Closing a Small Business Loophole

Over the last several blog posts, we’ve been looking at the details of the new SBA final rule and its impact on small business. For example, prime contractors who are slow to pay can now be reported, potentially reducing their rating in the Contractor Performance Assessment Reporting System (CPARS).

The next set of requirements we’re discussing deals with a major and long-standing loophole that has existed in the small business requirement. So as you remember, 23% is the overall goal set as the amount the government should be spending on small business. However, before now, this spending has only been measured at the prime contract level.

Only prime contracts were allowed to count towards an agency’s 23% small business success rate. If the prime contractor was a large business, then the agency got no credit (which wasn’t really a problem because of lack of enforcement, as we’ve discussed before).

This new requirement stipulates that if a multiple award IDIQ contract or a federal supply schedule contract exceeds a certain threshold, the prime contractor must submit a subcontracting plan to the contracting officer, including the details of the work that will be awarded to small business.

Up until now, subcontracting details were only evaluated for CPARS purposes at the end of the contract. So a prime could run along and just say, “Well, we’re going to use the small businesses in years three, four and five, but right now we’re going another way,” and then in years four and five nothing much changes, but there’s no impact on their evaluation because by then the contract is over and no one knew there was a problem.

What’s so important about this rule is that it has brought small business accountability to the task order level. The subcontracting reports have to come back on an annual basis, even on task orders, as long as they meet the threshold. This means that contracting officers will be able to see how a prime contractor is doing on their small business activity all the way along (provided, of course, that the CO enforces this rule).

The next point is also very critical, and that is that an agency can count small business subcontractor activity as credit towards their small business goals. This is the first time that’s ever been true, as I pointed out above – unless the prime contractor was a small business, it didn’t count. To some extent this may prove a double-edged sword; more subcontractor activity is counted, but hopefully that won’t reduce the prime activity.

Finally, all of these rules apply not only to the main MA-IDIQ and FSS contracts, but also to blanket purchasing agreements (BPAs) and basic ordering agreements (BOAs) awarded underneath these, especially the FSS. That’s important because often a prime contractor who had a big contract could get a BPA (like a mini contract) or a BOA off a big contract and the small business set aside requirements didn’t (or might not) apply. This is still discretionary rather than mandatory, but agencies do now have the option of setting small business goals for BPAs and BOAs to help meet their small business activity.

A couple of notes for the naysayers:

First of all, the caveat is that if the prime has a commercial subcontracting plan, which will then mean they have their own “approved purchasing system” and rules for how to award subcontractors, that will override this SBA rule. These “approved” purchasing systems require competition, even for subcontracts, and the rules are quite stringent, but many primes have such systems in place.

The other caveat is one that’s come up repeatedly in this series of blog posts and in discussions in my LinkedIn groups – as encouraging as these requirements are, it’s still up to the contracting officer to enforce them.

As small businesses, it’s our job to help educate our contracting officers, because the more they know about these rules, the more they will be enforced.


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