[Federal Register Volume 78, Number 136 (Tuesday, July 16, 2013)]
[Rules and Regulations]
[Pages 42391-42406]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2013-16967]


=======================================================================
-----------------------------------------------------------------------

SMALL BUSINESS ADMINISTRATION

13 CFR Parts 121 and 125

RIN 3245-AG22


Small Business Subcontracting

AGENCY: U.S. Small Business Administration.

ACTION: Final rule.

-----------------------------------------------------------------------

SUMMARY: The U.S. Small Business Administration (SBA or Agency) is 
amending its regulations governing small business subcontracting to 
implement provisions of the Small Business Jobs Act of 2010. In 
particular, this 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 the prime contractor does not utilize a small business 
subcontractor used in preparing its bid or proposal during contract 
performance. This rule also 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. In addition, this rule clarifies that the contracting officer 
is responsible for monitoring and evaluating small business 
subcontracting plan performance. The rule also clarifies which 
subcontracts must be included in subcontracting data reporting, which 
subcontracts should be excluded, and the way subcontracting data is 
reported. The rule also makes changes to update its subcontracting 
regulations, including changing subcontracting plan thresholds and 
referencing the electronic subcontracting reporting system (eSRS). 
Further, the rule adds a provision to the regulations which addresses 
subcontracting plan requirements and credit towards subcontracting 
goals in connection with multiple award multi-agency, Federal Supply 
Schedule, Multiple Award Schedule and government-wide acquisition 
indefinite delivery, indefinite quantity contracts.

DATES: Effective Date: This rule will be effective August 15, 2013.

FOR FURTHER INFORMATION CONTACT: Dean Koppel, U.S. Small Business 
Administration, Office of Government Contracting, 409 Third Street SW., 
8th Floor, Washington, DC 20416, (202) 205-7322, dean.koppel@sba.gov.

SUPPLEMENTARY INFORMATION: On October 5, 2011, SBA published in the 
Federal Register a proposed rule to implement provisions of the Jobs 
Act which pertain to small business subcontracting. 76 FR 61626. 
Section 1321 of the Jobs Act requires the SBA Administrator, in 
consultation with the Administrator of the Office of Federal 
Procurement Policy, to publish regulations establishing policies for 
subcontracting compliance, including assignment of compliance 
responsibilities between contracting offices, small business offices, 
and program offices.
    The proposed rule called for a 60-day comment period, with comments 
to be received by SBA by December 5, 2011. SBA published a notice in 
the Federal Register on December 1, 2011, reopening the comment period 
for an additional 30 days, until to January 6, 2012. 76 FR 74749.
    The proposed rule contained changes to SBA's size regulations (Part 
121) and the regulations governing SBA's government contracting 
programs (Part 125). SBA received 105 written comments during the 
comment period. Many of these comments were lengthy and discussed 
numerous proposed amendments. SBA has made changes in this final rule 
in response to comments received to its notice of proposed rulemaking. 
With the exception of comments which are beyond the scope of this rule, 
or which did not set forth any rationale or make suggestions, SBA 
discusses and responds fully to all of the comments below.

Summary of Comments and SBA's Responses

Part 121

    SBA received one comment on proposed Sec.  121.404(g)(3)(ii), which 
added a provision permitting a contracting officer to require a 
subcontracting plan if a prime contractor's size status changes from 
small to other than small as a result of a size recertification. The 
commenter recommended adding that size status at time of contract award 
controls subcontracting plan requirements or clarifying how a 
subcontracting plan must change if a former small business 
subcontractor reclassifies. Section 121.404(g)(3)(ii) provides that 
recertification does not change the terms and conditions of a contract, 
including the requirement for a subcontracting plan, and otherwise size 
is determined at time of offer and will not change during performance. 
However, under the final rule a contracting officer has the discretion 
to require a subcontracting plan if size status changes as a result of 
recertification.

Part 125

    The proposed rule revised Sec.  125.3(a) to update the 
subcontracting plan thresholds, which were increased pursuant to the 
government-wide procurement program inflationary adjustments required 
by Section 807 of the Ronald W. Reagan National Defense Authorization 
Act for Fiscal Year 2005. Public Law 108-375; see also 75 FR 53129 
(Aug. 30, 2010). One commenter recommended removing the reference to 
``a public facility'' in Sec.  125.3(a) because the term is not defined 
in the Code of Federal Regulations. SBA does not adopt this comment. It 
is up to the contracting officer to determine whether the term applies 
to a particular acquisition. Further, this term comes from Section 8(d) 
of the Small Business Act, so removing it would require legislative 
action.
    The proposed rule added Sec.  125.3(a)(1) to define subcontract in 
order to clarify which subcontracts must be included when reporting on 
small business subcontracting performance. SBA

[[Page 42392]]

received a number of comments on proposed Sec.  125.3(a)(1). Many 
commenters supported SBA's definition of a subcontract.
    One commenter requested confirmation that the new definition of 
subcontract will be coordinated with existing definitions at Federal 
Acquisition Regulation (FAR) 19.701 and FAR 52.219-9. SBA agrees that 
it is important for SBA's rules and the FAR to be consistent and notes 
that its rules will also be incorporated in the FAR after SBA's 
regulations are finalized.
    One commenter requested that SBA clarify how subcontracts to and by 
affiliates will be treated. SBA's long-standing policy has been to 
count subcontracts by first-tier affiliates as subcontracts of the 
prime contractor. SBA has amended Sec.  125.3(a)(1) to make this clear. 
SBA notes that the Subcontracting Report for Individual Contracts (ISR) 
(SF-294) and the Summary Subcontract Report (formerly the SF-295, now 
discontinued) and their electronic equivalents in eSRS specifically 
state that subcontracts to affiliates are not included in the 
individual and summary reports.
    One commenter recommended excluding bonds and all insurance from 
the definition of subcontract. The commenter noted that in the 
construction industry, prime contractors generally have established and 
ongoing relationships with sureties and insurance providers, and bond 
and insurance requirements are generally met through these 
relationships, so no real opportunity for small business exists in 
those areas. The commenter also noted that the government's 
requirements for bonds and insurance--specifically for construction 
contracts--normally preclude the use of small business concerns. 
Although SBA is sympathetic to this comment, SBA would need more 
information on the participation of small business concerns in these 
industries before excluding bonds and all insurance from the 
subcontracting base government-wide.
    One commenter opposed excluding philanthropic contributions from 
the definition of subcontract. The commenter noted that on Department 
of Defense contracts, services provided to the prime contractor by 
Historically Black Colleges and Universities (HBCUs) are generally 
funded by a donation or grant rather than charged, and excluding such 
donations/grants undermines a prime contractor's ability to support 
such HBCUs. SBA disagrees. It is unclear how a philanthropic 
contribution could be counted as a subcontract and charged to the 
government.
    One commenter recommended requiring transparency in calculating the 
subcontracting base, arguing that the prime contractor has too much 
discretion and there are no checks in place. SBA does not concur. By 
statute, the contracting officer is responsible for negotiating a 
subcontracting plan that maximizes small business participation and for 
monitoring performance. SBA and contracting agencies also monitor 
subcontracting plan compliance through compliance reviews.
    One commenter recommended requiring discrete subcontracting 
reports, rather than comprehensive reports, for all prime contracts of 
$1 million or more. SBA notes that comprehensive plans are authorized 
by statute and that commercial plans are authorized by the FAR. In 
addition, the thresholds for subcontracting plan reports are set by 
statute.
    Several commenters opposed the exclusion of utilities from the 
subcontracting base. One commenter argued that electricity and other 
utilities should be included in the subcontracting base because small 
business concerns may be licensed or otherwise equipped to provide 
these services. Another commenter suggested that the exclusion should 
be more specifically defined to exclude services that are not required 
municipal services such as those required under local franchise 
agreements. SBA has amended the rule to exclude utilities where no 
competition exists and thus no small business concern could have an 
opportunity to receive a subcontract. Specifically, SBA has amended the 
definition to exclude ``utilities such as electricity, water, sewer and 
other services purchased from a municipality or solely authorized by 
the municipality to provide those services in a particular geographical 
region.'' Another commenter argued that not including utilities in the 
subcontracting base causes an overstatement of the percentage of 
contracts given to small business. Subcontracting plans are required to 
the extent subcontracting possibilities exist. As stated above, SBA has 
amended the rule to clarify that utilities are only excluded to the 
extent there is no choice of provider.
    One commenter recommended clarifying that the supplies or services 
provided under the agreement must be specific to the particular prime 
contract requirements in order for the agreement to be considered a 
subcontract. Specifically, the commenter believed it would be useful to 
clarify that an agreement to obtain supplies or services that are in 
the nature of commercial items and are used to support both commercial 
and government contracts would not be considered a ``subcontract.'' The 
commenter is further requesting clarification concerning whether 
subcontracting flowdown requirements apply to certain types of 
contracts. As the commenter notes, certain vendor agreements must be 
included in the subcontracting base for commercial plans because those 
plans are required to consider indirect costs. Further, FAR 52.219-9(j) 
addresses flowdown requirements in the context of commercial items. 
Consequently, we have declined to address this matter in the final 
rule.
    One commenter recommended clarifying if the list of exclusions is 
exhaustive or illustrative. SBA agrees and has amended the rule to 
state that the list ``includes but is not limited to.''
    One commenter recommended clarifying whether vendors of commercial 
items are subcontractors for flow-down clauses. SBA has clarified that 
flow-down clauses apply to commercial item vendors, except when the 
subcontract is for a commercial item and the prime contract contains 
FAR clause 52.212-5 or 52.244-6. Under this scenario, the prime 
contractor is required to flow down FAR clause 52.219-8 but not the 
clause at 52.219-9; accordingly, no subcontracting plan is required 
from other than small subcontractors at any tier (see Federal 
Acquisition Streamlining Act of 1994, Pub. L. 103-355, and FAR 52.219-
9(j), 52.212-5(e), and 52.244-6(c)).
    One commenter requested clarification of whether contracts in 
connection with foreign military sales are subject to the 
subcontracting plan requirements of the Small Business Act and the FAR. 
Based on the proposed definition, which SBA is adopting, contracts in 
connection with foreign military sales are subject to the 
subcontracting plan requirements, unless this requirement is waived in 
accordance with the procuring agency's regulations. Specific questions 
concerning specific contracts should be directed to the contracting 
officer.
    The proposed rule added Sec.  125.3(a)(2) to explicitly authorize 
contracting officers to establish additional subcontracting goals in 
terms of total contract dollars. As explained in the proposed rule, 
contracting officers are already doing this, and when a prime 
contractor enters its subcontracting achievements (i.e., dollars) into 
eSRS, the system automatically calculates the percentage by both 
methods--that is, as a percentage of total subcontracting and as a 
percentage of total contract dollars. Thus, the contracting officer has 
the ability to compare achievements against

