Government Small Business Subcontracting Plan

Is Your Bid Subcontracted Out? What is a Small Business Participation Plan?

The answer to these questions can make the difference in getting a high proposal evaluation score and a low one.

    A Small Business Subcontracting plan is an agreement between private party government contractors submitted with a bid proposal detailing the specific division of the work between contractors.  This may be an agreement between a Prime and Subcontractor or between two Subcontractors. The level of work subcontracted out is just as critical.

A Small Business Participation Plan is the percentage (%) of work an Agency requires must be completed by a small business.  In other words, how much a small business must participate.  The reason for this is to involve small businesses in contracts and eliminate a Prime Contractor from being a “middle man.” Some agencies have chosen to name the requirement “small business participation plan” or ” small business utilization plans” since subcontracting plans were initially put in place for large businesses that compete in full and open bidding requirements.

What is a Small Business Subcontracting Plan?

 The biggest difference between the two is the reason for each.

A Small Business Participation Plan allows an Agency to contract directly with small businesses and sets a percentage goal based on a contracts total dollar value.  Whereas, a Small Business Subcontracting Plan sets a goal based on the amount of money a prime contractor subcontracts to small business subcontractors in order to allow small businesses to take on larger projects.

           Although it is true that a small business participation/utilization plan only sets forth goals, each prime contractor now has a legal obligation (through the expressed terms of the prime contract) to demonstrate a good faith effort to seek out qualified subcontractors in the various socio-economic categories (service disabled veteran-owned, HUBZone, government contracting small business disadvantage plan requirements, Woman-owned, and Veteran-owned).

Some companies may argue that the prime contractor should not be held to a standard where the government’s requirements are only goals. This argument will not stand when courts look at what if anything is subcontracted.

Government Oversight of Small Business Subcontracting Plans — a Continuing Problem

 Oversight has been an ongoing problem throughout the United States. FAR 52.219-9 small business subcontracting plan requires government contracts awarded to over $650,000 (over $1.5 million for the construction of a public facility) to have a mandatory subcontracting plan included in the prime contract. However, companies submitting federal bids offer the minimum pass through work to small businesses.

• After the government awards the contract, many federal agencies do not diligently follow up on the prime contractor’s compliance requirement.
• Recently, large prime contractors have been scrutinized and given show-cause letters for not complying with their subcontracting plans in good faith.

The Problem: Large businesses that bid on full and open government contracts have no problem submitting plans. However, when the bid is awarded, most large prime contractors know that government agencies genuinely do not follow up or enforce the statutory requirements for subcontracting plans.

As stated in 15 USC 637 (d)(8), any contractor or subcontractor failing to comply in good faith with the requirements of the subcontracting plan is in material breach of its contract. Further, 15 USC 637 (d)(4)(F) directs that a contractor’s failure to make a good faith effort to comply with the requirements of the subcontracting plan shall result in the imposition of liquidated damages. It is clear that prime contractors have an affirmative responsibility to comply with laws.

Under FAR 19.705-2, the contracting officer must take individual actions to determine whether a proposed contract requires subcontracting plans.

Reporting Requirements 15 USC 637 and FAR 52.219

To amplify the legal obligation, primes have to submit reports to support their progress (SF 294 and 295) in addition to other reports showing their interaction with small businesses. Good faith must be present, or the prime contractor runs the risk of breaching the contract.

• As stated in 15 USC 637 (d)(8) and FAR 19.7, any contractor or subcontractor failing to comply in good faith with the requirements of the subcontracting plan is in material breach of its contract.
• Further, 15 USC 637 directs that a contractor’s failure to make a good faith effort to comply with the requirements of the subcontracting plan shall result in the imposition of liquidated damages.

Is the named company not subcontracted?

Legal Rights for Government Small Business Subcontracting Plan Under FAR 19.7: Revisiting the lack of privity of contract excuse from government agencies, one has to ask what rights the small subcontractor has. Given the language of federal statutes and Federal Acquisition Regulations (FAR Part 19.7), it appears that subcontractors are third party beneficiaries to the terms of the prime contract.

• Regulations for government small business subcontracting plans tend to give rise to the contracting officer’s legal obligation to enforce the terms of the contract.
• More specifically, to ensure that large prime contractors do no just ‘blow off’ their responsibility to pass on work to small businesses.
• Companies should realize that their compliance with a small business subcontracting plan is measured in future government bids.

For small businesses affected, having a government contracts lawyer that understands the underlying principles of subcontracting plans can be the difference between getting work or not.

Common Issues faced by Small Businesses with Subcontracts and Subcontracting Plans: Losing Bids

 The first hurdle is the burden of submission itself.  Government bids have increased the requirement to submit small business subcontracting plans under FAR 19.7 and FAR 52.219 or what is now supplemented with the small business participation plan requirements. Despite already being a small business, there is a huge concern as to why small businesses should still have to submit participation plans.

Why Even Have the Small Business Subcontracting Plan Rule FAR 52.219?

