The FAR Council has released a proposed rule calling for significant revisions to the provisions in FAR Parts 19 and 52 addressing small business subcontracting plans.  The proposed changes, which are intended to implement regulations adopted by the Small Business Administration (SBA) in 2013, should serve as a not-so-subtle reminder of the range of small business-related obligations imposed on prime contractors, as well as the consequences of failing to satisfy those obligations.

The proposed rule’s origins can be traced back to the Small Business Jobs Act of 2010, which required the promulgation of regulations addressing various aspects of small business subcontracting compliance.  The SBA adopted regulations in accordance with this statutory directive in July 2013, but until now, no conforming changes were made to the FAR.  As a result, some prime contractors may have overlooked the responsibilities imposed upon them, including the following:

  • Use of Small Business Subcontractors in Performance: The proposed rule would amend FAR 19.704 and 52.219-9 to provide that all small business subcontracting plans must include assurances that, in the performance of the contract, “the offeror will make a good faith effort to acquire articles, equipment, supplies, services, or materials . . . from the small business concerns that the offeror used in preparing the bid or proposal, in the same or greater scope, amount, and quality used in preparing and submitting the bid or proposal.” Moreover, in the event that the prime contractor does not use a small business subcontractor to the same extent as described in its proposal, the proposed rule adds a requirement that the prime contractor draft a “written explanation [that] shall be submitted to the contracting officer within 30 days of contract completion.”   In other words, large prime contractors will be expected to follow through on the small business subcontracting plans set forth in their proposals, and they will be called to account if they fail do so.
  • Identification of NAICS Codes for Subcontracts: The proposed rule also would amend FAR 52.219-9 to make clear that prime contractors bear the responsibility for assigning the North American Industry Classification System (NAICS) codes and corresponding size standard to each subcontract. Again, this requirement tracks existing obligations set forth in the SBA regulations, but its inclusion in the FAR should dispel the common misconception that NAICS codes and size standards simply flow down from the prime contract. To the contrary, it is the prime contractor’s responsibility to identify and assign the NAICS code that best describes the principal purpose of each subcontract.
  • Consequences of Noncompliance with Subcontracting Plan: The proposed rule also includes a tweak to clarify the consequences of a prime’s failure to satisfy the requirements of its subcontracting plan. Although FAR 52.219-9 currently provides that a contractor’s failure to comply with its small business subcontracting plan constitutes a “material breach” of the contract, the proposed rule explicitly states for the first time that such noncompliance also may be counted against the contractor “in any past performance evaluation of the Contractor.” By including this direct reference to past performance evaluations, the proposed rule increases the likelihood that a contracting officer will focus on compliance with subcontracting plans—or lack thereof—when completing evaluations.

Although the provisions noted above may warrant particular attention, large primes would be well-advised to closely review the proposed rule in its entirety to ensure that their subcontracting plans are up to standard—and to confirm their compliance with these plans in their own performance.  For example, prime contractors should confirm that they are equipped to (i) meet new deadlines for correcting subcontracting reports, (ii) revise their method for calculating subcontracting goals to incorporate the total value of a contract when required, and (iii) report order-level subcontracting information under individual plans.  This sort of internal subcontracting review typically demands only a small commitment of time and resources, but it can be invaluable to ensuring that a contractor remains well-positioned to compete for future opportunities.

Tags: Rulemaking, Small Business Subcontracting
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Photo of Susan B. Cassidy Susan B. Cassidy

Susan is co-chair of the firm’s Aerospace and Defense Industry Group and is a partner in the firm’s Government Contracts and Cybersecurity Practice Groups. She previously served as in-house counsel for two major defense contractors and advises a broad range of government contractors…

Susan is co-chair of the firm’s Aerospace and Defense Industry Group and is a partner in the firm’s Government Contracts and Cybersecurity Practice Groups. She previously served as in-house counsel for two major defense contractors and advises a broad range of government contractors on compliance with FAR and DFARS requirements, with a special expertise in supply chain, cybersecurity and FedRAMP requirements. She has an active investigations practice and advises contractors when faced with cyber incidents involving government information, as well as representing contractors facing allegations of cyber fraud under the False Claims Act. Susan relies on her expertise and experience with the Defense Department and the Intelligence Community to help her clients navigate the complex regulatory intersection of cybersecurity, national security, and government contracts. She is Chambers rated in both Government Contracts and Government Contracts Cybersecurity. In 2023, Chambers USA quoted sources stating that “Susan’s in-house experience coupled with her deep understanding of the regulatory requirements is the perfect balance to navigate legal and commercial matters.”

