Takeaways

SBA revised the limitation on subcontracting rules for set-aside service contracts by excluding direct costs such as airline travel, transportation or disposal under an environmental remediation contract, cloud computing services, or mass media purchases.
SBA clarified that contracting officers have the discretion to request information from contractors to demonstrate compliance with limitation on subcontracting clauses for small business set-aside and sole-source awards at any time during performance and/or upon completion of a contract.
SBA also revised the rules concerning good faith compliance with small business subcontracting plans.

On November 29, 2019, the U.S. Small Business Administration (SBA) issued an extensive final rule that made numerous revisions to its small business regulations, including limitations on subcontracting and compliance with small business subcontracting plans. (See 84 Fed. Reg. 65647-65666). This final rule, which becomes effective on December 30, 2019, implements provisions of the National Defense Authorization Acts (NDAA) of 2016 and 2017 and the Recovery Improvements for Small Entities After Disaster Act of 2015. The final rule makes multiple changes to the SBA’s regulations, the most significant of which are described below.

First, the SBA revised the limitation on subcontracting rules for set-aside service contracts. The SBA’s  limitations on subcontracting regulations provided that for a set-aside service contract, the prime contractor must agree that it will not pay more than 50 percent of the amount paid from the government to firms that are not similarly situated. However, 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 portions, such as incidental supplies, are excluded. The final rule addresses industry criticism by excluding certain direct costs where there is no small business source, such as airline travel, transportation or disposal under a contract assigned the environmental remediation NAICS code (562910), cloud computing services, or mass-media purchases. The final rule states that these specified costs are not meant to be an exhaustive list and notes that a small business in another industry can demonstrate that certain direct costs should be excluded, where the efforts are not the principal purpose of the acquisition and small business concerns do not provide the service.

Second, the final rule clarifies that contracting officers have the discretion to request information from contractors to demonstrate compliance with limitation on subcontracting clauses for small business set-aside and sole-source awards. Contracting officers now may request, among other evidence, invoices, copies of subcontracts, or a list of the value of tasks performed, at any time during performance or upon completion of a contract. This clarification is a direct response to Government Accountability Office reports noting that contracting officers have not been monitoring contractors’ compliance with the limitations on subcontracting clause. 

Third, the final rule provides that it shall be a material breach when a contractor with a subcontracting plan fails to comply in good faith with the requirement to provide assurances that the offeror submit such periodic reports or cooperate in any studies or surveys as may be required by a federal agency or the SBA in order to determine the extent of compliance by the contractor with the subcontracting plan. The final rule states that such a breach may be considered in any past performance evaluation of the contractor. In addition, the final rule provides examples of activities that that would be considered a failure to make a good faith effort to comply with a small business subcontracting plan, including, but not limited to: failure to submit acceptable subcontracting reports in eSRS; failure to pay small business concern subcontractors in accordance with the terms of the contract with the prime; and failure to designate and maintain a company official to administer the subcontracting program and monitor and enforce compliance with the plan.

This alert only addresses a few of the rule’s numerous changes in the SBA’s size regulations. We recommend that government contractors review the revised regulations to assess how these changes could impact your company.