[[Page 42393]]

the total contract dollars if desired. Several commenters supported 
SBA's proposal to allow contracting officers to set additional 
subcontracting goals in terms of total dollars.
    One commenter opposed proposed Sec.  125.3(a)(2), arguing that the 
change would result in the illusion that there are more subcontracting 
opportunities for small businesses than in fact exist. The commenter 
argued under some contracts more than 70% of total contract dollars are 
spent on personnel expenses related to salary and benefits, which are 
costs for which there are no subcontracting opportunities. However, the 
commenter noted that the contracting officer has the ability to compare 
achievements either way (percent of subcontracting dollars or percent 
of total contract dollars) because eSRS automatically calculates 
percentage by both methods when prime contractors report achievements 
in whole dollars. Thus, SBA believes that contracting officers should 
have the discretion to set goals in terms of total contract dollars. 
Some contracting officers already set current goals in terms of total 
contract dollars, and as the commenter notes, the calculation is 
already available in eSRS. Contracting officers need to set realistic 
goals, taking into account the opportunity for subcontracting and the 
percentage of dollar value that accrues to personnel expenses. However, 
subcontracts for labor are counted towards the total dollar contract 
value. SBA does not want to limit contracting officer flexibility that 
benefits small businesses.
    One commenter questioned whether under the amended rule, small 
business goals set in terms of percentage of subcontracting dollars 
would be evaluated in terms of percentage of total contract dollars. 
SBA notes that the goals still must be set in terms of percentage of 
subcontracting dollars, but can be set in terms of total contract 
dollars as well.
    The proposed rule added Sec.  125.3(a)(3) to define a history of 
unjustified untimely or reduced payments as three incidents within a 12 
month period. SBA invited comments on the proposed definition, 
alternatives with supporting rationales, and/or comments on whether 
such judgments should be left to the discretion of the contracting 
officer. SBA received several comments on the proposed definition of a 
history of unjustified late payment. Some commenters recommended that 
the definition should look for patterns, as opposed to specific 
numbers. Others recommended defining it based on percentages, and 
others recommend establishing a dollar value threshold. Others asked 
SBA to define when a payment that is late is unjustified. Some 
commenters argued that it should be left in the discretion of the 
contracting officer.
    SBA has decided to retain the proposed definition of three payments 
in a twelve month period that are more than 90 days past due, after 
performance has occurred and the government has paid the prime 
contractor, where the late payment is unjustified. If a payment is late 
but it is justified in the opinion of the prime contractor, e.g., 
unacceptable or incomplete performance, then the late payment would be 
justified, and there would be no requirement to notify the contracting 
officer. On the other hand, if satisfactory performance by the 
subcontractor has occurred, the prime contractor has been paid by the 
government, and payment to the subcontractor is more than 90 days past 
due, the prime contractor owes the contracting officer an explanation, 
regardless of the dollar value of the contract. The statute stipulates 
that payment to a subcontractor after 90 days is unacceptable unless 
justified. Further, looking for patterns or percentages would overly 
complicate a fairly simple principle: if satisfactory performance has 
occurred and the prime has been paid, subcontractors must be paid 
within 90 days.

Additional Responsibilities of Large Prime Contractors

    The proposed rule amended the introductory text of Sec.  
125.3(c)(1) to reflect the updated subcontracting plan thresholds, as 
discussed above. One commenter opposed changing the thresholds, arguing 
that the higher the thresholds, the less small business participation 
will occur because small businesses are not required to submit 
subcontracting plans. However, the thresholds are set by statute, and 
subcontracting plans require percentages that are realistic based on 
subcontracting opportunity.
    One commenter recommended amending Sec.  125.3(c)(1)(i) to require 
prime contractors to give at least 30% of contracts to small business 
subcontractors. SBA disagrees. Subcontracting plans are established 
based on small business subcontracting opportunity. It would be 
inefficient and unfair to establish thresholds that would apply to all 
contracts government-wide.
    SBA proposed to amend Sec.  125.3(c)(1)(iii) to provide that a 
prime contractor may not prohibit a subcontractor from discussing with 
the contracting officer any material matter pertaining to payment or 
utilization. Some commenters argued that the proposed change conflicts 
with the principle of privity of contract. SBA disagrees. The 
contracting officer will not take any action with respect to the 
subcontractor. Rather, the contracting officer can take action with 
respect to the prime contractor's performance, which is the purpose of 
the statutory provisions. Other commenters argued that the contracting 
officer will become the entry point for contract disputes between 
primes and subcontractors. SBA notes that the contracting officer 
cannot be a party to disputes between subcontractors and prime 
contractors but must be involved in evaluating prime contractors' 
performance.
    SBA received several comments on proposed Sec.  125.3(c)(1)(iv), 
which provided that when preparing its individual subcontracting plan, 
a prime contractor must decide whether or not to include indirect costs 
in the subcontracting base, for both goaling and reporting purposes. 
Some commenters argued that this change would be an administrative 
burden on contractors and would not further the goals of the program. 
In proposing this rule, SBA's intent was to memorialize current 
practice. As explained in the proposed rule, indirect costs must be 
included in a commercial plan to ensure comparability between goals and 
achievements because companies with commercial plans file only a 
summary report, not an individual report. All contractors must include 
indirect costs in their summary subcontracting reports.
    As discussed in the proposed rule, Sec.  125.3(c)(1)(iv) is being 
amended to reflect current practice.
    One commenter recommended providing a specific definition for 
``indirect cost'' as it pertains to small business subcontracting plans 
and eSRS reporting. The commenter noted that the definition in FAR Part 
2 is vague and does not work well in this context. SBA disagrees. For 
consistency, SBA uses the FAR definition. SBA notes that requests to 
change the FAR should be directed to the FAR Council.
    SBA proposed to add Sec.  125.3(c)(1)(v), providing that large 
prime contractors are responsible for assigning NAICS codes and 
corresponding size standards to subcontracts. In response to comments, 
SBA has amended proposed Sec.  125.3(c)(1)(v) to clarify that in 
assigning NAICS codes to subcontracts, prime contractors should use the 
guidance in SBA's regulations governing contracting officers' 
assignment of NAICS codes to prime contractors, 13 CFR 121.410. In 
addition, SBA has amended the regulation to clarify that prime 
contractors may rely on

[[Page 42394]]

subcontractors' electronic representations and certifications made in 
the System for Award Management (SAM) (or any successor system), 
provided the subcontract contains a clause similar to current FAR 
clause 52.204-8(d) which clearly provides that the subcontractor is 
representing its size or socioeconomic at the time of offer for the 
subcontract. However, SBA notes that SAM was created for firms that 
want to do business with the government as prime contractors, and some 
subcontractors may not want to enter data into SAM. As such, SBA has 
also clarified that a prime contractor (or subcontractor) may not 
require the use of SAM (or a successor system) for size or 
socioeconomic representation for subcontracts.
    One commenter recommended clarifying whether Sec.  125.3(c)(1)(v) 
applies to all subcontractors or only to certified small business 
subcontractors. The commenter also inquired as to whether a list of 
applicable NAICS codes would be provided at the time of proposal 
request. The assignment of a NAICS code and size standard is required 
for subcontracts, since that forms the basis for the prime contractor's 
claim that it awarded a subcontract to a small business or an other 
than small business. The prime contractor must assign a NAICS code to 
the solicitation, so that the subcontractor can make a size or 
socioeconomic representation in connection with that offer for that 
subcontract. Size or socioeconomic status is determined as of the date 
of offer for the subcontract.
    The proposed rule amended redesignated Sec.  125.3(c)(1)(vi) 
(former Sec.  125.3(c)(1)(iii)) to provide that all contractors whose 
reports are rejected, including those with individual contract plans 
and commercial plans as defined in FAR 19.701, will be required to make 
the necessary corrections and resubmit their reports within 30 days of 
receiving the notice of rejection.
    One commenter recommended that the rule refer to eSRS ``or the 
successor system,'' arguing that eSRS is being replaced by SAM. In 
response to the comment, SBA has added clarifying language to the 
regulation.
    One commenter recommended allowing 60 days to correct a report. SBA 
disagrees. Thirty days should be sufficient. One of the reasons for the 
Jobs Act was the belief that contracting officers and prime contractors 
are not reporting or reviewing subcontracting accomplishments in a 
timely manner.
    One commenter recommended adding specific consequences for a prime 
contractor's failure to submit timely or accurate required reports. SBA 
does not concur. It is difficult to establish concrete, universally 
applicable consequences for contracting officers and prime contractors. 
SBA believes that compliance by the contracting officer or prime 
contractor could be considered as part of the performance evaluation of 
either party, at the discretion of the evaluator.
    One commenter recommended adding a provision addressing the 
frequency and nature of the subcontracting reports that must be 
submitted to the contracting officer. SBA notes that these issues are 
addressed in the FAR.
    One commenter recommended fixing data input and error issues in the 
eSRS system so the necessary data for enforcement can be available. In 
response to this comment, SBA recommends that contracting agencies 
include data quality as part of the performance evaluation of 
employees.
    One commenter recommended reviewing eSRS and the Federal Funding 
Accountability and Transparency Act (FFATA) Subaward Reporting System 
(FSRS) databases and eliminating duplicate reporting requirements. SBA 
notes that FSRS is the reporting tool required by FFATA, and eSRS 
serves a separate purpose--i.e., it is an electronic system for 
reporting subcontracting plan compliance required by the Small Business 
Act.
    SBA received several comments on redesignated Sec.  
125.3(c)(1)(viii) (former Sec.  125.3(c)(1)(v)), which requires pre-
award written notification to unsuccessful subcontractor offerors. SBA 
notes that this is not a new requirement (see also Sec.  121.411(b)). 
SBA is only moving this provision as a result of amending this section 
to increase the subcontracting plan thresholds. One commenter argued 
that this rule creates an unnecessary administrative burden. The 
commenter noted that there is no specified tracking of compliance or 
listed consequence for failure to meet this requirement. SBA again 
notes that this notification is required by the current regulations. 
Further, this requirement is the only means to trigger any self-
policing in the small business subcontracting community. The government 
may review compliance with this requirement as part of a compliance 
review.
    Some commenters recommended clarifying the language: ``for which a 
small business concern received a preference.'' One commenter noted 
that the FAR neither allows nor requires prime contractors to give 
small business preference on solicitations. Another commenter asked 
whether this language referred only to when a small business receives 
the award, or to all subcontracts set-aside for small businesses. This 
language is in the existing regulations and refers to subcontract 
competitions where consideration for award was limited based on size or 
socioeconomic status.

Use of Subcontractor in Performance

    The proposed rule added new Sec.  125.3(c)(3), providing that a 
prime contractor must represent that it will make a good faith effort 
to utilize the small business subcontractors used in preparing its bid 
or proposal during contract performance. SBA proposed that a prime 
contractor is deemed to have ``used'' a small business subcontractor in 
preparing its bid or proposal when: (i) The offeror specifically 
references a small business concern in a bid or proposal, (ii) the 
offeror has entered into a written agreement with the small business 
concern for purposes of performing the specific contract as a 
subcontractor, or (iii) the small business concern drafted portions of 
the proposal or submitted pricing or technical information that appears 
in the bid or proposal, with the intent or understanding that the small 
business concern will perform that related work if the offeror is 
awarded a contract. Some commenters opposed the provision in general 
terms, but as discussed previously, this provision is statutory and 
must be implemented. Some commenters requested clarifying whether this 
definition will be implemented in the FAR. SBA notes that this 
provision will be implemented in the FAR.
    One commenter argued that ``in the same amount and quality used in 
preparing and submitting the bid or proposal'' is not feasible because 
quantities often change. SBA disagrees. This language is directly in 
the statute and is meant to address a specific problem. If the 
subcontractor was ``used'' in preparing the offer as defined in the 
regulation, then the prime contractor must provide the contracting 
officer with a written explanation as to why the subcontractor was not 
actually used in performance to the extent set forth in the offer. That 
explanation would certainly include any information relating to 
required quantities changing, so that the small business could not be 
used in performance to the same extent as that set forth in the offer.
    One commenter noted that the proposed language would not address 
cases where a prime contractor issues a nominal subcontract but with 
significant down-scoping of the original

