Credit for Lower Tier Small Business Subcontracting

Big fish eating little fish

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As our good friends at PilieroMazza reported in their weekly update newsletter on October 10th, “SBA issued a proposed rule to amend its regulations to implement Section 1614 of the National Defense Authorization Act for Fiscal Year 2014.

The proposed amendments authorized by this statute would allow an other than small prime contractor that has an individual subcontracting plan for a contract to receive credit towards its small business subcontracting goals for subcontract awards made to small business concerns at any tier.”

You can see more details about the proposed rule at the Federal Register, where comments were collected until December 7, 2015.

Predictably, this rule is still in flux; it has so many potential dangers and pitfalls, as well as unintended consequences. The intent is to allow not only a direct subcontract to count towards the small business goals when awarded to a small business, but also for small businesses that subcontract to large businesses that subcontract to the Prime. Is that clear as mud? In other words, 3rd level (lower tier) small businesses would count towards the Prime’s small business goal.

Steven Koprince points out that SBA focused on not double counting. But that’s hardly the whole story. The 3rd tier subcontractor small business has no direct Prime relationship, and may even be completely out of sight and out of the CUSTOMER’s mind. So no “credit” (goodwill, relationships, work history) accrues towards later getting a direct small business Prime contract.

However, if this kind of extra credit means that more small business actual revenue occurs because somewhere in some tier of the working relationships, small businesses are working the job, that’s good. What I fear though is that BigBiz1 subs out to BigBiz2, and BigBiz2 gets to count its low level service support (like janitorial services) as subcontractors, getting small business credit for the Prime work. Unless the NAICS code for these subcontractors is the same as the Prime NAICS code, my feeling is this can easily become a sham.

This rule will require some detail before all the problems are worked out, so it may be a while. Watch this space for more details.


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