The short answer is that the RFP requirement is difficult to challenge in a pre-award bid protest. The remaining focus may be to challenge how the contracting agency actually evaluation your bid submission per the solicitation requirements.

Both GAO and the Court of Federal Claims are filled with cases where several companies have lost bids because there was no strategy or thought put into the response when the solicitation gave the minimum criteria for either a Small Business Participation Plan or Subcontracting Plan

• Small Businesses sometimes do not quite understand how it benefits them as a prime contractor
• Although the agency drafts its own contracting requirements, both contractors and federal contracting personnel still struggle to understand the unique difference between the two plans.
• Separate from the Small Business Participation Plan, large businesses contractors must also submit a Plan (Individual Contract Plan) as required by FAR 52.219-9.

Understanding Subcontract Management in Government Contracting

As a practical matter, your responsibility for taking charge and managing your subcontractors start at the bidding stage. Allegations up front can cause the SBA or agency to dig deeper into the original subcontracted agreements and make adverse legal conclusions. Subcontract management in government contracting is an initial matter. However, it also continues through the performance stages of the contract.

Do you understand how the SBA’s similarly situated small business rules play into the subcontracting requirement?

The Subcontracting plan Program is based on Public Law 95-507  that was passed in 1978 to ensure that large prime contractors further the goal of increasing participation of small businesses in federal procurement.

The reason is to ensure that some of the federal contracting dollars are passed down to small businesses that are service disabled veteran owned small business companies, SBA HUBZone, small disadvantaged requirements, Woman-owned small business, and Veteran-owned requirements.

Many solicitations now require contractors to submit the plans with their proposals. However, many bidders do not put enough emphasis on their plans. As a result, they receive a lower technical score. If the government states that it will evaluate your subcontracting plan, you want to make sure that you put as much emphasis on it just like any other solicitation evaluation requirements.

Small Business Subcontracting Plan Exemptions

Small business subcontracting plans are not required from subcontractors when the prime contract contains the clause at FAR 52.212–5, Contract Terms and Conditions Required to Implement Statutes or Executive Orders—Commercial Items, or when the subcontractor provides a commercial item subject to the clause at FAR 52.244–6, Subcontracts for Commercial Items, under a prime contract.

Other subcontracting plan exemptions include Small businesses Personal services contracts; Contract performed outside the US; Modifications that do not contain the clause at FAR 52.219-8, Utilization of Small Business Concerns.

Do You have to Respond Even Though You Are a Small Business?

The short answer is yes. When the government states in the solicitation that it wants to see more contracts subcontracted to small businesses, this is a very serious requirement. The government has the ability to state what it wants. However, if you see something that violates procurement law or develops valid challenges to the stated solicitation requirements, then you should seek help from legal counsel.

Federal agencies’ small business goals are based on congressional guidelines. The original intent was to put large businesses on notice that although there is no privity of contract between the government and your subcontractor, the terms and conditions of the prime contract would essentially get around the requirement.

A question arises as to whether your proposed subcontracting plan covers the entire contract period, option periods or in some way deficient. These are concerns that you should address during the initial bidding stage.

What if You Cannot Find Small Businesses to Perform the Work?

The reality is that not all prime contractors can find small businesses in the locale to perform work under the solicitation requirements. What do you do? One common suggestion would be to state the relevant reasons in your bid as to why you could not realistically submit a subcontracting plan that covers a specific group or groups. Just only saying that you will not be able to meet the requirement can potential penalize you in the evaluation scores.

As a bidder, you should focus on a few things.

• First, seek out credible small businesses that can actually perform the work. Fighting the solicitation requirement has proven not to work in the courts.
• Second, make sure that you do not fall short of the solicitation’s proposed goal requirements. If you fall short, the government may rate you lower (if subcontracting plans are part of the evaluation criteria.
• Third, make sure that you identify the percentage of work and of the contract for each subcategory (e.g. SDVOSB, HUBZone etc.) and how much of the overall contract cost will be passed on to your small business subcontractors.

Be aware of the new SBA rules regarding small business subcontracting and limitations.

Contracting Officer Enforcement Authority Under FAR 19.7 and 15 USC 637

The Contracting Officer has the statutory power to enforce small business participation plans under FAR 19.7 and 15 USC 637. If, after consideration of all the pertinent data, the contracting officer finds that the contractor failed to make a good faith effort to comply with its subcontracting plan, the contracting officer shall issue a final decision to the contractor to that effect and require the payment of liquidated damages in an amount stated.

SBA Responsibility for Small Business Participation Plans Under FAR

Does the SBA have authority and responsibility to participate in the oversight of your small business participation plans or small business subcontracting under FAR 52.219? Of course, it does. Under FAR Part 19.707. Although the rules state that the SBA “may” act, there should be an inclination to show that it will act. See information about SBA 8a small business plan.

GAO Reports: The Government Accounting Office  (GAO) has submitted reports addressing this very problem. In fact, it made stern recommendations to at least two agencies to implement more oversight into their government contract subcontracting goal plan obligations.

For immediate help with your small business subcontracting plans, please call us at 1-866-601-5518.