It’s a frustrating position for government contractors:  you have plenty of small businesses working on your job, but cannot count them towards your subcontracting goals because they are not first-tier subs.  Good news!  Things are about to change.

The U.S. Small Business Administration (SBA) is finally proposing to amend its regulations to allow large business prime contractors (“other than small” contractors in SBA speak) to count second and third tier small business subcontract awards towards their federal small business subcontracting goals on unrestricted federal projects.  The comment period ends officially on December 7, 2015, but signs are good that the proposed rule will help ensure that small business participation is more accurately reported on federal projects.


With limited exceptions, unrestricted federal procurements over $650,000 ($1.5 million for construction of any public facility) include Federal Acquisition Regulation (FAR) clauses 52.219-8 (Utilization of Small Business Concerns) and 52.219-9 (Small Business Subcontracting Plan), which require contractors and their first tier subcontractors to make a “good faith effort” to meet or to exceed the procuring agency’s small business subcontracting goals.  Failure to make this effort could result in liquidated damages, default termination, and negative performance reviews.  The contractor is required to submit an Individual Subcontract Report (ISR) and Summary Subcontracting Report (SSR). The ISR is submitted semiannually with the procuring agency during contract performance and upon contract completion. The SSR is submitted annually with civilian procuring agencies, or semiannually with the DoD. Both forms are submitted through the Electronic Subcontracting Reporting System (eSRS).

Until this proposed rule, a large small prime contractor could not count a second-tier 8(a) or other small business subcontractor (SDVOSB, EDWOSB, HUBZone, etc.) if the first-tier subcontractor was not a small business concern.  This situation led to an absurd result:  a large prime contractor would get no credit for a subcontract to a large business – even if the large first-tier then subcontracted 70% of the work to small businesses.  However, the large prime would get full credit from a subcontract to a small business, even if the small business then turned around and subcontracted a substantial portion of the work to a large business.

The proposed new rule gets the point: what matters most is having small businesses working – not whether there are first-tier subs.

Under FAR part 19.704, a “flow-down provision,” large subcontractors must also formulate subcontracting plans if they receive a subcontract in excess of the monetary threshold.  It is not clear whether the proposed rule will allow large subcontractors to count its lower tier subcontractors towards its subcontracting goals.  The proposed rule states only that it “also proposes to implement the statutory requirements related to the subcontracting plans of all subcontractors that are required to maintain such plans, including the requirement to monitor subcontractors’ performance and compliance towards reaching the goals set out in those plans as well as their compliance with subcontracting reporting requirements.”

Lastly, one potential complicating factor is that large primes will be required to list the size standard in its solicitations when they solicit bids from subcontractors.  Depending on the type of work being subcontracted, it can be hard to identify the size standard correctly as there are literally hundreds of North American Industry Classification Standards (NAICS) codes, from which to choose.