Important policy updates related to small business subcontracting that all contractors must know

The U.S. Small Business Administration (SBA) issued a final rule on July 16, 2013, 78 Federal Register 42391-42406, amending its regulations governing small business subcontracting to implement certain provisions of the Small Business Jobs Act of 2010.

The new rule, effective August 15, 2013, addresses the following important changes:

  1. Use of subcontractor in performance: The rule adds a provision providing that for a "covered contract" (a contract for which a small business subcontracting plan is required), a prime contractor must notify the contracting officer in writing whenever, during contract performance, the prime contractor does not utilize any of the small business subcontractor used in the preparation of its bid or proposal.
  2. Late or reduced payment: The rule adds a provision requiring a prime contractor to notify a contracting officer in writing whenever the prime contractor reduces payments to a small business subcontractor or when payments to a small business subcontractor are 90 days or more past due. If satisfactory performance by the subcontractor occurred, and the prime has been paid, subcontractors must be paid within 90 days.
  3. Reporting: The rule clarifies which subcontracts must be included in subcontracting data reporting, which subcontracts should be excluded, and the way subcontracting data is reported. In clarification for how subcontracts to and by affiliates are treated, SBA’s long standing policy has been to count subcontracts by first-tier affiliates as subcontracts of the prime contractor. Insofar as reporting, Subcontracting Plans must be set in terms of percentage of subcontracting dollars or in terms of total contract dollars. The rule also makes updates to its subcontracting regulations, including changing subcontracting plan thresholds and referencing the electronic subcontracting reporting system (eSRS).
  4. Multiagency, FAS, MAS, and government-wide IDIQ contracts: The rule adds a provision to the regulations which addresses subcontracting plan requirements and credit towards subcontracting goals in connection with multiple award multiagency, Federal Supply Schedule, Multiple Award Schedule and government-wide acquisition indefinite delivery, indefinite quantity contracts. SBA decided that an order’s funding agency should receive credit towards its small business subcontracting goals even if the order was awarded under another agency’s contract. SBA had originally proposed that a contractor must report small business subcontracting achievement for individual orders to the contracting officer for the ordering or funding agency on an annual basis; however this proposal did not make it into the Final Rule because of concerns that the additional reporting requirements for individual orders would be overly burdensome. Additionally, it should also be noted that the rule clarifies that contracting officers may establish subcontracting plans for Blanket Purchase Agreements (BPAs), Basic Ordering Agreements (BOAs), as well as individual orders.

In addition to the SBA policy updates described above, the Office of Management and Budget (OMB) decided to extend the policy to provide accelerated payments to Small Business Subcontractors. The extension of the policy is based on the temporary policy originally addressed in OMB Memorandum M-12-16 "Providing Prompt Payment to Small Business Subcontractors" on July 11, 2012 and was set to expire July 11, 2013. The recent Memorandum M-13-15 extends this policy by one additional year, setting to expire on July 11, 2014. The initiative is intended to improve cash flow for small businesses and increase small business participation in all levels of Federal contracting by accelerating payments to all prime contractors (with a goal of paying them within 15 days of receipt of proper invoice) thereby allowing primes to provide prompt payments to small business subcontractors.

For questions or further clarification on these updates, contact