This update addresses recent developments and decisions involving small business issues in federal contracting. The final part of 2015 brought relevant proposed regulations from the Small Business Administration (“SBA”) and FAR Council, and decisions by SBA’s Office of Hearings and Appeals that are discussed below.
SBA Proposed Regulations
- Proposed Rule—Credit for Lower Tier Small Business Subcontracting,
80 Fed. Reg. 60300; RIN 3245-AG71
The SBA proposed amendments to the small business regulations which require that “[p]rime contractors must incorporate the subcontracting plan goals of their lower tier subcontractors in their individual subcontracting plan.” The SBA recognizes that this new requirement will create costs for the prime contractor in incorporating subcontractor business performance at lower tiers. The proposed regulations will also create costs for the government in evaluating “whether the prime contractor’s goals adequately address maximum practicable small business subcontracting opportunity at all tiers.”
While the SBA estimates that the costs will be minimal, much will depend on the practical implementation of the proposed rule. For construction contracts, the identity of many of the eventual subcontractors is likely unknown at the time the prime contractor’s subcontracting plan is negotiated with the contracting officer. If the proposed regulation requires the subcontracting plan to be amended every time there is a qualifying change at any subcontracting tier, the rule may well prove costly and time consuming. These concerns have been raised in comments to the proposed rule, so hopefully the contracting community will see a clarification in the final rule that will avoid unnecessary compliance costs.
FAR Council Proposed Regulations
- Proposed Rule—Prime Contractor Payments to Small Businesses
81 FR 3087; RIN 9000–AM98
The FAR Council proposes amending the Federal Acquisition Regulation (“FAR”) to require federal contractors to self-report if they pay a reduced price to a small business subcontractor, or if the contractor’s payment to a small business contractor is more than 90 days past due. These proposed regulations would apply to prime contracts that require small business subcontracting plans. The proposed regulations would mirror requirements already set forth in the SBA’s small business regulations that were effective in 2013. A finding of three or more unjustified reduced or untimely payments to small business contractors within a 12-month period under a single contract would constitute a history of reduced or untimely payments that is required to be included and considered in past performance evaluations.
While the FAR Council has limited discretion in drafting the proposed regulations due to the terms of the enabling statute, there are questions as to how the requirement will be enforced and what penalties will be assessed for non-compliance. Another issue is whether contracting officers will have any guidance in determining which reductions in price or late payments are justified. The proposed regulations create an uncomfortable situation where contracting officers become involved in prime-sub relationships and allow the risk of findings of unjustified reductions and late payments to be used as a threat and a weapon by underperforming subcontractors.
SBA Office Of Hearings And Appeals Decisions
- Size Appeal of Potomac River Group, LLC, SBA No. SIZ-5689 (2015)
A recent Office of Hearings and Appeals (“OHA”) decision reminds contractors that they need to be careful if they become involved in the ownership of small or disadvantaged businesses. Imprecisely drafted business entity documents can lead to affiliation-causing control issues. Specifically, as the minority owner in Potomac River found out, any supermajority voting requirements may establish control (and affiliation), regardless of whether the minority owner actually exercises the negative control.
In Potomac River, the operating agreement of the small businesses provided that a supermajority vote was required to make business decisions. OHA found that “[w]hen a minority owner has the power to block ordinary actions essential to operating the company, that owner has negative control, and that negative control mandates a finding of affiliation.” “[The minority owner] has this power under the Agreement, whether it has chosen to exercise it or not.” As a result, “[u]nder SBA’s regulations, this degree of negative control mandates a finding that [the minority owner] is affiliated with Appellant.”