[[Page 42395]]

proposed work share, which according to the commenter is common 
practice. In response to this comment, SBA has amended Sec.  
125.3(c)(3) by adding the term ``scope.''
    One commenter argued that commitments to suppliers are never made 
at time of proposal because an order may never be awarded, the supplier 
may go out of business, the supplier may be removed due to quality or 
delivery or other issues, or the supplier's quote may have expired 
before an award is received. The commenter argued that due to FAR 
competition requirements, many proposals are received and responded to 
which do not become actual orders. The commenter recommended that the 
government allow large businesses to place orders with small business 
concerns and reimburse them. As SBA stated in the proposed rule, 
responding to a request for a quote does not constitute use in 
preparing the bid or offer. SBA has added this language to Sec.  
125.3(c)(3). Further, the statute and regulation require the prime 
contractor to notify the contracting officer with an explanation, which 
could include all of those reasons (e.g., subcontractor out of 
business, quality or delivery issues, etc.).
    Some commenters recommended requiring a more formal bid listing 
process requiring prime contractors to list in their bid the 
subcontractors they would use, allowing for later substitution if 
necessary. SBA considered requiring prime contractors to name 
subcontractors, but SBA has heard from the public and industry that 
selection of subcontractors in some industries does not occur until 
after contract award and requiring the prime to name subcontractors 
could result in a reduction of subcontracting opportunities.
    Some commenters recommended requiring prime contractors to submit 
formal requests to amend subcontracting plans, arguing that this would 
assist in ensuring that prime contractors used the subcontractors named 
in their proposals. SBA disagrees. Subcontracting plans generally do 
not name specific small business concerns. Subcontracting plans simply 
establish goals for each socioeconomic category.
    Some commenters recommended requiring prime contractors to include 
with their proposals fully executed subcontracts that are conditioned 
on the prime contractor's receipt of contract award and that are 
effective throughout the entire life of the contract. Other commenters 
recommended requiring a contract as evidence that a contractor failed 
to comply with proposed Sec.  125.3(c)(3). SBA disagrees. In some 
industries, specific subcontracts are not solicited or awarded until 
well after contract award. Thus, it is not possible to impose a 
requirement that prime contractors include subcontracts in their 
proposals government-wide. At the same time, limiting the rule's 
applicability to situations where a formal subcontract has been 
executed would severely hamper the scope and breadth of the statutory 
provision. Further, it could have the effect of reducing prime 
contractors' willingness to enter into subcontracts prior to offer, 
which is clearly contrary to congressional intent.
    One commenter argued that proposed Sec.  125.3(c)(3) should not be 
triggered if a prime contractor awards the work to another small 
business and is otherwise not in violation of any contract by doing so. 
The commenter argued that the goal of the Jobs Act is to protect small 
business in general, not specific small businesses. SBA disagrees, and 
believes that the Jobs Act specifically intended to apply to and 
protect individual small businesses. This statutory provision does not 
reference whether or not the prime contractor is meeting its goals. The 
statute was intended to address the complaints of small businesses that 
expended significant time and resources to assist large businesses 
prepare bids, quotes and proposals that assisted those large businesses 
in being awarded a contract and then were not used in the performance 
of that contract.
    One commenter suggested that the rule not apply if a quote from a 
small business is included in the bid or proposal as supporting 
documentation for a budget item. SBA disagrees. This is the type of 
behavior that the statute is intended to address. A prime contractor's 
inclusion of a quote in a bid raises the expectation of the 
subcontractor that its quote was used to win the award.
    SBA received a number of comments recommending revisions to the 
language of proposed Sec.  125.3(c)(3)(i)-(iii), which defined when an 
offeror used a small business in preparing a bid or proposal.
    One commenter recommended revising Sec.  125.3(c)(3)(i) to provide 
that an offeror used a small business concern in preparing the bid or 
proposal if ``the offeror indicates it has awarded or selected the 
small business concern as a subcontractor to perform a portion of the 
specific contract.'' SBA disagrees. If the prime refers to the 
subcontractor in its proposal or bid in order to influence the award, 
that is precisely the conduct this statutory provision was intended to 
address, without limiting it to a further representation that a 
subcontract has been awarded. If the prime feels it is necessary to 
mention the subcontractor by name, the prime contractor must explain 
why that firm is not used in performance.
    One commenter requested clarification of whether ``bid or 
proposal'' in Sec.  125.3(c)(3)(i) includes small businesses listed in 
a subcontracting plan submitted with the bid or proposal. SBA has added 
language stating that ``referenced in the bid or proposal'' includes 
associated small business subcontracting plans, if applicable. SBA 
notes that subcontracting plans are not necessarily required at the 
time of bid or proposal and are often not required until the apparent 
successful offeror has been identified.
    One commenter argued that proposed Sec.  125.3(c)(3)(i) and 
(c)(3)(iii) are unduly broad, suggesting that it is the subcontractor's 
perception of future work, rather than a reasonable expectation on 
behalf of both parties, that triggers the rule's requirements. SBA 
disagrees and believes that the language of the proposed rule 
adequately captures the intent of the statute.
    One commenter recommended defining the terms ``agreement in 
principle'' and ``intent or understanding'' in proposed Sec.  
125.3(c)(3)(ii). These terms will have to be interpreted by contracting 
officers and prime contractors on a case-by-case basis, as the 
provision is applied to specific factual circumstances.
    One commenter recommended revising proposed Sec.  125.3(c)(3)(ii) 
to read: ``has a written agreement as to all material terms (including 
price, work scope, schedule, etc.) with the small business to perform 
as a subcontractor.'' As discussed in the proposed rule, the statute 
applies where the subcontractor was ``used'' in preparing the bid or 
proposal. Requiring the level of detail recommended by the commenter is 
not consistent with statutory intent.
    One commenter recommended revising proposed Sec.  125.3(c)(3)(ii) 
by replacing ``agreement in principle'' with ``has made a written 
commitment to.'' SBA believes that ``agreement in principle'' is more 
consistent with statutory intent. Requiring written commitments might 
actually have the unintended effect of driving prime contractors to not 
enter into written agreements with subcontractors. Whether an agreement 
in principle existed will be a fact-specific exercise for the 
contracting officer to decide when evaluating prime contractor 
performance.

[[Page 42396]]

    Some commenters recommended revising proposed Sec.  
125.3(c)(3)(iii) by replacing ``intent or understanding'' with a 
written communication standard. Commenters suggested that 
correspondence would be sufficient, and a signed contract would not be 
necessary. SBA concurs with this comment and has amended the regulation 
to clarify that evidence should be in writing.
    The proposed rule added Sec.  125.3(c)(4), which implemented 
Section 1322 of the Jobs Act. This provision established a requirement 
that a prime contractor on a covered contract must notify the 
contracting officer in writing if the prime contractor fails to utilize 
a small business concern used in preparing and submitting the prime 
contractor's bid or proposal.
    SBA received eleven comments expressing concern that proposed Sec.  
125.3(c)(4) does not go far enough. Some commenters argued that prime 
contractors will not freely come forth and self-report. First, SBA 
notes that this notice requirement is statutory. In addition, SBA notes 
that the rule states that subcontractors can inform contracting 
officers of violations of this requirement.
    Based on a comment, SBA has amended proposed Sec.  125.3(c)(4) to 
state that the ``prime contractor'' rather than the ``offeror'' must 
provide the contracting officer with a written explanation as to why 
the prime did not acquire articles, equipment, supplies, services, or 
materials, or obtain the performance of construction work from the 
small business concerns that it used in preparing the bid or proposal, 
in the same scope, amount, and quality used in preparing and submitting 
the bid or proposal.
    In addition, SBA has amended proposed Sec.  125.3(c)(4) to clarify 
that the prime contractor must submit the written notification to the 
contracting officer prior to submitting to the Government the invoice 
for final payment and contract close-out.
    One commenter suggested requiring prime contractors to inform 
subcontractors that subcontractors have the right to appeal to the 
contracting officer when the proposed small business is not used. SBA 
notes that the terms of the contract will determine the extent to which 
the contracting officer has control over who the prime contractor uses 
as a subcontractor. This statutory provision is intended only to 
include the prime contractor's utilization of subcontractors used in 
preparing the bid as part of the performance evaluation of the prime 
contractor.
    One commenter recommended mirroring the requirement of DFAR 
252.219-7003(g), arguing that lack of consistency between the rules 
will cause confusion. DFAR 252.219-7003(g) reads as follows: ``In those 
subcontracting plans which specifically identify small businesses, the 
Contractor shall notify the Administrative Contracting Officer of any 
substitutions of firms that are not small business firms, for the small 
business firms specifically identified in the subcontracting plan. 
Notifications shall be in writing and shall occur within a reasonable 
period of time after award of the subcontract. Contractor-specified 
formats shall be acceptable.'' DFAR 252.219-7003(g) applies only when 
the prime contractor identifies specific small business concerns in the 
subcontracting plan, and no DFAR provision requires prime contractors 
to identify specific subcontractors in subcontracting plans. SBA 
believes that the language of the proposed rule more truly captures the 
statutory intent of this requirement. In any event, SBA's final rule 
will be implemented in the FAR and DFAR, and changes to those 
regulations will be made as necessary to ensure consistency.
    One commenter asked whether the rule will apply retroactively. The 
general rule is that regulations apply to solicitations issued on or 
after the effective date of the regulation. However, this rule will 
have to be implemented in the FAR, and consideration will be given as 
to whether any of these provisions need to apply to existing contracts.
    One commenter recommended requiring the prime contractor to report 
its intention not to use a designated subcontractor before the fact, 
rather than after the fact. Reporting is required if a subcontractor is 
not used in performance, and when that is triggered will depend on the 
specific facts and circumstances. The purpose of the reporting is 
primarily for purposes of evaluating the prime contractor's overall 
performance, and not necessarily for the purpose of affecting actual 
performance under the contract.
    One commenter recommended prohibiting prime contractors from 
terminating subcontractors and then performing the work on their own. 
The commenter suggested requiring that small business subcontracts may 
only be terminated for cause, and the prime contractor must make a good 
faith effort to replace the subcontractor with another small business 
subcontractor, all of which is subject to the contracting officer's 
approval. In addition, the commenter suggested that if a small business 
subcontractor is acquired by a large firm, the prime contractor must 
replace the subcontractor with a new small business subcontractor 
within six months. These comments go well beyond statutory intent. The 
statute did not intend for the contracting officer to intercede in the 
private contractual relationships of commercial concerns.
    One commenter recommended that the requirement should apply to all 
contracts. By statute, this requirement applies to all contracts 
requiring subcontracting plans. SBA believes that this was clear in the 
rule as proposed, and, as such, no further change is needed.
    Some commenters opposed the requirement, arguing that suppliers are 
sometimes unable to fulfill requirements. SBA notes that this can be 
explained in the notice to the contracting officer.
    Some commenters requested that SBA establish a threshold at which 
this reporting requirement would be triggered. Commenters also 
requested that SBA establish a timeframe for reporting. The statute 
does not create a threshold or a timeframe. SBA maintains that it will 
be incumbent upon the prime contractor to understand its subcontractors 
and proactively notify the contracting officer when the prime 
contractor has reason to believe that the relationship with the 
subcontractor met the definition. As for timeframe, it is difficult to 
set a timeframe because until the contract is completed, there is 
always theoretically a possibility that the prime contractor will use 
the subcontractor to the extent initially anticipated. Thus, it will be 
up to the prime contractor to come forward and notify the contracting 
officer when the prime contractor knows that the use of the 
subcontractor met the definition and that it will not use the 
subcontractor in performance in the same scope, amount, and quality as 
used in preparing and submitting the bid or proposal. However, SBA has 
added a requirement that the notice take place prior to submission of 
the final invoice for contract closeout.
    Some commenters argued that the notification requirement will be a 
disincentive for prime contractors from specifically including small 
business concerns in their proposals, which limits small businesses' 
ability to participate in the development of proposals and gain 
valuable insight into how prime contractors approach proposals in 
general. SBA understands this concern, but the requirement is 
statutory. Obviously, small business subcontractors felt that statutory 
action was needed to address some prime

[[Page 42397]]

contractor mistreatment of some small business subcontractors.
    Some commenters requested an exemption from the requirements in 
Sec.  125.3(c)(4) and (c)(5) for non-profit research institutions, 
arguing that reporting and oversight were an onerous burden for these 
groups. In the alternative, one commenter recommended requiring such 
organizations to provide notice and justification only in annual 
reports. SBA does not adopt this comment. Nonprofits are not exempt 
under the statute and are not exempt from these reporting requirements.
    Some commenters argued that contract awards attained via ``bait & 
switch'' should be vacated. SBA disagrees. In SBA's view, the intent 
was to use this information for purposes of evaluating performance. The 
statutory intent was not to require terminations whenever this 
provision was violated. Contracting officers have the discretion to 
consider such information for purposes of considering continued 
performance or exercising options, but SBA does not believe that 
mandating such action in all cases would be practical.

