Small Business Subcontracting

AGENCY:

U.S. Small Business Administration.

ACTION:

Proposed rule.

SUMMARY:

The U.S. Small Business Administration (SBA or Agency) is proposing to amend its regulations to implement provisions of the Small Business Jobs Act of 2010, which pertain to small business subcontracting. SBA is proposing to amend its regulations to provide for a “covered contract” (a contract for which a small business subcontracting plan is required, currently valued above $1.5 million for construction and $650,000 for all other contracts), a prime contractor must notify the contracting officer in writing whenever the prime contractor does not utilize a subcontractor used in preparing its bid or proposal during contract performance. SBA is also proposing to amend its regulations to require a prime contractor to notify a contracting officer in writing whenever the prime contractor reduces payments to a subcontractor or when payments to a subcontractor are 90 days or more past due. In addition, SBA is proposing to clarify that the contracting officer is responsible for monitoring and evaluating small business subcontracting plan performance. SBA is also proposing to clarify which subcontracts must be included in subcontracting data reporting, which subcontracts should be excluded, and the way subcontracting data is reported.

SBA is also proposing to make other changes to update its subcontracting regulations, including changing subcontracting plan thresholds and referencing the electronic subcontracting reporting system (eSRS). Some of the SBA's proposed changes would require the contracting officer to review subcontracting plan reports within 60 days of the report ending date.

Finally, SBA is also proposing to address how subcontracting plan requirements and credit towards subcontracting goals can be implemented in connection with Multi-agency, Federal Supply Schedule, Multiple Award Schedule and Government-wide Acquisition indefinite delivery, indefinite quantity (IDIQ) contracts.

DATES:

Comments must be received on or before December 5, 2011.

ADDRESSES:

You may submit comments, identified by RIN: 3245-AG23, by any of the following methods:

• Federal eRulemaking Portal: http://www.regulations.gov. Follow the instructions for submitting comments.
• Mail, for paper, disk, or CD/ROM submissions: Dean Koppel, U.S. Small Business Administration, Office of Government Contracting, 409 Third Street, SW., 8th Floor, Washington, DC 20416.
• Hand Delivery/Courier: Dean Koppel, U.S. Small Business Administration, Office of Government Contracting, 409 Third Street, SW., 8th Floor, Washington, DC 20416.

SBA will post all comments on http://www.regulations.gov. If you wish to submit confidential business information (CBI) as defined in the User Notice at http://www.Regulations.gov,, please submit the information to Dean Koppel, U.S. Small Business Administration, Office of Government Contracting, 409 Third Street, SW., 8th Floor, Washington, DC 20416, or send an e-mail to Dean.Koppel@sba.gov. 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 or not.

FOR FURTHER INFORMATION CONTACT:

Dean Koppel, Office of Government Contracting, 409 Third Street, SW., Washington, DC 20416; (202) 205-9751; Dean.Koppel@sba.gov.

SUPPLEMENTARY INFORMATION:

Section 1321 of the Jobs Act requires the SBA Administrator, in consultation with the Administrator of the Office of Federal Procurement Policy, to publish regulations establishing policies for subcontracting compliance, including assignment of compliance responsibilities between contracting offices, small business offices, and program offices. A 2010 Senate Report to a bill (S. 2989) that contained many of the same or similar provisions to the subcontracting provisions in the Jobs Act cites a 2005 Government Accountability Office (GAO) report concerning the Department of Energy, where GAO found that large business prime contractors had overstated their small business subcontracting achievements by excluding certain subcontracts from the base, such as electricity and utilities, thereby making it appear that the prime contractor awarded a much higher percentage of its subcontracts to small business concerns than the prime contractors actually awarded. S. Rep. No. 111-343, “Small Business Contracting Revitalization Act of 2010,” September 29, 2010; “Department of Energy, Improved Oversight Could Better Ensure Opportunities for Small Business Subcontracting,” GAO Report No. 05-459 (May 2005).

While SBA recognizes the valuable insight provided by GAO in the above-referenced report, it does not concur with all of GAO's findings. For example, SBA does not believe that electricity and utilities (e.g., water, sewer, and refuse collection purchased from a municipality) belong in the subcontracting base. Including electricity and other utilities in the base creates the illusion that there are more subcontracting opportunities for small business than are actually available. SBA is proposing to define subcontract so that prime contractors and contracting officers will no longer be confused about which subcontracts must be included when reporting on small business subcontracting performance. For example, when preparing its individual subcontracting plan, a prime contractor must decide whether or not to include indirect costs in the subcontracting base, for both goaling and reporting purposes. Indirect costs must be included in a commercial plan to ensure comparability between goals and achievements because companies with commercial plans file only a summary report, not an individual report. All contractors must include indirect costs in their summary subcontracting reports.

