SBA Finalizes Small Business Subcontractor Counting Rule

AGC-Enacted Law Leads to Rule
As a result of past AGC legislative success, the U.S. Small Business Administration (SBA) recently finalized a rule allowing direct-federal large business prime contractors to count lower tier small business subcontractors towards their small business subcontracting goals. Prior to this rule, such prime contractors were only able to count first tier small business subcontractors towards those goals. Although the rule goes “into effect” on Jan. 23, there will be no way for prime contractors to receive credit for small business subcontractors until the Federal Acquisition Regulation (FAR) Council issues a final rule to include this in federal contracts. That FAR rule and a new FAR clause could come in 2017.
In lieu of a FAR rule and clause, direct-federal large business prime contractors interested in taking credit for lower tier small business subcontractors may consider beginning preparations to comply with the SBA rule. To receive such credit, there are some strings attached under the rule. Those include:


  • Prime contractors, not federal agencies, establishing two sets of small business subcontracting goals: (1) one goal for the first subcontracting tier; and (2) another for lower tier subcontracts. Ultimately, however, federal agencies will evaluate the prime contractor’s small business subcontracting goal performance based on its combined performance under the first and lower tier goal;

  • Prime contractors and their large business subcontractors must assign a specific North American Industry Classification System (NAICS) Code and corresponding size standard that best describes the principal purpose of the subcontract to each small business subcontract;

  • Prime contractors and large business subcontractors are responsible for making a good faith effort to meet or exceed the small business subcontracting goals established in their respective subcontracting plans. Failure to make this effort could result in liquidated damages, default termination and negative performance reviews; and

  • Prime contractors are ultimately responsible for approving and policing their large business subcontractors’ subcontracting plans.

It should also be noted that the Electronic Subcontracting Reporting System will be the database used to capture lower tier small business subcontractor information, as it is currently used to collect information at the first subcontracting tier. AGC will provide additional information as it further examines this rule and monitors progress of a FAR rule and clause.
For more information, contact Jimmy Christianson at christiansonj@agc.org or 703-837-5325.


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