Late or Reduced Payment

    The proposed rule added Sec.  125.3(c)(5), which implemented 
Section 1334 of the Jobs Act. This provision established a requirement 
that a prime contractor notify the contracting officer in writing 
whenever a payment to a subcontractor is reduced or is 90 days or more 
past due for goods and services provided for the contract and for which 
the Federal agency has paid the contractor. SBA proposed that the prime 
contractor shall include the reason for the reduction in payment or 
failure to pay a subcontractor in the written notice.
    SBA received over twenty comments on proposed Sec.  125.3(c)(5). 
The commenters were split between those who suggested there be concrete 
consequences for prime contractors giving reduced or delayed payments, 
and those who argued that ``unjustified'' is not clearly defined, 
leaving prime contractors in a position to have to report in situations 
where the subcontractor is actually at fault.
    In response to several comments, SBA has amended the language of 
Sec.  125.3(c)(5) to clarify that this requirement applies only to 
small business subcontractors. The statutory provision pertains to 
contracts where a small business subcontracting plan is required, and 
such plans do not contain a goal for large business subcontractors.
    Some commenters argued that the requirement should not apply when a 
prime contractor has attached only a quote for the purchase of goods or 
services in a bid, arguing that a quote is only a projection of cost 
and may change due to market conditions. In response to these comments, 
SBA has amended Sec.  125.3(c)(5) to state that the reduced price 
applies only if the prime contractor awarded a subcontract.
    One commenter suggested implementing a requirement similar to the 
requirement for agencies that are delinquent in reimbursing 
contractors. SBA notes that this information will be used for past 
performance evaluation purposes. A different statute governs payment to 
prime contractors.
    One commenter recommended that the requirement should be extended 
to lower tier subcontractors that do not pay their subcontractors. SBA 
does not concur. The statute specifically refers to prime contractors 
and the contracting officer's ability to consider late payment in 
measuring prime contractor performance. There is lack of privity and 
authority between the government and lower tier subcontractors to 
extend the requirement as suggested.
    Some commenters recommended that each invoice submitted by the 
prime contractor include a report of payments to be made to each 
subcontractor, listing the name of the subcontractor and the amount 
owed. SBA does not adopt this comment. This is not required by statute 
and would increase the recordkeeping and reporting requirements of 
prime contractors.
    Some commenters opposed proposed Sec.  125.3(c)(5) as too far-
reaching. Some commenters argued that the requirement should apply only 
to late payments, not reduced payments. Other commenters recommended 
implementing the requirement on a contract-by-contract basis, based on 
the contracting officer's review of past performance. SBA does not 
concur. The statute specifically includes reduced payments and applies 
to all covered contracts.
    Some commenters argued that federal construction contractors are 
already subject to more stringent requirements under the FAR, including 
sanctions under Title 18 of the United States Code for making false 
claims. SBA notes that the requirements that apply in the construction 
arena do not apply government-wide, while these provisions apply to all 
contracts. However, the more stringent construction requirements still 
apply.
    Some commenters requested clarification of the definition of 
``unjustified'' late or reduced payment. Some commenters suggested that 
the definition should not include situations where the prime contractor 
acted in good faith and pointed out that budget cuts, agency 
reorganization, and similar situations are common reasons for reduced 
payment. Some commenters argued that a prime contractor often has 
legitimate reasons (substandard performance, improper billing, 
performance of unauthorized work, etc.) for late or lower payment. One 
commenter recommended that SBA clarify that the reporting obligation 
should not apply if the late/reduced payment was the byproduct of a 
government change to requirements. One commenter recommended allowing 
prime contractors to appeal a determination that a reduction is 
``unjustified.'' SBA believes that the facts of a specific case should 
determine whether a late or reduced payment was justified or not. A 
prime contractor must communicate the reasons for making a late or 
reduced payment to the relevant contracting officer as part of its 
required notification. A contracting officer will then use his or her 
best judgment in determining whether the late or reduced payment was 
justified.
    One commenter recommended clarifying what constitutes a ``payment'' 
to the prime contractor under different contract types. SBA notes that 
the opportunity for defining these terms will occur when these 
provisions are implemented in the FAR.
    Some commenters suggested that reports be protected if they contain 
proprietary and/or classified information. One commenter recommended 
adding a provision that would exclude prime contractors from having to 
include in a report on the reasons for reduced or delayed payment where 
such information: (1) Is exempt from FOIA disclosure; (2) constitutes 
``contractor bid or proposal information'' under the Procurement 
Integrity Act; or (3) is protected under the Privacy Act or other 
relevant law. SBA maintains that the reasons should be provided to the 
contracting officer--as required by statute--and the relevant 
information disclosure laws would apply to the reports. It is not up to 
prime contractors to interpret and apply information disclosure laws.
    Some commenters requested clarification of ``reduced price.'' In 
response to these comments, SBA has amended Sec.  125.3(c)(5) to 
clarify that ``reduced price'' means the price is less than the amount 
initially agreed to in a written, binding contractual document.
    Several commenters requested clarification of the term ``upon 
completion of the responsibilities.'' Specifically, one commenter asked

[[Page 42398]]

whether the rule applies to payment reductions on progress payments. 
Another commenter asked whether the obligation of a contractor to 
report a reduced payment to a subcontractor applies to every payment 
made by the prime contractor or applies only at the completion of the 
entire subcontract. In response to these comments, SBA has amended 
Sec.  125.3(c)(5) to state that the completion of responsibilities 
means that the subcontractor is entitled to payment under the terms of 
the subcontract.
    Some commenters made recommendations for uniform payment terms for 
subcontracts. Such recommendations go beyond statutory intent and are 
beyond the scope of this rule.
    One commenter recommended holding a public meeting where industry 
representatives from both large and small business may voice concerns. 
SBA held meetings in several cities to receive input on the proposed 
rule as part of its Jobs Act tour, and received significant written 
comments on the proposed rule. As such, SBA believes that additional 
public forums are unnecessary to fully understand the public concerns 
regarding the implementation of this rule. In addition, the public will 
have another opportunity to comment when this rule is incorporated in 
the FAR.
    One commenter requested that SBA reduce the late payment definition 
from 90 days to 30 days. SBA does not adopt this comment. For purposes 
of this statutory reporting requirement, the statute defines late as 
being 90 days past due. This final rule continues to adopt the 
statutory definition.
    One commenter recommended requiring agencies to publish actual 
payments to small business subcontractors. SBA does not adopt this 
comment. This requirement would be overly burdensome, and prime 
contractors as well as subcontractors may not want such information to 
be public. There is no clear public benefit from publicizing such 
information.
    In response to comments, SBA has added new Sec.  125.3(c)(6) to 
this final rule, which provides that if at the conclusion of a 
contract, the prime contractor did not meet all of the small business 
subcontracting goals in the subcontracting plan, the prime contractor 
shall provide the contracting officer with a written explanation as to 
why it did not meet the goals of the plan so that the contracting 
officer can evaluate whether the prime contractor acted in good faith 
as set forth in Sec.  125.3(d)(3).
    One commenter opposed proposed Sec.  125.3(d)(5), arguing that 
payments to subcontractors may vary month to month under normal 
circumstances. The commenter also argued that subcontractors have 
existing legal means to receive payments due. Again, SBA notes that the 
requirement of proposed Sec.  125.3(d)(5) is required by statute. In 
some circumstances, subcontractors do not have the resources to 
litigate claims, or may not want to exercise rights out of fear of not 
receiving future work.
    One commenter recommended clarification of the differing language 
in proposed Sec.  125.3(c)(5) (``more than 90 days past due'') and 
proposed Sec.  125.3(d)(5) (``more than 90 days late''). The commenter 
recommended changing both to ``more than 90 days past the contractual 
due date.'' SBA has changed the language in both provisions to ``90 
days past due under the terms of the subcontract.''

Contracting Officer Responsibilities

    The proposed rule revised Sec.  125.3(d) to clarify that the 
contracting officer is responsible for monitoring and evaluating the 
prime contractor's small business subcontracting plan compliance and 
reporting.
    SBA received a number of comments expressing concern that over-
extended contracting officers will not actually be able to monitor a 
prime contractor's compliance with the subcontracting plan on an 
ongoing basis as described in proposed Sec.  125.3(d). SBA disagrees. 
Contracting officers are already required to monitor and evaluate prime 
contractors' compliance with subcontracting plans. The intent of this 
rule is simply to more clearly define the contracting officers' 
responsibilities.
    Some commenters recommended Office of Small and Disadvantaged 
Business Utilization (OSDBU) participation in subcontracting plan 
compliance and enforcement. SBA disagrees. A subcontracting plan is a 
material part of a contract, and only the contracting officer has the 
authority to monitor contract performance. OSDBUs are not in the 
acquisition chain of command and have no authority to order a 
contracting officer to accept or reject a subcontracting plan or take 
some other enforcement action. Certainly, individual contracting 
officers may decide that OSDBUs can assist with subcontracting plan 
monitoring and enforcement, but SBA cannot impose a rule government-
wide that gives OSDBUs authority over contracts.
    Some commenters recommended requiring that the contracting officers 
in the field be responsible for monitoring compliance with 
subcontracting plans. SBA does not adopt this comment. The rule states 
the contracting officer is responsible, and if there is more than one 
contracting officer involved in a particular contract, the contracting 
agency must determine which contracting officer is responsible.
    One commenter recommended the use of federal audit agencies to 
ensure that prime contractors comply with subcontracting requirements. 
Agencies may use audit agencies to assist in compliance, but SBA cannot 
mandate such a requirement in all cases. Audit agencies face resource 
challenges as well. SBA and the Defense Contract Management Agency 
(DCMA) do conduct subcontracting compliance reviews each year.
    One commenter recommended requiring subcontracting program review 
once every two years if a prime contractor has active contracts with 
subcontracting plans. SBA does not adopt this comment. The contracting 
officer is responsible for reviewing, monitoring and evaluating a prime 
contractor's subcontracting plan performance with regard to each 
contract. In addition, compliance reviews conducted by SBA and DCMA 
occur as dictated by resource availability.
    The proposed rule added new Sec.  125.3(d)(1), which requires 
contracting officers to ensure that contractors submit their 
subcontracting reports into eSRS within 30 days after the report ending 
date. Some commenters recommended transparent monitoring to improve 
accountability of prime contractors. SBA notes that the eSRS system is 
a reporting system that enables a prime contractor to report to the 
contracting officer. Public access is beyond the scope of this rule, 
and access to the system is not controlled by SBA.
    The proposed rule added Sec.  125.3(d)(2), which requires the 
contracting officer to review every prime contractor's report within 60 
days of the report ending date and accept or reject the report. One 
commenter recommended requiring contracting officers to give a reason 
for rejecting a report in order to ensure clarity and quick responses. 
SBA concurs and has amended proposed Sec.  125.3(d)(2) to provide that 
the contracting officer should give an explanation for rejecting a 
report, since the eSRS system is already capable of doing this.
    One commenter suggested that the language regarding conducting an 
SSR review should include ``or designated Agency representative,'' 
arguing that