In addition, GAO recommended that prime contractors report subcontracting to small businesses as a percentage of total contract dollars. Under current reporting requirements, prime contractors report subcontracting achievement in whole dollars and as a percentage of eligible subcontracts. SBA believes that subcontracting should be reported as a percentage of total subcontracting dollars rather than as a percentage of total contract dollars. The Small Business Act establishes government goals for socioeconomic groups based on a percentage of total subcontracted dollars, not total contract dollars. 15 U.S.C. 644(g)(1). However, SBA is proposing to explicitly authorize contracting officers to establish additional goals in terms of total contract dollars. Contracting officers are already doing this, and when a prime contractor enters its subcontracting achievements (i.e., dollars) into eSRS, the system automatically calculates the percentage by both methods—i.e., as a percentage of total subcontracting and as a percentage of total contract dollars. Thus, the contracting officer has the ability to compare achievements against the total contract dollars if desired.

GAO also found that there was confusion within the procuring agency about who was responsible for monitoring small business subcontracting plan performance. SBA is proposing to amend its regulations to make it clear that contracting officers (or administrative contracting officers if applicable) are responsible for monitoring and evaluating the prime contractor's small business subcontracting plan compliance and reporting. SBA is proposing to require the cognizant contracting officer to review every prime contractor's Individual Subcontract Report (ISR) or Subcontracting Report for Individual Contracts, SF 294, if authorized, or when applicable, the Summary Subcontract Report (SSR) for a commercial plan, within 60 days of the report ending date (e.g., by November 30th for a report submitted for the fiscal year ended September 30th) and accept or reject the report in accordance with the Federal Acquisition Regulation (FAR) provisions set forth in subpart 19.7 and the eSRS instructions ( http://www.esrs.gov ).

All contractors whose reports are rejected, including those with individual contract plans and commercial plans as defined in FAR 19.701, will be required to make the necessary corrections and resubmit their reports within 30 days of receiving the notice of rejection.

SBA is also proposing to address subcontracting plans in connection with Multi-Agency, Federal Supply Schedule, Multiple Award Schedule and Government-wide Acquisition IDIQ contracts. Funding agencies have expressed interest in receiving credit towards their subcontracting goals for orders placed against another agency's task or delivery order contract. SBA is proposing that the contracting officer for the IDIQ contract will establish subcontracting plans for contractors without commercial plans. The contractor will report small business subcontracting achievement on an order-by-order basis to the contracting officer for the contracting agency. Contractors are currently reporting information on all orders collectively on a semi-annual or annual basis. Reporting on an order-by-order basis will allow the funding agency to receive credit towards its small business subcontracting goals. SBA is requesting comments on whether the reporting requirement should apply to all orders, or only apply to orders above a certain threshold. SBA is also proposing to allow the funding agency contracting officer the discretion to establish goals in connection with individual orders.

SBA is proposing that contracting officers require prime contractors to update subcontracting plans whenever an option is exercised, as currently required by FAR 19.705-2(e). SBA is also proposing to require subcontracting plans whenever a modification causes a contract to exceed the subcontracting plan threshold. As currently written the FAR only requires a subcontracting plan if the value of the modification exceeds the subcontracting threshold. SBA is also proposing to allow the contracting officer to request a subcontracting plan when a firm's status changes from small to other than small as a result of a size recertification.

Section 1322 of the Jobs Act established a requirement that a prime contractor on a covered contract must notify the contracting officer in writing if the prime contractor fails to utilize a small business concern used in preparing and submitting the prime contractor's bid or proposal. Defining when a prime used a subcontractor in preparing a bid or proposal is very difficult. For example, providing a quote, or discussing availability, does not rise to the level of collaboration that would require notice to the Government. Consequently, we are proposing that the notice required by the statute will be triggered when: (1) The offeror specifically references a small business concern in a bid or proposal, (2) the offeror has entered into a written agreement with the small business concern for purposes of performing the specific contract as a subcontractor, or (3) the small business concern drafted portions of the proposal or submitted pricing or technical information that appears in the bid or proposal, with the intent or understanding that the small business concern will perform that related work if the offeror is awarded a contract.

