What is Considered a Small Business Subcontract?

The new SBA final rule includes more clarification about what constitutes a small business contract. It needs clarifying, because unfortunately some prime contractors have been skirting the rules about small business requirements. They might claim a small business contractor participated in the project, even if that meant they went down to their local “Mom and Pop” shop to have some photocopies done.

It’s great to support local Mom and Pop shops, but that shouldn’t take away the prime’s responsibility to bring in small businesses to perform a certain portion of the actual project.

With the new rule, if the small business activity a prime claims has nothing to do with the main contract, it may no longer qualify as small business subcontracting activity.

The thing about all of these new SBA rules is that they give the contracting officer the authority to look at these issues, and they allow more actual small business subcontracting activity to be counted in the small business plan.

If the contracting officers know about them and enforce the rules, but the prime isn’t following them, the CPARS ratings of prime contractors can be downgraded, and that can get their attention. And believe me, that will make a difference.

It’s our job as small business owners to inform our contracting officers about these changes. I mentioned this in the last post about how subcontracting can now be monitored at the task order level, and it is worth repeating here. It’s really just a matter of education.

Organizations like the NCMA – the National Contract Management Association – do a great job with educational events to get this news out there to the contracting professionals, and there are also resources like the Veterans Affairs Acquisition Academy, the Defense Acquisition University, and the Federal Acquisition Academy.

Here are links to all the posts in this series about the SBA final rules:

Maximum Practicable Opportunity for Small Business Subcontractors – New SBA Final Rule

Small Business Subcontractors Are Feeling Used

Primes Who Are Slow to Pay Can Be Reported

Closing a Small Business Loophole

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.

Primes Who Are Slow to Pay Can Be Reported

In the last few posts I’ve been digging down into the details of the SBA’s final rule from July 16, 2013, issued to implement provisions from the Small Business Jobs Act of 2010. First, we discussed the rule that prime contractors must give small business subcontractors every possible opportunity to fulfill the work on their projects.

Then, we looked at the problem where prime contractors say in a bid that they’ll set aside project revenue to a small and/or specially-certified business, but then neglect to award that work in the same scope, amount and quality that was used to submit the quote or bid.

The next problem that subcontractors deal with on a regular basis is with the payment process. We’ve talked before about some of the financing challenges for government contractors. Now as a sub, your customer is the prime, not the government, and so that’s who pays you. If the prime hasn’t addressed their own financing challenges, or is trying to avoid their own financing charges, that might result in late or even reduced payments.

Section 125.3(c)(5) of the proposed rule deals with Section 1334 of the Jobs Act, and requires that a prime contractor notify the contracting officer in writing whenever a payment to a subcontractor is reduced or is 90 days or past due, when the Federal agency has paid the contractor, including the reason.

Similar to the other rules we’ve discussed, the SBA final rule now gives the small business the right to address the contracting officer directly and raise an objection when prime contractors pay slowly or reduced amounts. And the CO can report those late payments, which means the prime contractor will be deemed to be out of compliance in the Contractor Performance Assessment Reporting System (CPARS). The contracting officer can really take the prime to task properly on this issue.

We’re still faced with the reality that none of this will have any effect if the contracting officer doesn’t take action. But if they do use their newfound right to talk to the prime about late or reduced payments, or reduce their CPARS ratings, then this rule will begin to have a real and strenuous effect.

Small Business Subcontractors Are Feeling Used

As we discussed in the last post, the U.S. Small Business Administration (SBA) issued a series of final rules on July 16, 2013 that could have several important repercussions for small business subcontractors and the primes who hire them.

No longer are small business contracting set-aside requirements just some number to reach for. There are now more accountability practices available to keep large business prime contractors in line.

In the last post, we talked about how primes must now provide “maximum practicable opportunity” to small businesses to do the actual work awarded to the prime contractor. But how much of that work needs to be farmed out to the subcontractor?

According to the new SBA final rule, the work must be in the same scope, amount and quality that was used to submit the quote or bid.