[[Page 42399]]

most agencies have an OSBP associate director review and accept SSRs. 
SBA recognizes that agencies usually have a person other than a 
contracting officer review the summary reports, since a summary report 
frequently contains achievements on multiple contracts with multiple 
contacting officers. However, the purpose of this rule is to clarify 
the responsibilities of the contracting officer.
    One commenter recommended including language regarding the 
timeframe for a contracting officer to review all resubmitted reports. 
SBA notes that the same timeframes apply that apply to the submission 
of the original report.
    The proposed rule amended redesignated Sec.  125.3(d)(3) (former 
Sec.  125.3(d)) to clarify that a contracting officer must evaluate 
whether a prime contractor made a good faith effort to comply with its 
small business subcontracting plan. The proposed rule maintained the 
current definition of when a prime contractor has made a good faith 
effort to comply with its small business subcontracting plan 
(redesignated Sec.  125.3(d)(3)(i)-(iii), former Sec.  125.3(d)(1)-
(3)).
    One commenter suggested that prime contractors that have not met 
subcontracting plan goals should be prohibited from receiving an option 
award until the prime contractor can show compliance. SBA disagrees. 
This could result in the government being deprived of vital goods or 
services and would severely hamper mission effectiveness.
    Several commenters requested clarification of the actions 
contracting officers could take in response to a contractor's failure 
to meet its subcontracting goals. One commenter recommended that the 
government instruct contracting officers that compliance with a 
subcontract plan constitutes a material element of contract 
performance, with instruction to issue show cause notices and default 
terminations to prime contractors who fail to comply with 
subcontracting plans. SBA notes that the statute and the FAR provide 
that a subcontracting plan is a material part of a contract and provide 
for the possibility of liquidated damages, as well as the other actions 
noted by the commenter. However, these actions cannot be required by 
rule in all cases.
    The proposed rule added new Sec.  125.3(d)(4), which provides that 
the contracting officer must evaluate the prime contractor's written 
explanation concerning its failure to use a small business concern in 
the performance of a contract when that small business concern was used 
to prepare the bid or proposal.
    One commenter recommended requiring the contracting officer to 
document a justification for awarding to a prime contractor with a 
history of not meeting subcontracting plan goals. SBA notes that 
contracting officers are required to consider subcontracting plan past 
performance in negotiated acquisitions. Further, SBA's regulations 
permit contracting officers to use other subcontracting-related 
evaluation factors.
    SBA received significant negative comment on proposed Sec.  
125.3(d)(6), which provided that the contracting officer must consider 
whether to require a prime contractor to enter into a funds control 
agreement with a neutral third party if the prime contractor fails to 
pay subcontractors in a timely manner or fails to pay the agreed upon 
contractual price without justification. Although requested, SBA did 
not receive any comments explaining how this process should work or has 
worked in practice. Consequently, SBA has decided not to implement this 
provision in this final rule.
    Proposed Sec.  125.3(d)(7) required the contracting officer to 
record the identity of a prime contractor with a history of unjustified 
untimely payments to subcontractors in the Federal Awardee Performance 
and Integrity Information System (FAPIIS) or any successor system. This 
requirement is statutorily mandated. SBA received several comments 
supporting proposed Sec.  125.3(d)(7) (changed to Sec.  125.3(d)(6) in 
this final rule) but requesting that it go further in punishing non-
compliant prime contractors. One commenter recommended a repository of 
names of prime contractors who have treated subcontractors poorly. SBA 
notes that the statutory requirement is FAPIIS.
    One commenter asked whether these rules would override or interfere 
with already existing regulations concerning payment of subcontractors 
in the construction industry. These rules are in addition to, and do 
not supersede, other laws and regulations that apply to construction 
contracts, such as the requirement that the prime contractor certify in 
an invoice that all subcontractors have been paid or will be paid after 
payment. The commenter also asked whether information entered into 
FAPIIS concerning a prime contractor that has a history of unjustified 
late or reduced payment of subcontractors would be available to the 
public. That question is beyond the scope of this rule and SBA's 
knowledge. The commenter should inquire with GSA, the government agency 
responsible for FAPIIS.
    The proposed rule added Sec.  125.3(d)(8), providing that the 
contracting officer must require prime contractors to update their 
subcontracting plans whenever an option is exercised, as currently 
required by FAR 19.705-2(e). SBA received five comments expressing 
concerns that the additional reporting requirements at the time of 
option exercise would be burdensome.
    One commenter argued that this requirement would be an 
administrative redundancy. The commenter argued that some agencies 
already call out for small business subcontracting plans to have 
subcontracting goals for individual option years. The commenter argued 
that there may be a lack of foreseeability when a contractor submits a 
proposal that a subcontracting plan may be required. The commenter 
argued that if a prime contractor is awarded an option continuing 
existing services, the prime contractor will already have 
subcontractors in place (mobilized and executing the work), which may 
not be small business concerns. The commenter argued that replacing the 
existing subcontractors would result in additional costs and 
operational inefficiency. SBA disagrees. The existing requirement in 
the FAR, which we are simply adding to SBA's regulations, requires the 
plan to be updated as necessary. All of the factors that the commenter 
articulates can be considered when deciding whether to change any of 
the percentages for an option period.
    One commenter argued that if existing work is won through a 
recompete, then the new contract should have precedence over the old 
contract terms, subcontracting plan, personnel staffing, and other 
contract-related issues. SBA notes that new contracts should have new 
subcontracting plans, based on the subcontracting opportunities for the 
new contract.
    One commenter argued that pursuant to FAR 19.704(c), a 
subcontracting plan is supposed to contain separate goals for the base 
contract and each option individually. The commenter argued that any 
updated subcontracting goals can be by a confirming correspondence and 
subsequent reporting. In the final rule, SBA has amended this provision 
(now contained in Sec.  125.3(d)(7)) to state that the contracting 
officer has the discretion to require an updated subcontracting plan.
    One commenter recommended that updates for options and 
modifications be considered as a new subcontracting requirement from 
the date of the

[[Page 42400]]

modification or the date the option is invoked, requiring a 
subcontracting plan only for the new portion of the work and only if 
that new work, standing alone, exceeds the applicable threshold. The 
commenter argued that this approach is consistent with FAR 
19.702(a)(1). SBA has added a new Sec.  125.3(d)(10) to clarify that 
the rule will apply to the subcontracting opportunities from that point 
forward and will not have retroactive effect. The ISR and SF-294 
require that achievements be cumulative from the inception of the 
contract, and the accompanying instructions require that goals be 
rolled into the report as options are exercised. For example, if the 
base contract contained a small business goal of $10 million and each 
option contained a small business goal of $2 million, the small 
business goal for the entire contract in option year one would be $12 
million. This ensures that the contracting officer is doing an 
``apples-to-apples'' comparison when he compares achievements against 
goals.
    SBA received six comments on proposed Sec.  125.3(d)(9) (now Sec.  
125.3(d)(8)), under which the contracting officer must require a 
subcontracting plan if a modification causes the overall value of a 
contract to exceed the subcontracting plan threshold. As currently 
written, the FAR only requires a subcontracting plan if the value of 
the modification exceeds the subcontracting threshold. Commenters 
expressed concern about having to add a subcontracting plan if a 
modification to the contract raises the value above the subcontract 
threshold since this eventuality might occur when a substantial portion 
of the work has already been completed, and commitments have already 
been made on an ongoing basis. In response, SBA notes that plans are 
only required to the extent that subcontracting opportunities exist.
    SBA received several comments on proposed Sec.  125.3(d)(10) (now 
Sec.  125.3(d)(9)), which allows a contracting officer to require a 
subcontracting plan if a prime contractor's size status changes from 
small to other than small as a result of a size recertification. Some 
commenters recommended requiring the contracting officer to require a 
subcontracting plan rather than making it discretionary. SBA disagrees. 
This is not required by statute. Further, it may be impractical to 
require a subcontracting plan at or near the end of performance, or 
after all subcontracting opportunities have passed. Thus, SBA maintains 
that it should be left to the discretion of the contracting officer.

Compliance Reviews

    SBA received several comments addressing Sec.  125.3(f) in general. 
One commenter recommended more third-party monitoring of prime 
contractors, with verification by affected subcontractors. SBA does not 
concur. Compliance with these provisions will be evaluated as part of 
the compliance reviews conducted by SBA, DCMA, Office of Naval 
Research, DLA Energy, and possibly other government agencies in the 
future; there are no other resources available. Another commenter 
recommended that contracting officers be required to respond to 
compliance review audits. SBA notes that a copy is sent to the 
contracting officer. Another commenter recommended that SBA perform 
more compliance reviews. SBA conducts as many as possible consistent 
with its resources and other priorities. One commenter argued that the 
compliance review requirements are potentially burdensome for prime 
contractors and difficult to obtain from other than small 
subcontractors. SBA disagrees. These requirements already exist. 
Without monitoring or spot checking, there is no incentive to properly 
administer subcontracting plans or to ensure that prime contractors are 
meeting their goals.
    SBA received one comment on proposed Sec.  125.3(f)(2)(i), which 
provided that a compliance review must include an analysis as to 
whether the prime contractor has assigned the correct NAICS code and 
corresponding size standard to the subcontract, and whether the 
subcontractor qualifies under the size or socioeconomic status claimed. 
The commenter recommended further clarification of proposed Sec.  
125.3(f)(2)(i). SBA notes that every subcontract must be assigned a 
NAICS code and size standard; otherwise there is no basis for a claim 
that a subcontract went to a small business. Thus, a compliance review 
must verify that that prime contractors or subcontractors are not 
improperly claiming to be small and using inappropriate NAICS codes and 
size standards.
    SBA received several comments on proposed Sec.  125.3(f)(2)(iii), 
which provided that a compliance review must include an analysis of 
whether the prime contractor is monitoring its other than small 
subcontractors with respect to their subcontracting plans, determining 
achievement of their subcontracting goals, and reviewing their ISRs or 
other reports.
    Some commenters requested additional guidelines for monitoring. SBA 
notes that the prime contractor is responsible for making sure that the 
subcontracting plan requirements flow down to subcontractors and for 
monitoring subcontractor performance. Some commenters recommended 
clarifying the definition of the term ``monitor.'' One commenter argued 
that prime contractors do not have the same abilities to do so with 
respect to subcontractors as the government does with respect to prime 
contractors. Whether or not prime contractors have the same ability to 
monitor performance of subcontractors as the government does for 
primes, the government has no ability to monitor a prime contractor's 
subcontractors. As such, this function must be the responsibility of 
prime contractors. SBA notes that this includes monitoring whether the 
relevant clauses are being included in subcontracts and whether goals 
are being met.
    One commenter that opposed proposed Sec.  125.3(f)(2)(iii) argued 
that prime contractors never before had to monitor other than small 
subcontractors' subcontracting plan compliance. This is incorrect. The 
FAR currently requires prime contractors to ensure that subcontractors 
issue subcontracting plans and issue reports.

