SBA Proposes Revisions to the Small Business Regulations

January 7, 2019

The Small Business Administration (SBA) is proposing to amend its small business regulations to implement provisions of the 2016 and 2017 National Defense Authorization Acts (NDAAs) and the Recovery Improvements for Small Entities After Disaster Act of 2015 (RISE Act). The proposed revisions could have a significant impact on small business government contracting, including small business subcontracting plans and set-aside contracts.

The small business subcontracting plan regulations will be amended to state that a contractor’s failure to comply in good faith with the subcontracting plan requirements will be considered a material breach of the contract and will be reflected in Contractor Performance Assessment Reports (CPARS). The revised regulations provide examples of what constitutes a “lack of a good faith effort,” including a failure to:

  • Submit the required subcontracting reports
  • Pay subcontractors on time
  • Conduct market research
  • Appoint a company official to administer the plan

In addition, prime contractors with commercial subcontracting plans will be required to include indirect costs in the calculation of their goals.

Small businesses maintain that in too many cases, large business primes are not complying with the terms of their subcontracting plans. It will be interesting to see if contracting officers react to the regulatory changes by more actively monitoring subcontracting plan compliance.

The SBA is also proposing a new “disaster area” small business set-aside program. Henceforth, agencies will be able to set-aside contracts for small businesses located in a presidential-declared disaster area, when the contract will be performed in the disaster area.

Additionally, SBA is proposing changes to the prime contractor performance obligation under the Limitation on Subcontracting clause (LOC). The SBA regulations will now clearly state that contracting officers are responsible for monitoring compliance with the LOC and that contracting officer should require LOC compliance reports when compliance cannot be ascertained from the invoice. Many contracting officers thought the SBA was responsible for monitoring LOC compliance.

The SBA has already changed their version of the LOC to prohibit the prime contractor from paying more than 50% of the amount paid from the government to firms that are not similarly situated. The proposed amendments will exempt environmental remediation contracts, IT contracts that require substantial cloud computing, and contracts performed overseas from complying with the LOC.

However, the Federal Acquisition Regulation (FAR) has not yet been updated to incorporate the new SBA regulations. The LOC in the FAR currently requires that “at least 50% of the cost of contract performance incurred for personnel shall be expended for employees of the concern.” The SBA revisions are designed to benefit the small business prime contractors by:

  • Simplifying the prime/subcontractor workshare calculation
  • Providing more flexibility in how the work share may be divided
  • Allowing more small businesses to participate in a set-aside award, as the prime can count subcontracts to similarly situated firms towards meeting the prime’s performance requirement.

As the FAR has not yet been updated, the question is: When are the SBA regulations effective? For Department of Defense (DoD) contractors, that question was answered on December 3, 2018, when DoD issued a Class Deviation, which implemented the SBA version of the LOC for all set-aside contracts. Existing contracts will continue to be subject to the original LOC. For new civilian agency set-aside procurements, Aronson recommends bidders check with the contracting officer if there is any doubt which LOC requirement will apply to the contract.

Comments on the SBA proposed regulations are due February 2, 2019. For questions about the proposed revisions and how this could impact you, contact our government contracting specialists at 301.231.6200.