Her clients range from new entrants into the federal procurement market to well established defense contractors and she provides compliance advices across a broad spectrum of procurement issues. Susan consistently remains at the forefront of legislative and regulatory changes in the procurement area, and in 2018, the National Law Review selected her as a “Go-to Thought Leader” on the topic of Cybersecurity for Government Contractors.

In her work with global, national, and start-up contractors, Susan advises companies on all aspects of government supply chain issues including:

  • Government cybersecurity requirements, including the Cybersecurity Maturity Model Certification (CMMC), DFARS 7012, and NIST SP 800-171 requirements,
  • Evolving sourcing issues such as Section 889, counterfeit part requirements, Section 5949 and limitations on sourcing from China
  • Federal Acquisition Security Council (FASC) regulations and product exclusions,
  • Controlled unclassified information (CUI) obligations, and
  • M&A government cybersecurity due diligence.

Susan has an active internal investigations practice that assists clients when allegations of non-compliance arise with procurement requirements, such as in the following areas:

  • Procurement fraud and FAR mandatory disclosure requirements,
  • Cyber incidents and data spills involving sensitive government information,
  • Allegations of violations of national security requirements, and
  • Compliance with MIL-SPEC requirements, the Qualified Products List, and other sourcing obligations.

In addition to her counseling and investigatory practice, Susan has considerable litigation experience and has represented clients in bid protests, prime-subcontractor disputes, Administrative Procedure Act cases, and product liability litigation before federal courts, state courts, and administrative agencies.

Susan is a former Public Contract Law Procurement Division Co-Chair, former Co-Chair and current Vice-Chair of the ABA PCL Cybersecurity, Privacy and Emerging Technology Committee.

Prior to joining Covington, Susan served as in-house senior counsel at Northrop Grumman Corporation and Motorola Incorporated.

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Photo of Michael Wagner Michael Wagner

Mike Wagner represents companies and individuals in complex compliance and enforcement matters arising in the public procurement context. Combining deep regulatory expertise and extensive investigations experience, Mike helps government contractors navigate detailed procurement rules and achieve the efficient resolution of government investigations and…

Mike Wagner represents companies and individuals in complex compliance and enforcement matters arising in the public procurement context. Combining deep regulatory expertise and extensive investigations experience, Mike helps government contractors navigate detailed procurement rules and achieve the efficient resolution of government investigations and enforcement actions.

Mike regularly represents contractors in federal and state compliance and enforcement matters relating to a range of procurement laws and regulations. He has particular experience handling investigations and litigation brought under the civil False Claims Act, and he routinely counsels government contractors on mandatory and voluntary disclosure considerations under the FAR, DFARS, and related regulatory regimes. He also represents contractors in high-stakes suspension and debarment matters at the federal and state levels, and he has served as Co-Chair of the ABA Suspension & Debarment Committee and is principal editor of the American Bar Association’s Practitioner’s Guide to Suspension & Debarment (4th ed.) (2018).

Mike also has extensive experience representing companies pursuing and negotiating grants, cooperative agreements, and Other Transaction Authority agreements (OTAs). In this regard, he has particular familiarity with the semiconductor and clean energy industries, and he has devoted substantial time in recent years to advising clients on strategic considerations for pursuing opportunities under the CHIPS Act, Inflation Reduction Act, and Bipartisan Infrastructure Law.

In his counseling practice, Mike regularly advises government contractors and suppliers on best practices for managing the rapidly-evolving array of cybersecurity and supply chain security rules and requirements. In particular, he helps companies assess and navigate domestic preference and country-of-origin requirements under the Buy American Act (BAA), Trade Agreements Act (TAA), Berry Amendment, and DOD Specialty Metals regulation. He also assists clients in managing product and information security considerations related to overseas manufacture and development of Information and Communication Technologies & Services (ICTS).

Mike serves on Covington’s Hiring Committee and is Co-Chair of the firm’s Summer Associate Program. He is a frequent writer and speaker on issues relating to procurement fraud and contractor responsibility, and he has served as an adjunct professor at the George Washington University Law School.

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