Subcontracting Consideration in Source Selection

    The proposed rule added new Sec.  125.3(g)(1), under which SBA 
proposed to give agencies the discretion to consider subcontracting in 
source selection.
    One commenter recommended that the FAR be amended to include 
subcontracting consideration in source selection. SBA notes that the 
rule will be implemented in the FAR after SBA's regulations are 
finalized.
    SBA received six comments on proposed Sec.  125.3(g)(1) requesting 
the inclusion of past prime contractor performance as an evaluation 
factor in source selection. SBA has agreed to amend its rule to make it 
clear that in addition to considering subcontracting plan compliance 
under a past performance factor, a contracting officer can also create 
an evaluation factor or subfactor specifically for purposes of 
considering subcontracting plan past performance.
    One commenter recommended clarification of the circumstances under 
which the evaluation factor would apply. SBA notes that it applies only 
in full and open competition with value above the threshold, and it 
will apply at the discretion of the contracting officer.
    One commenter recommended that government contractor past 
performance databases should be required to quantify successful 
compliance with

[[Page 42401]]

subcontracting plans. The commenter argued that this will assist source 
selection boards in determining the credibility of a concern's proposed 
subcontracting plan and past performance on a per-contract basis. SBA 
notes that like other aspects of the solicitation, the contracting 
officer will establish the parameters of the evaluation factor and what 
information should be submitted.
    One commenter argued that this particular provision in the proposed 
rule will largely benefit small businesses that pursue contracts as 
Federal prime contractors and does not benefit (and in fact may have a 
detrimental impact on) small businesses that pursue work as Federal 
subcontractors. The commenter recommended an equivalent evaluation to 
assure that the awarded prime contractor--large or small--is providing 
maximum practicable opportunity to small business concerns at all 
levels of subcontracting. SBA disagrees. It is unclear how this 
proposal will harm small businesses. This proposal establishes an 
evaluation factor for small business subcontracting and ensures that a 
small business competing for a larger contract in full and open 
competition is not at a disadvantage, since small businesses are not 
required to have small business subcontracting plans. Small businesses 
will benefit either way--at the prime level or at the subcontracting 
level, depending on who wins the competition.
    In response to several comments, SBA has redesignated proposed 
Sec.  125.3(g)(2) (former Sec.  125.3(g)) as Sec.  125.3(g)(3) in this 
final rule and added a new paragraph (g)(2), providing that a 
contracting officer may include an evaluation factor in a solicitation 
which evaluates an other than small business concern's commitment to 
pay small business subcontractors within a specific number of days 
after receipt of payment from the Government.

Multi-agency, Federal Supply Schedule, Multiple Award Schedule and 
Governmentwide Acquisition IDIQ Contracts

    The proposed rule added new Sec.  125.3(h), which addresses 
subcontracting plans in connection with multiple award Multi-agency, 
Federal Supply Schedule, Multiple Award Schedule and Governmentwide 
acquisition indefinite delivery, indefinite quantity (IDIQ) contracts. 
Under proposed Sec.  125.3(h)(1), SBA proposed that the contractor will 
report small business subcontracting achievement for individual orders 
to the contracting officer for the ordering or funding agency on an 
annual basis. SBA requested comments on whether the reporting 
requirement should apply to all orders or only apply to orders above a 
certain threshold.
    SBA received eleven comments on proposed Sec.  125.3(h)(1) 
expressing concerns that the additional reporting requirements for 
individual orders would be overly burdensome. Several commenters 
suggested creating a threshold level that would trigger the order-by-
order reporting requirement. Some commenters recommended requiring 
reporting at the contract level or individual order level, but not 
both. Some commenters argued that the requirement should apply only to 
individual orders that are above a certain threshold. One commenter 
argued that on IDIQ contracts, a contractor may not know how many or 
which subcontractors are needed until the government issues task 
orders. Some commenters expressed concern about the additional burden 
imposed on large businesses or additional costs that might result from 
the requirement to report task-order subcontracting. Some commenters 
argued that contracting officers are already overburdened and that they 
should be spending time reviewing contracts rather than reports. One 
commenter who opposed the added reporting requirement argued that it is 
not required by statute. One commenter who supported the requirement 
recommended that all orders be reported with no minimum threshold to 
ensure maximum transparency.
    Based on the comments received, SBA has decided that as a matter of 
policy the funding agency of an order should receive credit towards its 
small business subcontracting goals for orders awarded under another 
agency's contract. This policy is consistent with SBA's long-standing 
policy with respect to prime contracts, where the funding agency 
receives the credit towards its prime contracting goals for orders 
awarded under another agency's contract. The policy promotes 
transparency and accountability for prime contractors, and is 
consistent with the Small Business Jobs Act provisions concerning 
compliance, oversight and review of subcontracting plans. The 
requirement to report to the ordering agency on an annual basis will 
not be overly burdensome, as the new provision only applies where the 
funding agency and the contracting agency are not the same agency, and 
prime contractors already must report this information to the 
contracting agency. The contracting agency will still be responsible 
for the subcontracting plan for the underlying IDIQ contract. SBA 
recognizes that electronic reporting systems and the FAR will have to 
be revised before 125.3(i) can be implemented or utilized by ordering 
agencies or prime contractors. To ensure data integrity, SBA does make 
clear in this final rule that only one procuring agency may receive 
credit towards it subcontracting goals for a particular contracting 
action.
    One commenter requested clarification regarding the applicability 
of proposed Sec.  125.3(h)(1) to Blanket Purchase Agreements (BPAs) and 
Basic Ordering Agreements (BOAs). In the final rule, SBA has clarified 
that the contracting officer may establish subcontracting plans for 
BPAs and BOAs as well as orders. However, the annual reporting 
requirement for subcontracting credit purposes applies to orders issued 
under the BPA or BOA.

Compliance With Executive Orders 12866, 13563, 12988, 13132, the 
Paperwork Reduction Act (44 U.S.C. Ch. 35), and the Regulatory 
Flexibility Act (5. U.S.C. 601-612)

Executive Order 12866

    The Office of Management and Budget (OMB) has determined that this 
final rule is a significant regulatory action for purposes of Executive 
Order 12866. Accordingly, the next section contains SBA's Regulatory 
Impact Analysis. This is not a major rule, however, under the 
Congressional Review Act, 5 U.S.C. 801, et seq.

Regulatory Impact Analysis

    1. Is there a need for the regulatory action? The regulations 
implement Sections 1321, 1322 and 1334 of the Small Business Jobs Act 
of 2010, Public Law 111-240, 124 Stat. 2504, September 27, 2010 (Jobs 
Act); 15 U.S.C. 637(d)(6)(G), (d)(12). Section 1321 of the Jobs Act 
requires the Administrator to establish a policy on subcontracting 
compliance within one year of enactment.
    2. What are the potential benefits and costs of this regulatory 
action? The regulations will benefit small business subcontractors by 
encouraging large business prime contractors to pay small business 
subcontractors in a timely manner and the agreed upon contractual 
price. The regulations will benefit small business subcontractors by 
encouraging large business contractors to utilize small business 
concerns in contract performance where the prime contractor used the 
small business concern to prepare the bid or proposal. The regulations 
will benefit small business subcontractors by clarifying the 
responsibilities of the contracting officer in monitoring small 
business

[[Page 42402]]

subcontracting plan compliance. The regulations will benefit small 
business subcontractors by specifically authorizing procuring agencies 
to consider proposed small business subcontracting when evaluating 
offers.
    The regulations will benefit small business subcontractors by 
requiring large business concerns to report subcontracting results on 
an order-by-order basis, thereby enabling the funding agency to more 
closely monitor small business subcontracting in connection with the 
order and enabling the funding agency to receive credit towards its 
small business subcontracting goals. The regulation will benefit the 
contracting agency because the agency will not have to establish or 
monitor subcontracting plans for the contract. The rule benefits small 
business subcontractors by providing transparency with respect to small 
subcontracting on an order-by-order basis, thereby allowing the funding 
agency to monitor performance and establish subcontracting goals for 
particular orders.
    eSRS will have to be altered to allow large business prime 
contractors to report subcontracting results on an order-by-order 
basis. Other systems may have to be altered to allow funding agencies 
to receive credit towards their small business subcontracting goals.
    Large businesses will have to report to the contracting officer in 
writing when they fail to utilize a small business concern in contract 
performance when the prime contractor utilized the small business 
concern in preparing the bid or proposal. Large businesses will have to 
report to the contracting officer in writing when they fail to pay a 
subcontractor within 90 days or when they pay a subcontractor a reduced 
price. The contracting officer will have to consider these written 
explanations when evaluating contract performance. FAPIIS will have to 
be modified to allow contracting officers to identify large business 
prime contractors with a history of unjustified untimely payments.
    3. What are the alternatives to this final rule? Many of the 
regulations set forth in this final rule are required to implement 
statutory provisions, and the Jobs Act requires promulgation of a 
policy on subcontracting compliance, a requirement that prime 
contractors notify the contracting officer when payment to a 
subcontractor is late, and a requirement that prime contractors notify 
the contracting officer when the prime contractor uses a subcontractor 
to prepare an offer but does not use the subcontractor in performance. 
The alternative to the regulation concerning orders would be to 
maintain the current environment, where subcontracting results are not 
reported on an order-by-order basis, and agencies funding orders do not 
receive credit towards their small business subcontracting goals.

Executive Order 13563

    As part of its ongoing efforts to engage stakeholders in the 
development of its regulations, SBA solicited comments and suggestions 
from procuring agencies on how to best implement the Jobs Act. SBA held 
public forums around the country to discuss implementation of the Jobs 
Act. Where feasible, SBA incorporated public input into the rule. The 
regulations concerning evaluation factors provide contracting officers 
with the discretion to utilize various methods to improve small 
business subcontracting, without requiring their use in all cases. The 
rule concerning orders will provide contracting agencies with 
transparency by providing data concerning small business subcontracting 
for particular orders. Overall, these regulations minimize the burden 
resulting from these statutory provisions. SBA amended its regulations 
to remove outmoded thresholds that have increased and remove references 
to paper based forms that have been replaced by electronic reporting 
through eSRS.
    As part of its implementation of this executive order and 
consistent with its commitment to public participation in the 
rulemaking process, SBA held public meetings in 13 locations around the 
country to discuss implementation of the Jobs Act, and received public 
input from thousands of small business owners, contracting officials 
and large business representatives. Although most of these amendments 
are new, SBA expects that public participation will help to form the 
Agency's retrospective analysis of related contracting regulations that 
are not being amended at this time.

Executive Order 12988

    For purposes of Executive Order 12988, SBA has drafted this final 
rule, to the extent practicable, in accordance with the standards set 
forth in section 3(a) and 3(b)(2) of that Order, to minimize 
litigation, eliminate ambiguity, and reduce burden. This rule has no 
preemptive or retroactive effect.

Executive Order 13132

    This rule does not have federalism implications as defined in 
Executive Order 13132. It will not have substantial direct effects on 
the States, on the relationship between the national government and the 
States, or on the distribution of power and responsibilities among the 
various layers of government, as specified in the order. As such, it 
does not warrant the preparation of a Federalism Assessment.

Paperwork Reduction Act, 44 U.S.C. Ch. 35

    For the purpose of the Paperwork Reduction Act, SBA has determined 
that this rule would impose new government-wide reporting requirements 
on large prime contractors. The Jobs Act requires such contractors to 
notify in writing contracting officers at the applicable procuring 
agency whenever a prime contractor fails to utilize a small business 
subcontractor used in preparing and submitting a bid or proposal; when 
the prime contractor pays a subcontractor a reduced price without 
justification; or when payments to a subcontractor are 90 days or more 
past due. These requirements will also be incorporated in the FAR.

Regulatory Flexibility Act, 5 U.S.C. 601-612

    SBA has determined that this final rule may have a significant 
economic impact on a substantial number of small entities within the 
meaning of the Regulatory Flexibility Act (RFA), 5 U.S.C. 601-612. 
Therefore, SBA has prepared a Regulatory Flexibility Act (RFA) analysis 
addressing the regulatory provisions.