Section 1334 of the Jobs Act established a requirement that a prime contractor notify the contracting officer in writing whenever a payment to a subcontractor is reduced or is 90 days or more past due for goods and services provided for the contract and for which the Federal agency has paid the contractor. The prime contractor shall include the reason for the reduction in payment to or failure to pay a subcontractor in the written notice. The contracting officer must consider the prime contractor's unjustified untimely or reduced price payments to subcontractors when evaluating the prime contractor's performance.

In addition, we are proposing that the contracting officer should consider whether to require a prime contractor to enter into a funds control agreement with a neutral third party if the prime contractor fails to pay subcontractors in a timely manner or fails to pay the agreed upon contractual price without justification. S. Rep. No. 111-343, p. 15. SBA is specifically requesting comments on how these arrangements work in the commercial sector, and specific language which can be used to guide contracting officers on the use of such an arrangement.

As required by the statute, SBA is also proposing that the contracting officer must record the identity of a prime contractor with a history of unjustified, untimely payments to subcontractors in the Federal Awardee Performance and Integrity System or any successor system. SBA is proposing to define a history of unjustified untimely or reduced payments as three incidents within a 12 month period. SBA invites comments on the proposed definition or alternatives with supporting rationales, or comments on whether such judgments should be left to the discretion of the contracting officer.

SBA is proposing to update its regulations to increase the subcontracting plan thresholds which were increased pursuant to the government-wide procurement program inflationary adjustments required by Section 807 of the Ronald W. Reagan National Defense Authorization Act for Fiscal Year 2005, Public Law 108-375, see also 75 FR 53129 (Aug. 30, 2010). SBA proposes to reference eSRS instead of SF-294 and SF-295 (where appropriate). SBA proposes to clarify that compliance reviews include reviews to determine whether the prime has assigned the subcontract the correct NAICS code and corresponding size standard, and whether the subcontractor qualifies under the size or socioeconomic status claimed. In addition, SBA is proposing to update its regulations to specify that a compliance review includes analysis of whether the prime contractor is monitoring its subcontractors with respect to their subcontracting plans, achievement of their subcontracting goals and reviewing their ISRs or other reports.

Compliance With Executive Orders 12866, 13563, 12988, 13132, 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 proposed rule is a significant regulatory action for purposes of Executive Order 12866. Accordingly, the next section contains SBA's Regulatory Impact Analysis. This is not a major rule, however, under the Congressional Review Act, 5 U.S.C. 801, et. seq.

Regulatory Impact Analysis

1. Is there a need for the regulatory action? The proposed regulations implement Sections 1321, 1322 and 1334 of the Small Business Jobs Act of 2010, Public Law 111-240, 124 Stat. 2504, September 27, 2010 (Jobs Act); 15 U.S.C. 637(d)(6)(G), (d)(12). Section 1321 of the Jobs Act requires the Administrator to establish a policy on subcontracting compliance within one year of enactment.

2. What are the potential benefits and costs of this regulatory action?

The proposed regulations will benefit small business subcontractors by encouraging large business prime contractors to pay small business subcontractors in a timely manner and the agreed upon contractual price. The proposed regulations will benefit small business subcontractors by encouraging large business contractors to utilize small business concerns in contract performance where the prime contractor used the small business concern to prepare the bid or proposal. The proposed regulations will benefit small business subcontractors by clarifying the responsibilities of the contracting officer in monitoring small business subcontracting plan compliance. The proposed regulations will benefit small business subcontractors by specifically authorizing procuring agencies to consider proposed small business subcontracting when evaluating offers.

The proposed regulations will benefit small business subcontractors by requiring large business concerns to report subcontracting results on an order-by-order basis, thereby enabling the funding agency to more closely monitor small business subcontracting in connection with the order and enabling the funding agency to receive credit towards its small business subcontracting goals. The proposed rule benefits funding agencies by allowing them to receive credit towards their subcontracting goals. The proposed rule benefits small business subcontractors by providing transparency with respect to small subcontracting on an order-by-order basis, thereby allowing the funding agency to monitor performance, and in its discretion, establish subcontracting goals for particular orders.

eSRS will have to be altered to allow large business prime contractors to report subcontracting results on an order-by-order basis. Other systems may have to be altered to allow funding agencies to receive credit towards their small business subcontracting goals. Large business prime contractors will have to submit subcontracting reports more frequently.

