What Every Large Business Should Know About Small Business Subcontracting Plans Matt Koehl Diego Hunt Thursday, October 24, 2013 9:00 10:00 p.m. MT Introduction Overview of Small Business (SB) Subcontracting Plan Requirement Exceptions to the Plan Requirement Plan Types (Individual vs. Commercial) Obtaining and Verifying Subcontractor Size and Business Status Representations Subcontractor Flow Down Requirements Strategies for Negotiating Plan Terms Timing and Mechanics for Reporting Plan Results Good Faith Effort and Liquidated Damages New SBA Subcontracting Plan Rule 2 1
Overview of SB Subcontracting Plan Requirement General Rule: Prime contracts expected to > $650k ($1.5 million for construction) must include a SB Subcontracting Plan Plan establishes goals for the award of subcontracts to the following types of SB concerns: SB Veteran-Owned SB (VOSB) Service-Disabled Veteran Owned SB (SDVOSB) Woman-Owned SB (WOSB) Small Disadvantaged Business (SDB) Historically Underutilized Business (HUBZone) Other agency-specific categories (e.g., Indian-Owned) Liquidated damages remedy for failure make good faith effort to meet SB Subcontracting Plan requirements FAR Subpart 19.7 (Attachment A); FAR 52.219-9 (Attachment B) 3 Exceptions to Plan Requirement Contracts where no subcontracting possibilities exist Contracts awarded to SBs Each RFP is assigned a single NAICS Industry code NAICS code establishes SB status based upon employee or revenue Can be SB under some NAICS codes but not others http://www.sba.gov/sites/default/files/files/size_standards_table.pdf Personal services contracts (as defined in FAR 2.101) Contracts performed entirely outside the United States and its outlying areas FAR 19.702 4 2
SB Subcontracting Plan Types Commercial Plan applies to subcontracts supporting the company s entire production of commercial items Preferred but not required for commercial item contractors Plan application may be limited to the applicable company division or business unit Pro: single commercial plan meets the plan requirement for all prime contracts (first Contracting Officer approves, plan is simply provided to the other Contracting Officers) Con: subjects all subcontracts to the plan requirement, not just those in direct support of the prime contract Con: annual updates required 5 SB Subcontracting Plan Types Individual contract plan applies to a specific contract, and has goals that are based on the offeror s planned subcontracting in support of the specific contract Pro: only direct support subcontracting is subject to the plan requirements At the contractor s option, indirect costs may be allocated on a pro rata basis Pro: no annual updates required Con: burden of administering separate plans for multiple prime contracts 6 3
Verifying Subcontractor Status The contractor must know the size and business status of its subcontractors to accurately reports its results under the plan The contractor may rely upon self-representations of its subcontractors for the following: SB VOSB SDVOSB WOSB SDB The contractor must verify the HUBZone status of its subcontractors using a SBA database of verified HUBZone companies: http://dsbs.sba.gov/dsbs/search/dsp_searchhubzone.cfm 7 Verifying Subcontractor Status No FAR or SBA rule specifying the frequency with which subcontractor size and status representations must be obtained Common practice to obtain updated subcontractor information on an annual basis Annual survey sent to subcontractors just for purposes of plan OR Better practice: integrate subcontractor size and status data collection into the company procurement group s standard practices for subcontractor on boarding and updates Less one time manual effort just for plan reporting Leverage existing data retention and storage procedures 8 4
Subcontractor Flow Down Requirements Prime contractor must flow down plan requirement to all subcontractors (except SBs) valued in excess of the applicable threshold. FAR 19.704(a)(9) BUT, flow down requirement does NOT apply to subcontracts for commercial items FAR 52.244-6(c) FAR 52.212-5(e) SBA SOP 60 30 6 (Attachment C, p. 50) 9 Subcontractor Flow Down Requirements Model agency SB Subcontracting Plans generally include the flow down requirement without qualification. Attachment D Practice Tips Prime contractor: modify model plan to expressly exempt commercial item subcontracts Subcontractor: if you re supplying commercial items (and don t already have a commercial plan), don t accept the plan requirement SBA and some model SB Subcontracting Plans seek to make the prime contractor responsible for subcontractor plan approval and compliance Not based upon regulation Don t accept plans with this requirement 10 5
Mandatory Plan Requirements Plan requirements listed in FAR 52.219-9(d) (Attachment B) The Plan should meet the following eleven basic requirements: 1. Percentage goals of total planned subcontracting dollars for SBs, VOSBs, etc. 2. A statement of total dollars planned to be subcontracted (individual contract plan) or total projected sales and the total value of projected subcontracts to support the sales (commercial plan;) 3. A description of the principal types of supplies and services to be subcontracted, and an identification of the types planned for subcontracting to SB, VOSBs, etc. 4. A description of the method used to develop the subcontracting goals; 11 Mandatory Plan Requirements (Cont d) 5. The method used to identify potential sources for solicitation purposes 6. Whether indirect costs are included and a description of the method used to determine the proportionate share of indirect costs 7. The name of the plan administrator 8. A description of the efforts the offeror will make to assure that SB, VOSB, etc. have an equitable opportunity to compete for subcontracts 9. Assurances that the offeror will include FAR 52.219-8 in all subcontracts, and flow down FAR 52.219-9 as per the clause prescription 10. Assurances that the offeror will cooperate in any studies or surveys, and submit ad hoc and required reports 11. A description of the types of records that will be maintained concerning procedures that have been adopted to comply with the requirements and goals in the plan, including establishing source lists; and a description of the offeror s efforts to locate 12 6
