURTHER INFORMATION CONTACT: Roman Ivey, Program Analyst, Office of 
Policy Planning and Liaison, Small Business Administration, at 
[email protected], (202) 401-1420.

SUPPLEMENTARY INFORMATION:

I. Background Information

    The SBA is revising 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. SBA published a proposed rule on 
December 19, 2022, 87 FR 77529, to implement section 870. After 
receiving comments from the public, SBA finalizes the rule with the 
changes described below.
    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

[[Page 70340]]

subcontracts under certain criteria. Section 870 changed the criteria 
for receiving such credit, and this final 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 
prior statutory language, the December 2016 Final Rule made it 
mandatory for contractors with individual subcontracting plans to take 
credit for lower-tier subcontracts. Section 870, by contrast, removes 
the mandate and states that prime contractors ``may elect to receive 
credit'' either for first-tier subcontracts on their own, or for 
subcontracts at any tier. Accordingly, SBA is changing the prior 
mandate to an election.
    Additionally, the December 2016 Final Rule only allowed for 
contractors to receive lower-tier subcontracting credit if the 
contractor had two sets of subcontracting goals. A contractor would 
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 section 870, 
SBA is revising the regulations so that all prime contractors will have 
only one set of subcontracting goals. This 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), that requires 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).
    SBA received 10 comments in response to the proposed rule. The 
following section discusses and responds to the comments.

II. Summary of and Response to Comments

Support for the Rule

    Comment: SBA received numerous comments expressing support for the 
proposed changes that are implemented by this final rule. One commenter 
specifically highlighted that this rule will increase small business 
utilization in Federal contracting.
    Response: SBA acknowledges the commenters' support. SBA will 
implement the rule with the changes as noted below.

Outside the Scope of the Rule

    Comments: SBA received four comments that were unrelated in any way 
to the proposed rule or the issue of credit for lower-tier 
subcontracting.
    Response: As these comments do not relate to the rulemaking, SBA 
will not provide a response to these comments.
    Comment: SBA received one comment regarding the applicability of 
lower-tier subcontracting credit for Small Business Participation 
Plans.
    Response: Small Business Participation Plans are not within the 
purview of SBA regulations and thus are not impacted by this final 
rule.

Opposition to the Rule

    Comments: SBA received two comments that opposed the proposed 
changes that are implemented by this final rule. One commenter opposed 
the rule on the basis that it grants credit to a prime contractor for 
the subcontracting work done by a first-tier or lower-tier 
subcontractor. This commenter emphasized that prime contractors would 
be able to get credit for something that they do not take full 
responsibility for. Another commenter opposed the rule on the basis 
that it would increase costs to the government.
    Response: SBA is implementing these regulatory changes in line with 
the statutory mandate from section 870. In addition, SBA does not agree 
with the concerns of these commenters. Prime contractors will have to 
take some level of responsibility for lower-tier subcontracting in 
their subcontracting plan and compliance review. In addition, there is 
no basis for concluding that this rule will result in an increased cost 
to the government. Therefore, these comments do not justify SBA failing 
to implement the NDAA for FY 2020.

Concerns With Implementation in eSRS

    Comments: Two commenters expressed concern with how the Electronic 
Subcontracting Reporting System (eSRS) would be able to handle the new 
reporting and elections of lower-tier subcontracting under this rule. 
Specifically, they highlight issues with certifying subcontractor data 
entries and limitations in Individual Subcontractor Reports (ISRs) as 
points of concern.
    Response: SBA does not believe that this final rule needs to 
determine exactly how the new lower-tier subcontracting election and 
reporting will work within eSRS. Prime contractors are not responsible 
for certifying the data entries input by subcontractors into eSRS. Any 
potential issues can be resolved by the technical teams that run eSRS.

