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Government Contractors

Improvements to Subcontracting

On July 14, 2016, the Federal Acquisition Regulatory Council published a final rule in Federal Acquisition Circular 2005-89, effective November 16, 2016, intended to improve subcontracting with small business concerns. The new rule implements sections 1321 and 1322 of the Small Business Jobs Act of 2010. Under section 1321, the Federal Acquisition Regulation (“FAR”) was to be amended “to establish a policy on, subcontracting compliance relating to small business concerns.” Thus, the new rule makes many FAR provisions relating to subcontracting with small business concerns. We will not discuss all the changes here, but will highlight those that have a significant impact on prime contractors and subcontractors.

First, prime contractors will now be required to make good faith efforts to utilize their proposed small business subcontractors during performance of a contract to the same degree the prime contractor relied on the small business in preparing and submitting its bid or proposal. If a prime contractor is unable to make a good faith effort to utilize the small business subcontractors relied upon in preparing its bid or proposal, the prime contractor is required to explain, in writing, within 30 days of contract completion, to the contracting officer the reasons why it is unable to do so. Although this explanation is not to be provided until after contract completion, it can have an effect on the prime’s potential liability for liquidated damages under FAR 52.219-10 and 26 if the prime was required to submit a small business subcontracting plan.

Furthermore, contracting officers are now given the discretion to calculate subcontracting goals in terms of total contract dollars in addition to the required goals in terms of total subcontracted dollars. Thus, there can be two sets of goals, one based on anticipated subcontract dollars and one based on total contract dollars.

Contracting officers are now given the discretion to require a subcontracting plan in situations where a small business rerepresents its size as an other than small business in accordance with FAR 52.219-28. Under that clause, contractors are required to rerepresent their size status following certain events. If the contractor cannot rerepresent its small business status, it will no longer be considered a small business. However, as the contract should have been initially written, the contractor would not have been required to submit a small business subcontracting plan when the contractor was awarded the contract. This discretion to require a subcontracting plan, does not apply to making the contractor subject to the Cost Accounting Standards or eliminating the Limitation on Subcontracting requirements applicable when a contract is awarded on a set-aside basis.

Next, subcontracting plans will now be required when a modification to a contract brings the contract value above the threshold for requiring a plan, even for modifications under the subcontracting plan threshold if the modification would cause the contract to exceed the plan threshold.

Another change is that the FAR now forbids prime contractors from prohibiting a subcontractor from discussing payment or utilization matters with the contracting officer. This touches on an area that has been of concern to subcontractors, particularly small business subcontractors for some time. It is not unusual for prime contractors to place “gag order” restrictions on subcontractors. Under these restrictions, subcontractors are not permitted to speak with the government concerning contract matters. These provisions have had a chilling effect on subcontractors being able to take advantage of the opportunities to complain about non-payment found in FAR 32.112-1 and 2. This new rule should alleviate that issue.

Finally, for indefinite delivery, indefinite quantity (“IDIQ”) contracts, unless the contractor has a commercial subcontracting plan in place, the contracting officer may establish subcontracting goals at the order level but may not require a new subcontracting plan at the order level. This new authority does not apply to requirements contracts.

Contractors need to review these new changes closely to determine what, if any, impact they will have on contractor practices and procedures. If you have any questions or concerns regarding the new subcontracting rules, please do not hesitate to contact one of our experienced GovCon professionals for assistance.

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