Negotiation Strategies Practice Tip: Read closely and take advantage of the agency s model plan Model plan generally included as a solicitation attachment Sometimes varies from FAR 52.219-9 Take advantage of narrower statement of plan requirements Take exception to broader statement of plan requirements 13 Negotiation Strategies Practice Tip: exclude subcontracts available only from Large Business from the subcontract total used to measure small business subcontract goal achievement E.g., computer hardware manufacturer might exclude operating system software and microprocessors from pool of available subcontractors Contractor removes only available from Large Business subcontract dollars from the denominator against which the numerator of SB subcontracting dollars is measured for goal achievement purposes Often dramatic improvement to plan percentage goal achievement Government approval for this approach much more likely than a reduction to the percentage goals Don t be greedy (only remove items verifiably unavailable from SBs) FAR 19.704(a)(2) 14 7
Negotiation Strategies Practice Tip: define a specific sub-set of plan requirements that will be used to determine whether the contractor has made a good faith effort to comply with the plan Relates to liquidated damages (discussed later) Remove ambiguity as to applicable standard Define as narrowly as possible Stick with objectively-measurable, achievable requirements Create additional paragraph at the end of model plan 15 Timing and Mechanics for Reporting Plan Results Electronic Subcontracting Reporting System (esrs) http://www.esrs.gov/ Government-wide, electronic, web-based system for SB subcontracting plan reporting Training guides for Individual and Commercial Plan reporting Webinars on filing required SB Subcontracting Plan reports 16 8
Timing and Mechanics for Reporting Plan Results Individual Contract Plans Reports on plan results due twice annually (April 1 and October 30) Standard Form (SF) 294 Commercial Plans Reports on plan results due once annually (October 30) Standard Form (SF) 295 17 Common Non-Compliance Scenarios SB Subcontracting Plan is negotiated by sales or contracts groups and not communicated correctly to purchasing group responsible for subcontractor buying activity Failure to seek subcontractor size and status information Failure to verify (where required) subcontractor size and status information Failure to archive required subcontractor solicitation documentation Failure to file required reports on time 18 9
Liquidated Damages If the Contractor has failed to meet its subcontracting goals and the Contracting Officer decides that the Contractor failed to make a good faith effort to comply with its subcontracting plan, the Contractor shall pay the Government liquidated damages. FAR 52.219-16(b) (emphasis added; Attachment E) Liquidated damages for failure to make a good faith effort are rarely asserted by Government Contracting Officers 19 Good Faith Effort means a willful or intentional failure to perform in accordance with the requirement of the subcontracting plan or willful and intentional action to frustrate the plan. FAR 52.219-16(a) 20 10
FAR 19.705-7(d) In determining whether a contractor failed to make a good faith effort to comply with its subcontracting plan, a contracting officer must look to the totality of the contractor s actions, consistent with the information and assurances provided in its plan. The fact that the contractor failed to meet its subcontracting goals does not, in and of itself, constitute failure to make good faith effort. 21 Amount of Liquidated Damages The amount of probable damages attributable to the Contractor s failure to comply shall be an amount equal to the actual dollar amount by which the Contractor failed to achieve each subcontracting goal. FAR 52.219-16(b) (emphasis added) Individual Plan formula: percentage goals compared to actual subcontracting dollars Commercial Plan formula: pro rata share of actual subcontracting dollars attributable to government contracts covered by the plan 22 11
Procedure Contracting Officer shall give written notice specifying the failure and permitting the Contractor to demonstrate what good faith efforts have been made and to discuss the matter. FAR 52.219-16(c) The Contractor shall have the right of appeal any final decision of the Contracting Officer. FAR 52.219-16(e) 23 Recent Subcontracting Plan Rule Changes July 16, 2013 SBA adopted amendments implementing the Small Business Jobs Act of 2010. Attachment F Amended regulations governing small business subcontracting to provide the maximum practicable subcontracting opportunities for small business concerns. 13 CFR 125.3(a) Creates several new reporting requirements and obligations for large contractors 24 12
New Subcontracting Rules Contractors must conduct market research to identify small business subcontractors through all reasonable means Contractor must provide pre-award written notification to unsuccessful small business subcontracts Contractor may not prohibit a subcontractor from discussing any material matter with the contracting officer. 25 New Subcontracting Rules Contractors must make good faith effort to use small businesses that the contractor used to prepare its bid or proposal in the same scope, amount, and quality. 26 13
New Reporting Requirements Contractor must provide a written explanation for failure to use small businesses used to prepare bid or proposal prior to contract close-out Contractor must notify Contracting Officer in writing of slow or reduced pay of subcontractors Contractor must provide a written explanation as to why the contractor did not meet the goals of the plan so the contracting officer can evaluate good faith efforts to comply with subcontracting plan 27 Past Performance Rating Requires the Contracting Officer to monitor compliance and consider the contractor s written explanations when rating the contractor for past performance purposes. Expressly authorizes agencies to use subcontracting plan compliance as an evaluation factor in making new award decisions 28 14
Questions? What Every Large Business Should Know About Small Business Subcontracting Plans Presented by: Matt Koehl 208.383.3965 gmkoehl@hollandhart.com U.S. Bank Plaza 101 S. Capitol Boulevard, Suite 1400 Boise, ID 83702 Diego Hunt 303.295.8087 dghunt@hollandhart.com 555 17 th Street, Suite 3200 Denver, CO 80202 15