Large businesses will have to report to the contracting officer in writing when they fail to utilize a small business concern in contract performance when the prime contractor utilized the small business concern in preparing the bid or proposal. Large businesses will have to report to the contracting officer in writing when they fail to pay a subcontractor within 90 days or when they pay a subcontractor a reduced price. The contracting officer will have to consider these written explanations when evaluating contract performance. The Federal Awardee Performance and Integrity System will have to be modified to allow contracting officers to identify large business prime contractors with a history of unjustified untimely payments.

3. What are the alternatives to this final rule?

Many of the proposed regulations are required to implement statutory provisions, and the Jobs Act requires promulgation of a policy on subcontracting compliance with within one year of enactment. The alternative to the proposed regulation concerning orders would be to maintain the current environment, where subcontracting results are not reported on an order-by-order basis, and agencies funding orders do not receive credit towards their small business subcontracting goals.

Executive Order 13563

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 the Jobs Act. SBA held public forums around the country to discuss implementation of the Jobs Act. SBA has incorporated, where feasible, public input into the proposed rule. The proposed regulations concerning evaluation factors provide contracting officers with the discretion to utilize various methods to improve small business subcontracting, without requiring their use in all cases. The proposed rule concerning orders will provide contracting agencies with transparency by providing data concerning small business subcontracting for particular orders. Overall, these regulations would minimize the burden resulting from these proposed amendments. SBA is proposing to amend its regulations to remove outmoded thresholds that have increased and remove references to paper based forms that have been replaced by electronic reporting through eSRS.

As part of its implementation of this executive order and consistent with its commitment to public participation in the rulemaking process, SBA held public meetings in 13 locations around the country to discuss implementation of the Jobs Act, and received public input from thousands of small business owners, contracting officials and large business representatives. Although most of these amendments are new, SBA expects that public participation will help to form the Agency's retrospective analysis of related contracting regulations that are not being amended at this time.

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 Order, to minimize litigation, eliminate ambiguity, and reduce burden. This rule has no preemptive or retroactive effect.

Executive Order 13132

This rule does not have federalism implications as defined in Executive Order 13132. It 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, as specified in the order. As such it does not warrant the preparation of a Federalism Assessment.

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

For the purpose of the Paperwork Reduction Act, SBA has determined that this rule, if adopted in final form, would impose new government-wide reporting requirements on large prime contractors. The Jobs Act requires such contractors to notify contracting officers, at the applicable procuring agency, in writing whenever a prime contractor fails to utilize a small business subcontractor used in preparing and submitting a bid or proposal; when the prime contractor pays a subcontractor a reduced price without justification; or when payments to a subcontractor are 90 days or more past due. These requirements will also be incorporated in the Federal Acquisition Regulations.

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

SBA has determined that this proposed rule, if adopted in final form, may have a significant economic impact on a substantial number of small entities within the meaning of the Regulatory Flexibility Act (RFA), 5 U.S.C. 601-612. Therefore, SBA has prepared an Initial Regulatory Flexibility Act (IRFA) analysis addressing the proposed regulation.

IRFA

When preparing a Regulatory Flexibility Analysis, an agency shall address all of the following: a description of why the action by the agency is being considered; the objectives and legal basis of the rule; the estimated number of small entities to which the rule may apply; a description of the projected reporting, recordkeeping and other compliance requirements; identification of all Federal rules which may duplicate, overlap or conflict with the proposed rule; and a description of significant alternatives which minimize any significant economic impact on small entities. This IRFA considers these points and the impact the proposed regulation concerning subcontracting may have on small entities.

(a) Need for, Objectives, and Legal Basis of the Rule

The majority of the proposed regulatory amendments are required to implement Sections 1321, 1322 and 1334 of the Small Business Jobs Act of 2010, Public Law 111-240, 124 Stat. 2504, September 27, 2010 (Jobs Act); 15 U.S.C. 637(d)(6)(G), (d)(12). The proposed regulations that are not required by the Jobs Act are intended to help small business subcontractors by explicitly authorizing procuring agencies to consider proposed small business participation when evaluating offers from other than small business concerns, and to require other than small prime contractors to report data on small business subcontracting in connection with certain orders.

