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 [email protected] or 703-837-5325.

FAR Council Addresses Many of AGC’s Concerns
On Dec. 20, the Federal Acquisition Regulation (FAR) Council issued a final rule requiring a prime contractor to notify federal contracting officers if (1) the prime contractor makes a reduced payment to a small business subcontractor or (2) if the prime contractor’s payment to a small business subcontractor is more than 90 days past due. The rule goes into effect on Jan. 19. The FAR Council did not withdraw the proposal as AGC recommended based on a myriad of existing small business subcontractor payment legal protections. However, it did take into account many of AGC’s concerns with the proposed rule.
For example, the FAR Council at AGC’s recommendation included:

• Examples where a prime contractor need not report reduced or late prime contractor payments to small business subcontractors, including subcontract performance disputes, administrative mistakes and late performance by such subcontractors.


• Clarification that the rule does not flow down beyond the first tier of subcontracting. The rule only applies to prime contractor payments to small business subcontractors at the first subcontracting tier. Therefore, any small business subcontractor below the first tier does not receive the benefit of this rule and prime contractors are not responsible for monitoring any flow down conditions.

Compliance with the rule will be considered in the small business past performance evaluation factor for prime contractors. It should be noted, however, that prime contractors may receive an exceptional rating where they “did not have a history of three or more unjustified reduced or untimely payments to small business subcontractors within a 12-month period.”
AGC also called upon the FAR Council to address the greatest problem facing contractor payment: government agency-caused payment delays. The FAR Council noted that “the FAR already contains adequate policy on Government-caused delays and changes to contract terms and conditions.” AGC disagrees. As such, AGC is already working with Congress on ways to address government-caused payment delays in the context of change orders. A hearing in the House of Representatives on the topic will likely occur in the first quarter of 2017.
For more information, contact Jimmy Christianson at [email protected] or 703-837-5325.