Applicability of ``Good Faith Effort'' and Liquidated Damages to Lower-
Tier Subcontracting

    Comments: One commenter sought clarification on the applicability 
of ``good faith effort'' and liquidated damages to lower-tier 
subcontracting. Presumably, this commenter was referring to those terms 
as they are used in the context of subcontracting goals and performance 
under 13 CFR 125.3. This commenter also sought clarification on the 
standard of review that a prime contractor is subject to with respect 
to first-tier and lower-tier subcontractor performance. SBA also 
presumes this comment refers to Compliance Reviews which are described 
in 13 CFR 125.3(f).
    Response: SBA is not altering any regulatory language other than 
what is noted below in this final rule. Thus, prime contractors are 
still subject to the requirement to make good faith efforts to meet 
subcontracting goals even when a prime contractor elects to receive 
credit for lower-tier subcontracting. In addition, an agency may impose 
liquidated damages if a contractor fails to demonstrate good faith 
effort or fails to provide a corrective action plan after receiving a 
marginal or unsatisfactory rating following a Compliance Review. 13 CFR 
125.3(f)(5)(i).SBA is also declining to adopt a preferential or lenient 
review standard for Compliance Reviews as that process is described in 
13 CFR 125.3(f).

Flow-Down of Federal Acquisition Regulation (FAR) Clauses to All 
Subcontracting Levels

    Comment: One commenter requested that SBA provide regulatory 
language to direct flow-down of relevant FAR clauses (48 CFR Chapter 1) 
to all applicable subcontracts so that prime contractors can more 
easily rely on first-tier and lower-tier subcontractors to

[[Page 70341]]

provide data necessary to comply with subcontracting requirements.
    Response: Subcontracting flow-down clauses are already mandated 
under the CFR and FAR regulations. Therefore, including such language 
in this rule would be duplicative and unnecessary.

Ensuring Subcontractor Compliance

    Comment: One commenter requested SBA assistance with holding other-
than-small subcontractors accountable for their lower-tier 
subcontracting plans. This commenter specifically requested that SBA 
define its role in holding these subcontractors accountable when they 
fail to meet lower-tier subcontracting goals.
    Response: SBA has an interest in seeing all subcontracting plans--
at all levels of subcontracting--followed to ensure maximum small 
business utilization in Federal procurement. To that end, there should 
be consequences for subcontractors that fail to meet lower-tier 
subcontracting requirements. Prime contractors can accomplish this by 
not subcontracting to firms that continuously fail to meet 
subcontracting requirements. In some cases, it may be appropriate for 
the government to send a ``show cause'' letter that proposes debarment 
for subcontractors that repeatedly fail to meet their lower-tier 
subcontracting goals.

Applicability to Commercial Goods and Services

    Comment: One commenter requested that commercial goods and services 
be omitted from the reporting requirements on prime contractors and 
subcontractors. This commenter cited a FAR clause that exempts small 
business reporting requirements for commercial goods and services.
    Response: This comment is not related to lower-tier subcontracting 
credit which is the focus of this rule. This rule does not change any 
of the reporting requirements for commercial goods and services, it 
merely allows a prime contractor to elect to receive credit for lower 
tier subcontracting. The exception to reporting for commercial goods 
and services found at FAR 52.219-9(j) remains in place. Commercial 
goods and services could be part of any subcontracting plan so changing 
the reporting requirements for them would require a much broader 
rulemaking than the instant one.

Timeline for Incorporating Lower-Tier Subcontracting Plan

    Comment: One commenter requested a specific timeline for 
incorporating lower-tier subcontracting goals of within 90 days of 
contract award. The commenter noted the difficulty in gathering the 
required information from first-tier and lower-tier subcontractors in 
order to prepare a full subcontracting plan especially when relying on 
input from first-tier and lower-tier subcontractors.
    Response: SBA is not adopting this timeline within 13 CFR 
125.3(a)(1)(i)(C)(1). All prime contractors are required to have a 
subcontracting plan in place by the time of award in those cases where 
a subcontracting plan is mandated by 13 CFR 125.3(a).

