SBA Rule Allows Prime Contractors to Claim Credit for Small Lower-Tier Subcontractors

By Taimur Rabbani

The Small Business Administration recently issued a rule to allow a large, prime government contractor with an individual subcontracting plan to receive small-business credit for subcontracts issued to small businesses at any tier. The rule has significant implications for businesses performing on unrestricted federal contracts – at all tiers.

The final rule, issued December 23, 2016, creates a benefit for prime contractors, which previously only could receive small-business credit for subcontract awards at the first subcontract tier. As the SBA notes, “until this final rule, a large prime contractor could not take credit for a subcontract award to a second-tier small business subcontractor.” However, the final rule also creates some substantial requirements for large prime contractors and their subcontractors.

The rule requires large prime contractors with individual subcontracting plans to create two subsets of small business subcontracting goals. The first subset is a goal for the prime’s first-tier subcontractors; the second subset is a goal for lower-tier subcontractors to the prime’s large first-tier subcontractors with individual subcontracting plans. The prime contractor and any subcontractor with a subcontracting plan must report on small business performance at the first tier below them. The credit a prime contractor receives for lower-tier small business subcontracts will be based on these reports.

The rule creates some new requirements that government contractors need to understand. For instance, a prime contractor is responsible for ensuring accurate reporting to the government. A prime contractor may be subject to liquidated damages unless it reviews, approves, and monitors its subcontractor’s compliance with its subcontracting plans. This, of course, affects the performance by the prime’s subcontractors.

The rule also requires prime contractors to assign to each subcontract, or to any solicitation it may utilize, a NAICS code applicable to the principal purpose of the specific subcontract and the corresponding size standard. The prime contractor may not simply “flow down” the NAICS code applicable to the prime contract: instead, it must assign a NAICS code for every subcontract and notify prospective subcontractors prior to contract award.

Given that the new rule impacts both prime contractors with individual subcontracting plans, first-tier subcontractors, and potential lower-tier subcontractors, government contractors at all levels should be aware of the rule. We are able to help your business figure out the ins and outs of this new rule.

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