One of the biggest complaints that I’ve heard over and over again, is that in order to get an award and show their compliance with set-aside requirements, the large business will use the small business as an appliance, taking advantage of your small business qualification or special certification (as a woman-owned, HUBZone, veteran-owned, service-disabled veteran-owned or 8(a) business). They may also use your relationship with or knowledge of a particular customer to further their cause.

Unfortunately, when it comes time to actually dole out the work, two really problematic things might happen. First, even though you invested time, money and energy into the bidding process, now you’re thrown back into the fray with everyone else and you have to compete for providing people (FTEs), products or services for the project.

The second thing that might happen is that even though your people are just as qualified, or you’re just as experienced with the special needs of the project, you don’t get the work because someone else provided it cheaper or had some other advantage over you. Yet you’re the one who contributed to – and was named in – the bid.

What the new rule states is that if the prime contractor does not give you the specific work promised in the bid, at the same scope, amount and quality, they must notify the contracting officer in writing as to why they did not buy from you.

Someone in one of my LinkedIn groups has his doubts about the effect any of the new SBA rules will have, writing, “It will NOT make a difference. As with all previous, similar attempts, there is always a way to skirt the requirement. The big guys rule the roost.”

Unfortunately, it’s true that it will be easy for primes to skirt the requirement. The downside of any of these stipulations is that it’s up to the contracting officer to enforce. These are busy people, working to get their next contract out the door. So first, are they willing to enforce these rules, and second, are they willing to downgrade the prime’s CPARS rating (Contractor Performance Assessment Reporting System) for not giving you the work?

We’ll talk more in an upcoming post about the issue of privity of contract. Essentially what this relates to is that as the subcontractor, your contract is with the prime, not the customers (the government). And that means that the contracting officer cannot deal with you directly. That makes it very difficult to stand up for yourself and speak against unfair practices by prime contractors.

Again, it’s up to the contracting officer to evaluate the prime contractor for compliance with the small business subcontracting regulations and rate them accordingly. If they see their CPARS being affected, primes will do what they’re supposed to do.

Maximum Practicable Opportunity for Small Business Subcontractors – New SBA Final Rule

The U.S. Small Business Administration (SBA) issued a final rule on July 16, 2013 to implement provisions of the Small Business Jobs Act of 2010, an act that was signed into law on September 27, 2010.

One thing the rule states is that primes must provide “maximum practicable opportunity” to small businesses. What does that mean? It means the onus is on the large company to source out appropriate small business contractors and give them the opportunity to fulfill the work of the project.

This practice is more enforceable than previous efforts, because the agency’s contracting officer now has the responsibility to evaluate the prime contractor in terms of their compliance with small business contracting regulations. In fact, the contracting officer will record the large business’s performance in the Contractor Performance Assessment Reporting System (CPARS).

This is extremely important because these ratings are given annually. In the past the standard for this performance – whether prime contractors met their small business goals – was only measured over the entire life of the contract.

What that meant in practicality was that primes would conclude that they didn’t have to pay attention to this until the end of the contract. As a result, they wouldn’t bother to give the subcontractors much extra business. In many cases, they’d simply ignore the small businesses over the life of the contract. When the contract ended, it was over and no one cared anymore. The contracting officers were too busy with the next contract and no one was enforcing or following up on the small business contracting issue.

With this new rule in place, prime contractors will have to pay attention to their small business numbers every year, not just when the contract comes to a close. Will there be more paperwork? Absolutely. Will this rule help small businesses? Absolutely! Small businesses WILL get more work under these rules.

In some cases it will be up to you as the small business to call attention to these changes. At TAPE, LLC, we just sent a note about this announcement to one of our primes, so they’d understand that they’d be rated on whether they included us in their work share, and in the same scope, amount and quality as indicated in the proposal that won them the work.

This issue of scope, amount and quality relates to another new requirement under the SBA final rule, which we’ll talk about next time. Stay tuned!