Remove Restriction on Governmentwide and Multi-Agency Contracts

    Comments: One commenter requested that SBA remove the language in 
the new regulations that would prohibit lower-tier subcontracting 
credit for governmentwide and multi-agency contracts. This commenter 
argued that SBA's proposed regulatory change enlarges the restrictions 
on lower-tier subcontracting as written in section 870. They requested 
that SBA strike the language referring to governmentwide and multi-
agency contracts in proposed 13 CFR 125.3(a)(1)(i)(C)(5).
    Response: The restriction on governmentwide and multi-agency 
contracts comes directly from the language of section 870. The 
categories listed in the second sentence of proposed regulation 13 CFR 
125.3(a)(1)(i)(C)(5) are all synonymous with ``more than one contract 
with one or more Federal agencies, or to one contract with more than 
one Federal agency.'' Thus, SBA is declining to adopt this comment as 
it is counter to the plain language of section 870.

Clarification on Definition of ``Single Contract With One Federal 
Agency''

    Comment: One commenter requested that SBA define what is meant by a 
single contract with one Federal agency. Specifically, this commenter 
wanted to know whether individual branches (Army, Navy, etc.) within 
the Department of Defense are treated as separate agencies.
    Response: The term ``Executive Agency'' is defined in FAR 2.101. In 
this specific example, Army and Navy would be treated as separate 
agencies for Federal procurement.

Whether a Firm Can Opt-In to the Lower-Tier Subcontracting Credit 
During Contract Performance

    Comments: One commenter asked whether it is possible to ``opt-in'' 
to receiving credit for lower-tier subcontracting during the 
performance of a contract. This commenter highlighted examples where 
the use of an other-than-small subcontractor may not be known until 
years into the performance of a contract. In such cases it may be 
appropriate for the prime contractor to elect to receive credit for 
lower-tier subcontracting well after contract award.
    Response: SBA recognizes that there may be instances when a prime 
contractor is unaware of subcontracting opportunities for other-than-
small firms until after contract award and during performance. However, 
prime contractors can always request a modification of their 
subcontracting plan from the contracting officer to account for newly 
discovered other-than-small subcontractors or other changed 
circumstances.

Section-by-Section Analysis

Section 125.3(a)
    SBA is changing the threshold for a required subcontracting plan to 
$750,000. This makes the threshold consistent with the FAR subpart 19.7 
and with other references to the threshold in Sec.  125.3.
Section 125.3(a)(1)(i)(C)
    SBA is revising 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 revised 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 will be credited with lower-tier 
subcontracts that are reported under lower-tier subcontracting plans. 
This rule does not require prime contractors to submit additional 
reports. Prime contractors will be required to report only their

[[Page 70342]]

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 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, the prime contractor will 
incorporate the subcontracting-plan goals of its lower-tier 
subcontractors into its individual-subcontracting-plan goals.
Section 125.3(c)
    SBA is creating a new requirement codified at 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).

III. Compliance With Executive Orders 12866, 12988, 13132, 13175, and 
13563, the Congressional Review Act (5 U.S.C. 801-808), 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 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.

Executive Order 12988

    For purposes of Executive Order 12988, SBA has drafted this 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 rule does not have tribal implications under Executive Order 
13175, Consultation and Coordination with Indian Tribal Governments, 
because it does 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 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 rule has no 
federalism implications warranting preparation of a federalism 
assessment.

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

    This rule updates 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 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 this rule on small business 
concerns.
    In sum, the regulatory amendments implemented by this rule will not 
have a disparate impact on small businesses and will increase their 
opportunities to participate in Federal Government contracting as 
subcontractors without imposing any additional costs. For the reasons 
discussed, SBA certifies that this rule will 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 amends 13 CFR part 125 
as follows:

[[Page 70343]]

PART 125--GOVERNMENT CONTRACTING PROGRAMS

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

    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 receive credit only 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. 2023-22466 Filed 10-10-23; 8:45 am]
BILLING CODE 8026-09-P