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Final Rule Imposes New Small Business Subcontracting Obligations on Large Business Prime Contractors




by:
Maria L. Panichelli
Michael H. Payne
Cohen Seglias Pallas Greenhall & Furman PC - Philadelphia Office

 
August 22, 2013

Previously published on August 20, 2013

On August 15, 2013, the SBA put into effect a long-awaited Final Rule (Federal Register Volume 78, Number 136 (Tuesday, July 16, 2013)) designed to help small business subcontractors. The Final Rule, which implements policies set forth in the Small Business Jobs Act of 2010, provides for several very important changes to small business contracting.

First, the rule will impact the ways large business contractor-offerors must utilize small business subcontractors who help during the proposal stage. Small businesses frequently complain that they spend considerable time, effort, and resources assisting large businesses in preparing bids, quotes and proposals, only to be left without any subcontract when the large business actually secures an award of the contract. To combat this problem, the Final Rule requires that large business contractor-offerors (those in line for an award over $650,000, or, in the context of a contract for the construction of a public facility, an award over $1,500,000) “represent to the contracting officer that it will make a good faith effort to acquire articles, equipment, supplies, services, or materials, or obtain the performance of construction work from small business concerns that it used in preparing its bid or proposal, in the same scope, amount, and quality used in preparing and submitting the bid or proposal.” Pursuant to the rule, an offeror “uses” a particular small business in its bid or proposal if:

  • The large business referenced the small business as a subcontractor in its bid or proposal;
  • The large business referenced the small business as a subcontractor in its small business subcontracting plan;
  • The large business has a subcontract or “agreement in principle” to subcontract with the small business to perform a portion of the contract work;
  • The small business drafted any portion of the bid or proposal; or
  • The large business used the small business’s cost/pricing information or technical expertise in preparing the bid or proposal.

If the large business ultimately fails to use the small business as a subcontractor it must provide the Contracting Officer with a written explanation as to why. Under the rule, the CO must consider these issues when rating the large business prime’s overall performance. Moreover, in the most extreme cases, the CO is required to report a large business’ non-compliance to the Federal Awardees Performance and Integrity Information System (FAPISS). In short, large business offerors will no longer be able to rely on the efforts of small business subcontractors during the proposal stage without conferring some of the benefits of award on those subcontractors.

Second, the rule provides that large business prime contractors are responsible for ensuring that small business concerns are given the “maximum practicable opportunity” to participate in the performance of the work. The prime contractors must conduct market research and use “all reasonable means” to identify small business subcontractors and suppliers. Contractors on larger awards also have additional administrative and substantive responsibilities. For example, they must give pre-award written notice to unsuccessful small business subcontractors. Lastly, the primes cannot prohibit subcontractors from discussing any material matter, including payment from the prime, directly with the contracting officer.

Third, the rule requires that prime contractors must notify the Contracting Officer, in writing, when it is more than 90 days behind paying its small business subcontractors. Primes must also notify the CO if they pay the small business contractor a reduced price, lower than that agreed to in the subcontract. A contractor will be deemed to have a history of slow or reduced payments if it self-reports 3 times within a one-year period. The contracting officer is required to evaluate these payment factors when ultimately rating the contractor’s overall performance.



 

The views expressed in this document are solely the views of the author and not Martindale-Hubbell. This document is intended for informational purposes only and is not legal advice or a substitute for consultation with a licensed legal professional in a particular case or circumstance.
 

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Author
 
Maria L. Panichelli
Michael H. Payne
 
Cohen Seglias Pallas Greenhall & Furman PC Overview