RFA

    When preparing a Regulatory Flexibility Analysis, an agency shall 
address all of the following: a description of why the action by the 
agency is being considered; the objectives and legal basis of the rule; 
the estimated number of small entities to which the rule may apply; a 
description of the projected reporting, recordkeeping and other 
compliance requirements; identification of all Federal rules which may 
duplicate, overlap or conflict with the proposed rule; and a 
description of significant alternatives which minimize any significant 
economic impact on small entities. This RFA considers these points and 
the impact the proposed regulation concerning subcontracting may have 
on small entities.
(a) Need for, Objectives, and Legal Basis of the Rule
    The majority of the regulatory amendments are required to implement 
Sections 1321, 1322 and 1334 of the Small Business Jobs Act of 2010, 
Public Law 111-240, 124 Stat. 2504, September 27, 2010 (Jobs Act); 15 
U.S.C. 637(d)(6)(G), (d)(12). The regulations

[[Page 42403]]

that are not required by the Jobs Act are intended to help small 
business subcontractors by explicitly authorizing procuring agencies to 
consider proposed small business participation when evaluating offers 
from other than small business concerns. The regulations allow 
contracting officers to establish subcontracting plans and require 
other than small prime contractors to report data on small business 
subcontracting in connection with certain orders under existing 
contracts.
(b) Estimate of the Number of Small Entities To Which the Rule May 
Apply
    The RFA directs agencies to provide a description of and, where 
feasible, an estimate of the number of entities that may be affected by 
the rules. The RFA defines ``small entity'' to include ``small 
businesses,'' ``small organizations,'' and ``small governmental 
jurisdictions.'' SBA's programs generally do not apply to ``small 
organizations'' or ``small governmental jurisdictions'' because they 
are non-profit or governmental entities and do not generally qualify as 
``business concerns'' within the meaning of SBA's regulations. SBA's 
programs generally apply only to for-profit business concerns. However, 
to the extent this rule will impact small organizations or small 
governmental jurisdictions that receive prime contracts from the 
Federal government with values that exceed the threshold, the numbers 
would be minimal, and the major provisions would only apply if the 
entity fails to pay or utilize small business subcontractors.
    The final rule will not directly negatively affect any small 
business concern, because it applies to other than small concerns and 
contracting officers. The final rule will indirectly benefit small 
business concerns by requiring other than small prime contractors to 
report to the contracting officer when the prime contractor has failed 
to utilize a small business subcontractor used in preparing the bid or 
proposal. The final rule will also indirectly benefit small business 
concerns, by requiring large business prime contractors to report to 
the contracting officer when the prime contractor has failed to pay a 
small business subcontractor in a timely manner or pays a subcontractor 
a reduced rate without justification.
    There are approximately 348,000 concerns listed as small business 
concerns in the Dynamic Small Business Search (DSBS) database. We do 
not know how many of these concerns participate in small business 
subcontracting. Firms do not need to register in the DSBS database to 
participate in subcontracting. The DSBS database is primarily used for 
prime contracting purposes. Thus, the number of firms participating in 
subcontracting may be greater than or lower than the number of firms 
registered in the DSBS database.
(c) Projected Reporting, Recordkeeping and Other Compliance 
Requirements
    To the extent the rule imposes new information collection, 
recordkeeping or compliance requirements, these requirements are 
imposed on other than small business concerns, not on small business 
concerns.
(d) Federal Rules Which May Duplicate, Overlap or Conflict With the 
Proposed Rule
    SBA is not aware of any rules which duplicate, overlap or conflict 
with the final rule. The final rule primarily implements statutory 
provisions.
(e) Significant Alternatives to the Rule Which Could Minimize Impact on 
Small Entities
    Section 1321 of the Jobs Act requires SBA to promulgate regulations 
implementing it. Section 1321 of the Jobs Act and its implementing 
regulations primarily apply to contracting officers. Sections 1322 and 
1334 of the Jobs Act amend portions of the Small Business Act, which 
SBA is responsible for administering and implementing through its 
regulations. The regulations implementing Sections 1322 and 1334 of the 
Jobs Act primarily apply to other than small concerns. As discussed 
above, the rule indirectly benefits small business concerns, without 
requiring small business concerns to report, keep records or take other 
compliance actions.

List of Subjects

13 CFR Part 121

    Government procurement, Government property, Grant programs--
business, Individuals with disabilities, Loan programs--business, Small 
businesses.

13 CFR Part 125

    Government Contracting Programs; Small Business Subcontracting 
Program.
    For the reasons set forth above, SBA amends parts 121 and 125 of 
title 13 of the Code of Federal Regulations as follows:

PART 121--SMALL BUSINESS SIZE REGULATIONS

0
1. The authority citation for 13 CFR part 121 continues to read as 
follows:

    Authority: 15 U.S.C. 632, 634(b)(6), 636(b), 662, and 694a(9).


0
2. Amend Sec.  121.404(g)(3)(ii) by adding the following sentence at 
the end of the paragraph:


121.404  When does SBA determine the size status of a business concern?

* * * * *
    (g) * * *
    (3) * * *
    (ii) * * * However, a contracting officer may require a 
subcontracting plan if a prime contractor's size status changes from 
small to other than small as a result of a size recertification.
* * * * *

0
3. Amend Sec.  121.411 as follows:
0
a. Revise paragraph (a); and
0
b. Redesignate paragraphs (b) and (c) as paragraphs (c) and (d) and add 
new paragraph (b).


121.411  What are the size procedures for SBA's Section 8(d) 
Subcontracting Program?

    (a) Prime contractors may rely on the information contained in the 
System for Award Management (SAM) (or any successor system or 
equivalent database maintained or sanctioned by SBA) as an accurate 
representation of a concern's size and ownership characteristics for 
purposes of maintaining a small business source list.
    (b) Even if a concern is on a small business source list, it must 
still qualify and self-certify as a small business at the time it 
submits its offer as a section 8(d) subcontractor. Prime contractors 
may accept a subcontractor's electronic self-certifications as to size, 
if the subcontract contains a clause which provides that the 
subcontractor verifies by submission of the offer that the size or 
socioeconomic representations and certifications made in SAM (or any 
successor system) are current, accurate and complete as of the date of 
the offer for the subcontract. Prime contractors or subcontractors may 
not require the use of SAM (or any successor system) for purposes of 
representing size or socioeconomic status in connection with a 
subcontract.
* * * * *

PART 125--GOVERNMENT CONTRACTING PROGRAMS

0
4. The authority citation for part 125 is revised to read as follows:

    Authority:  15 U.S.C. 632(p), (q); 634(b)(6); 637; 644 and 
657(f); Pub. L. 111-240, Sec.  1321.


0
5. Amend Sec.  125.3 as follows:
0
a. Revise paragraph (a);
0
c. Revise paragraphs (b)(1) and (b)(3)(ii);
0
d. Revise paragraph (c)(1) introductory text;
0
e. Revise paragraphs (c)(1)(iii)-(vi);

[[Page 42404]]

0
f. Add new paragraphs (c)(1)(vii)-(ix);
0
g. Redesignate paragraph (c)(3) as (c)(7) and add new paragraphs 
(c)(3), (c)(4), (c)(5) and (c)(6);
0
h. Revise paragraph (d);
0
i. Revise paragraph (e)(3);
0
j. Revise paragraphs (f)(1) and (f)(2);
0
k. Revise paragraph (g); and
0
l. Add new paragraph (h).


Sec.  125.3  Subcontracting assistance.

    (a) General. The purpose of the subcontracting assistance program 
is to provide the maximum practicable subcontracting opportunities for 
small business concerns, including small business concerns owned and 
controlled by veterans, small business concerns owned and controlled by 
service-disabled veterans, certified HUBZone small business concerns, 
certified small business concerns owned and controlled by socially and 
economically disadvantaged individuals, and small business concerns 
owned and controlled by women. The subcontracting assistance program 
implements section 8(d) of the Small Business Act, which includes the 
requirement that, unless otherwise exempt, other than small business 
concerns awarded contracts that offer subcontracting possibilities by 
the Federal Government in excess of $650,000, or in excess of 
$1,500,000 for construction of a public facility, must submit a 
subcontracting plan to the appropriate contracting agency. The Federal 
Acquisition Regulation sets forth the requirements for subcontracting 
plans in 48 CFR 19.7, and the clause at 48 CFR 52.219-9.
    (1) Subcontract under this section means any agreement (other than 
one involving an employer-employee relationship) entered into by a 
Government prime contractor or subcontractor calling for supplies and/
or services required for performance of the contract or subcontract 
(including modifications).
    (i) Subcontract award data reported by prime contractors and 
subcontractors shall be limited to awards made to their immediate next-
tier subcontractors. Credit cannot be taken for awards made beyond the 
immediate next-tier, except as follows:
    (A) The contractor or subcontractor has been designated to receive 
a small business or small disadvantaged business credit from an ANC or 
Indian Tribe; or
    (B) Purchases from a corporation, company, or subdivision that is 
an affiliate of the prime contractor or subcontractor are not included 
in the subcontracting base. Subcontracts by first-tier affiliates shall 
be treated as subcontracts of the prime.
    (ii) Only subcontracts involving performance in the United States 
or its outlying areas should be included, with the exception of 
subcontracts under a contract awarded by the U.S. Department of State 
or any other agency that has statutory or regulatory authority to 
require subcontracting plans for subcontracts performed outside the 
United States and its outlying areas and subcontracts for foreign 
military sales unless waived in accordance with agency regulations.
    (iii) The following should not be included in the subcontracting 
base: internally generated costs such as salaries and wages; employee 
insurance; other employee benefits; payments for petty cash; 
depreciation; interest; income taxes; property taxes; lease payments; 
bank fees; fines, claims, and dues; Original Equipment Manufacturer 
relationships during warranty periods (negotiated up front with 
product); utilities such as electricity, water, sewer, and other 
services purchased from a municipality or solely authorized by the 
municipality to provide those services in a particular geographical 
region; and philanthropic contributions. Utility companies may be 
eligible for additional exclusions unique to their industry, which may 
be approved by the contracting officer on a case-by-case basis. 
Exclusions from the subcontracting base include but are not limited to 
those listed above.
    (2) Subcontracting goals required under paragraph (c) of this 
section must be established in terms of the total dollars subcontracted 
and as a percentage of total subcontract dollars. However, a 
contracting officer may establish additional goals as a percentage of 
total contract dollars.
    (3) A prime contractor has a history of unjustified untimely or 
reduced payments to subcontractors if the prime contractor has reported 
itself to a contracting officer in accordance with paragraph (c)(5) of 
this section on three occasions within a 12 month period.
    (b) Responsibilities of prime contractors. (1) Prime contractors 
(including small business prime contractors) selected to receive a 
Federal contract that exceeds the simplified acquisition threshold, 
that will not be performed entirely outside of any state, territory, or 
possession of the United States, the District of Columbia, or the 
Commonwealth of Puerto Rico, and that is not for services which are 
personal in nature, are responsible for ensuring that small business 
concerns have the maximum practicable opportunity to participate in the 
performance of the contract, including subcontracts for subsystems, 
assemblies, components, and related services for major systems, 
consistent with the efficient performance of the contract.
* * * * *
    (3) * * *
    (ii) Conducting market research to identify small business 
subcontractors and suppliers through all reasonable means, such as 
performing online searches via the System for Award Management (SAM) 
(or any successor system), posting Notices of Sources Sought and/or 
Requests for Proposal on SBA's SUB-Net, participating in Business 
Matchmaking events, and attending pre-bid conferences;
* * * * *
    (c) Additional responsibilities of large prime contractors. (1) In 
addition to the responsibilities provided in paragraph (b) of this 
section, a prime contractor selected for award of a contract or 
contract modification that exceeds $650,000, or $1,500,000 in the case 
of construction of a public facility, is responsible for the following:
* * * * *
    (iii) The contractor may not prohibit a subcontractor from 
discussing any material matter pertaining to payment or utilization 
with the contracting officer;
    (iv) When developing an individual subcontracting plan (also called 
individual contract plan), the contractor must decide whether to 
include indirect costs in its subcontracting goals. If indirect costs 
are included in the goals, these costs must be included in the 
Individual Subcontract Report (ISR) in www.esrs.gov (eSRS) or 
Subcontract Reports for Individual Contracts (the paper SF-294, if 
authorized). If indirect costs are excluded from the goals, these costs 
must be excluded from the ISRs (or SF-294 if authorized); however, 
these costs must be included on a prorated basis in the Summary 
Subcontracting Report (SSR) in the eSRS system. A contractor authorized 
to use a commercial subcontracting plan must include all indirect costs 
in its SSR;
    (v) The contractor must assign each subcontract the NAICS code and 
corresponding size standard that best describes the principal purpose 
of the subcontract (see Sec.  121.410). The prime contractor may rely 
on subcontractor self-certifications made in SAM (or any successor 
system), if the subcontract contains a clause which provides that the 
subcontractor verifies by submission of the offer that the size or 
socioeconomic representations and certifications in SAM (or any 
successor system) are current, accurate and