(b) Estimate of the Number of Small Entities to Which the Rule May Apply

The RFA directs agencies to provide a description of and, where feasible, an estimate of the number of entities that may be affected by the proposed rules, if adopted. The RFA defines “small entity” to include “small businesses,” “small organizations,” and “small governmental jurisdictions.” SBA's programs generally do not apply to “small organizations” or “small governmental jurisdictions” because they are non-profit or governmental entities and do not generally qualify as “business concerns” within the meaning of SBA's regulations. SBA's programs generally apply only to for-profit business concerns. However, to the extent this rule will impact small organizations or small governmental jurisdictions that receive prime contracts from the Federal government with values that exceed the threshold, the numbers would be minimal, and the major provisions would only apply if the entity fails to pay or utilize small business subcontractors.

The proposed rule will not directly negatively affect any small business concern, because it applies to other than small concerns and contracting officers. The proposed rule will indirectly benefit small business concerns, by requiring other than small prime contractors to report to the contracting officer when the prime contractor has failed to utilize a small business subcontractor used in preparing the bid or proposal. The proposed rule will also indirectly benefit small business concerns, by requiring large business prime contractors to report to the contracting officer when the prime contractor has failed to pay a small business subcontractor in a timely manner or pays a subcontractor a reduced rate without justification.

There are in approximately 348,000 concerns listed as small business concerns in the Dynamic Small Business Search (DSBS) database. We do not know how many of these concerns participate in small business subcontracting. Firms do not need to register in the DSBS database to participate in subcontracting. The DSBS database is primarily used for prime contracting purposes. Thus, the number of firms participating in subcontracting may be greater than or lower than the number of firms registered in the DSBS database.

(c) Projected Reporting, Recordkeeping and Other Compliance Requirements

To the extent the proposed rule imposes new information collection, recordkeeping or compliance requirements, they are imposed on other than small business concerns, not on small business concerns.

(d) Federal Rules Which May Duplicate, Overlap or Conflict With the Proposed Rule

SBA is not aware of any rules which duplicate, overlap or conflict with the proposed rule. The proposed rule primarily implements statutory provisions.

(e) Significant Alternatives to the Rule Which Could Minimize Impact on Small Entities

Section 1321 of the Jobs Act requires SBA to promulgate regulations implementing it. Section 1321 of the Jobs Act and its proposed implementing regulations primarily apply to contracting officers. Sections 1322 and 1334 of the Jobs Act amend portions of the Small Business Act, which SBA is responsible for administering and implementing through its regulations. The proposed rules implementing Sections 1322 and 1334 of the Jobs Act primarily apply to other than small concerns. As discussed above, the proposed rule indirectly benefits small business concerns, without requiring small business concerns to report, keep records or take other compliance actions.

List of Subjects

13 CFR Part 121

• Government procurement
• Government property
• Grant programs—business
• Individuals with disabilities
• Loan programs—business
• Small businesses

13 CFR Part 125

• Government contracting programs; Small business subcontracting program

For the reasons stated in the preamble, SBA proposes to amend parts 121 and 125 of title 13 of the Code of Federal Regulations as follows:

PART 121—SMALL BUSINESS SIZE REGULATIONS

1. The authority citation for 13 CFR part 121 continues to read as follows:

Authority: 15 U.S.C. 632, 634(b)(6), 636(b), 637(a), 644, and 662(5); and Public Law 105- 135, sec. 401 et seq., 111 Stat. 2592.

2. Amend § 121.404(g)(3)(ii) by adding the following sentence at the end of the paragraph:

PART 125—GOVERNMENT CONTRACTING PROGRAMS

3. The authority citation for part 125 is revised to read as follows:

Authority: 15 U.S.C. 632(p), (q); 634(b)(6); 637; 644 and 657(f); Pub. L. 111-240, § 1321.

4. Amend § 125.3 as follows:

a. Revise paragraph (a);

b. Revise paragraph (b)(1);

c. Revise paragraph (c)(1) introductory text;

d. Revise paragraph (c)(1)(iii);

e. Redesignate paragraphs (c)(1)(iv), (v), and (vi) as (c)(1)(vii), (viii) and (ix) and add new paragraphs (c)(1)(iv), (v), and (vi);

f. Revise newly redesignated paragraphs (c)(1)(viii) and (ix);

g. Redesignate paragraph (c)(3) as (c)(6) and add new paragraphs (c)(3), (c)(4) and (c)(5);

h. Revise paragraph (d);

i. Revise paragraph (f)(2);

j. Revise paragraph (g); and

k. Add paragraph (h).

The additions and revisions read as follows: