SBA Issues Final Rule Intended to Protect Small Businesses That Work with Large Government Contractors

UNITED_STATES_GOVERNMENT_CONTRACT_NOTICE_TO_EMPLOYEES_-_NARA_-_515923.jpgThe U.S. Small Business Administration (SBA) recently issued a final rule relating to large government contractors’ use of small businesses as subcontractors. 78 Fed. Reg. 42391 (Jul. 16, 2013). Part of the SBA’s mission is to ensure that small businesses have a reasonable opportunity to participate in government contracts alongside larger companies. The SBA’s recent revisions protect small businesses from larger companies that include them in a bid for a government contract, in order to improve their chances of winning the contract, but then do not use them, or use them in a different manner, once the contract is awarded and the company begins work. Small businesses have had little recourse against this “bait and switch” practice, although Congress included protections for small businesses in this sort of situation in the Small Business Jobs Act (SBJA) of 2010.

Government agencies routinely enter into contracts with private companies for provision of goods or services to the agency, or for provision of services to others on the agency’s behalf. Companies that regularly enter into large government contracts are known as “prime contractors.” The SBJA requires prime contractors to include a “small business subcontracting plan” in bids for construction contracts valued at more than $1.5 million and non-construction contracts worth over $650,000. The bid must show that the prime contractor intends to use qualifying small businesses as subcontractors.

Various federal agencies maintain offices, such as the SBA’s Office of Government Contracting and the Department of Homeland Security’s Office of Small and Disadvantaged Business Utilization, to assist small businesses looking for prime contractors. The General Services Administration publishes the GSA Subcontracting Directory, which identifies prime contractors eligible for contracts requiring a small business subcontracting plan. Private-sector publications like Washington Technology also provide information on prime contractors.

The SBA’s new rule amends 13 C.F.R. § 125.3 to bring it in line with the Small Business Act as amended by the SBJA. 78 Fed. Reg. at 42403, Pub. L. 111-204 § 1321, 15 U.S.C. § 637(d)(6)(G). The SBJA created the “Subcontracting Assistance Program,” which protects small businesses from “bait and switch” tactics by prime contractors. It requires prime contractors to disclose whether or not they actually subcontracted with certain small businesses included in their winning bid.

A prime contractor must make a “good faith effort” to subcontract with the small business or businesses identified in its winning bid. If it does not use the small business in the manner described in the bid, it must provide a written explanation to the government’s contracting officer. 15 U.S.C. § 637(d)(6)(G). Under the revised rules, it must provide this explanation at the conclusion of the contract, and the contracting officer evaluates whether or not the prime contractor acted in “good faith.” 78 Fed. Reg. at 42405.

At Samuel C. Berger, PC, our small business attorneys offer fixed-fee legal-service packages to New York and New Jersey entrepreneurs and businesses. We handle a variety of legal matters for our clients, with the goal of enabling them to understand their rights and obligations, to keep their operations running smoothly, and to grow their businesses and prosper according to their plans and wishes. Contact us today online or at (212) 380-8117 to schedule a confidential consultation with a member of our legal team.

Web Resources:

SOP 60 03 6, “Subcontracting Assistance Program” (PDF file), Office of Government Contracting, Small Business Administration, December 4, 2006
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Photo credit: National Archives and Records Administration, ARC Identifier 515923 [Public domain], via Wikimedia Commons.