[[Page 42405]]

complete as of the date of the offer for the subcontract. A prime 
contractor or subcontractor may not require the use of SAM (or any 
successor system) for purposes of representing size or socioeconomic 
status in connection with a subcontract;
    (vi) The contractor must submit timely and accurate ISRs and SSRs 
in eSRS (or any successor system), or if information for a particular 
procurement cannot be entered into eSRS (or any successor system), 
submit a timely SF-294, Subcontracting Report for Individual Contract. 
When a report is rejected by the contracting officer, the contractor 
must make the necessary corrections and resubmit the report within 30 
days of receiving the notice of rejection;
    (vii) The contractor must cooperate in the reviews of 
subcontracting plan compliance, including providing requested 
information and supporting documentation reflecting actual achievements 
and good-faith efforts to meet the goals and other elements in the 
subcontracting plan;
    (viii) The contractor must provide pre-award written notification 
to unsuccessful small business offerors on all subcontracts over 
$150,000 for which a small business concern received a preference. The 
written notification must include the name and location of the apparent 
successful offeror and if the successful offeror is a small business, 
veteran-owned small business, service-disabled veteran-owned small 
business, HUBZone small business, small disadvantaged business, or 
women-owned small business; and
    (ix) As a best practice, the contractor may provide the pre-award 
written notification cited in paragraph (c)(1)(viii) of this section to 
unsuccessful and small business offerors on subcontracts at or below 
$150,000 and should do so whenever practical.
* * * * *
    (3) An offeror must 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 the small business concerns that it used in preparing the bid or 
proposal, in the same scope, amount, and quality used in preparing and 
submitting the bid or proposal. Merely responding to a request for a 
quote does not constitute use in preparing a bid or offer. An offeror 
used a small business concern in preparing the bid or proposal if:
    (i) The offeror references the small business concern as a 
subcontractor in the bid or proposal or associated small business 
subcontracting plan;
    (ii) The offeror has a subcontract or agreement in principle to 
subcontract with the small business concern to perform a portion of the 
specific contract; or
    (iii) The small business concern drafted any portion of the bid or 
proposal or the offeror used the small business concern's pricing or 
cost information or technical expertise in preparing the bid or 
proposal, where there is written evidence (including email) of an 
intent or understanding that the small business concern will be awarded 
a subcontract for the related work if the offeror is awarded the 
contract.
    (4) If a prime contractor fails to acquire articles, equipment, 
supplies, services or materials or obtain the performance of 
construction work as described in (c)(3), the prime contractor must 
provide the contracting officer with a written explanation. This 
written explanation must be submitted to the contracting officer prior 
to the submission of the invoice for final payment and contract close-
out.
    (5) A prime contractor shall notify the contracting officer in 
writing if upon completion of the responsibilities of the small 
business subcontractor (i.e., the subcontractor is entitled to payment 
under the terms of the subcontract), the prime contractor pays a 
reduced price to a small business subcontractor for goods and services 
provided for the contract or the payment to a small business 
subcontractor is more than 90 days past due under the terms of the 
subcontract for goods and services provided for the contract and for 
which the Federal agency has paid the prime contractor. ``Reduced 
price'' means a price that is less than the price agreed upon in a 
written, binding contractual document. The prime contractor shall 
include the reason for the reduction in payment to or failure to pay a 
small business subcontractor in any written notice.
    (6) If at the conclusion of a contract the prime contractor did not 
meet all of the small business subcontracting goals in the 
subcontracting plan, the prime contractor shall provide the contracting 
officer with a written explanation as to why it did not meet the goals 
of the plan so that the contracting officer can evaluate whether the 
prime contractor acted in good faith as set forth in paragraph (d)(3) 
of this section.
    (d) Contracting officer responsibilities. The contracting officer 
(or administrative contracting officer if specifically delegated in 
writing to accomplish this task) is responsible for evaluating the 
prime contractor's compliance with its subcontracting plan, including:
    (1) Ensuring that all contractors submit their subcontracting 
reports into the eSRS (or any successor system) or, if applicable, the 
SF-294, Subcontracting Report for Individual Contracts, within 30 days 
after the report ending date (e.g., by October 30th for the fiscal year 
ended September 30th).
    (2) Reviewing all ISRs, and where applicable, SSRs, in eSRS (or any 
successor system) within 60 days of the report ending date (e.g., by 
November 30th for a report submitted for the fiscal year ended 
September 30th) and either accepting or rejecting the reports in 
accordance with the Federal Acquisition Regulation (FAR) provisions set 
forth in 48 CFR subpart 19.7, 52.219-9, and the eSRS instructions 
(www.esrs.gov). The authority to acknowledge or reject SSRs for 
commercial plans resides with the contracting officer who approved the 
commercial plan. If a report is rejected, the contracting officer must 
provide an explanation for the rejection to allow prime contractors the 
opportunity to respond specifically to perceived deficiencies.
    (3) Evaluating whether the prime contractor made a good faith 
effort to comply with its small business subcontracting plan. Evidence 
that a large business prime contractor has made a good faith effort to 
comply with its subcontracting plan or other subcontracting 
responsibilities includes supporting documentation that:
    (i) The contractor performed one or more of the actions described 
in paragraph (b) of this section, as appropriate for the procurement;
    (ii) Although the contractor may have failed to achieve its goal in 
one socioeconomic category, it over-achieved its goal by an equal or 
greater amount in one or more of the other categories; or
    (iii) The contractor fulfilled all of the requirements of its 
subcontracting plan.
    (4) Evaluating the prime contractor's written explanation 
concerning the prime contractor's failure to use a small business 
concern in performance in the same scope, amount, and quality used in 
preparing and submitting the bid or proposal, and considering that 
information when rating the contractor for past performance purposes.
    (5) Evaluating the prime contractor's written explanation 
concerning its payment of a reduced price to a small business 
subcontractor for goods and services upon completion of the 
responsibilities of the subcontractor or its payment to a subcontractor 
more than 90 days past due under the terms

[[Page 42406]]

of the subcontract for goods and services provided for the contract and 
for which the Federal agency has paid the prime contractor, and 
considering that information when rating the contractor for past 
performance purposes.
    (6) Evaluating whether the prime contractor has a history of 
unjustified untimely or reduced payments to subcontractors, and if so, 
recording the identity of the prime contractor in the Federal Awardee 
Performance and Integrity Information System (FAPIIS), or any successor 
database.
    (7) In his or her discretion, requiring the prime contractor (other 
than a prime contractor with a commercial plan) to update its 
subcontracting plan when an option is exercised.
    (8) Requiring the prime contractor (other than a contractor with a 
commercial plan) to submit a subcontracting plan if the value of a 
modification causes the value of the contract to exceed the 
subcontracting plan threshold and to the extent that subcontracting 
opportunities exist.
    (9) In his or her discretion, requiring a subcontracting plan if a 
prime contractor's size status changes from small to other than small 
as a result of a size recertification.
    (10) Where a subcontracting plan is amended in connection with an 
option, or added as a result of a recertification or modification, the 
changes to any existing plan are for prospective subcontracting 
opportunities and do not apply retroactively. However, since 
achievements must be reported on the ISR (or the SF-294, if applicable) 
on a cumulative basis from the inception of the contract, the 
contractor's achievements prior to the modification or option will be 
factored into its overall achievement on the contract from inception.
    (e) * * *
    (3) Instructing large prime contractors on identifying small 
business concerns by means of SAM (or any successor system), SUB-Net, 
Business Matchmaking events, and other resources and tools;
* * * * *
    (f) Compliance reviews. (1) A prime contractor's performance under 
its subcontracting plan is evaluated by means of on-site compliance 
reviews and follow-up reviews. A compliance review is a surveillance 
review that determines a contractor's achievements in meeting the goals 
and other elements in its subcontracting plan for both open contracts 
and contracts completed during the previous twelve months. A follow-up 
review is done after a compliance review, generally within six to eight 
months, to determine if the contractor has implemented SBA's 
recommendations.
    (2) All compliance reviews begin with a validation of the prime 
contractor's most recent ISR (or SF-294, if applicable) or SSR. A 
compliance review includes:
    (i) An evaluation of whether the prime contractor assigned the 
proper NAICS code and corresponding size standard to a subcontract, and 
a review of whether small business subcontractors qualify for the size 
or socioeconomic status claimed;
    (ii) Validation of the prime contractor's methodology for 
completing its subcontracting reports; and
    (iii) Consideration of whether the prime contractor is monitoring 
its other than small subcontractors with regard to their subcontracting 
plans, determining achievement of their proposed subcontracting goals, 
and reviewing their subcontractors' ISRs (or SF-294s, if applicable).
* * * * *
    (g) Subcontracting consideration in source selection. (1) A 
contracting officer may include an evaluation factor in a solicitation 
which evaluates:
    (i) An offeror's proposed approach to small business subcontracting 
participation in the subject procurement;
    (ii) The extent to which the offeror has met its small business 
subcontracting plan goals on previous covered contracts; and/or
    (iii) The extent to which the offeror timely paid its small 
business subcontractors under covered contracts.
    (2) A contracting officer may include an evaluation factor in a 
solicitation which evaluates an offeror's commitment to pay small 
business subcontractors within a specific number of days after receipt 
of payment from the Government for goods and services previously 
rendered by the small business subcontractor.
    (i) The contracting officer will comparatively evaluate the 
proposed timelines.
    (ii) Such a commitment shall become a material part of the 
contract.
    (iii) The contracting officer must consider the contractor's 
compliance with the commitment in evaluating performance, including for 
purposes of contract continuation (such as exercising options).
    (3) A small business concern submitting an offer shall receive the 
maximum score, credit or rating under an evaluation factor described in 
paragraph (g) of this section without having to submit any information 
in connection with this factor.
    (4) A contracting officer shall include a significant evaluation 
factor for the criteria described in paragraphs (g)(2)(i) and 
(g)(2)(ii) of this section in a bundled contract or order as defined in 
Sec.  125.2.
    (5) Paragraph (g) of this section may apply to solicitations for 
orders against multiple award contracts, (including a Federal Supply 
Schedule or Multiple Award Schedule contract, a Government-wide 
acquisition contract (GWAC), or a multi-agency contract (MAC)), blanket 
purchase agreements or basic ordering agreements.
    (h) Multiple award contracts. (1) Except where a prime contractor 
has a commercial plan, the contracting officer shall require a 
subcontracting plan for each multiple award indefinite delivery, 
indefinite quantity contract (including Multiple Award Schedule), where 
the estimated value of the contract exceeds the subcontracting plan 
thresholds in paragraph (a) of this section and the contract has 
subcontracting opportunities.
    (2) Contractors shall submit small business subcontracting reports 
for individual orders to the contracting agency on an annual basis.
    (3) The agency funding the order shall receive credit towards its 
small business subcontracting goals. More than one agency may not 
receive credit towards its subcontracting goals for a particular 
subcontract.
    (4) The agency funding the order may in its discretion establish 
small business subcontracting goals for individual orders, blanket 
purchase agreements or basic ordering agreements.

    Dated: June 25, 2013.
Karen G. Mills,
Administrator.
[FR Doc. 2013-16967 Filed 7-15-13; 8:45 am]
BILLING CODE 8025-01-P