Small Business Subcontracting Plans
Resolve Government Subcontracting Plan Disputes
- Provide Winning Plans For Your Next Government Contract
- Avoid Breach of Contract Actions by The Agency & Learn How to Resolve Privity of Contract Disputes Quickly
By: Theodore Watson, Esquire
The Small Business Subcontracting Plan Program is based on Public Law 95-507 that was passed in 1978 to ensure that prime contractors further the goal of increasing participation of small businesses in federal procurement. Per Federal Acquisition Regulation (FAR) Subpart 19.7, any contractor receiving a contract for more than the simplified acquisition threshold must agree in the contract that small businesses, veteran-owned small business, service-disabled veteran-owned small business, HUBZone small business, small disadvantaged business, and women-owned small business concerns will have the maximum practicable opportunity to participate in contract performance consistent with its efficient performance. See also Section 8(d) of the Small Business Act (15 U.S.C. 637(d)).
The government requires the adoption of FAR Clause 52.219-8, ‘Utilization of Small, Small Disadvantaged and Women-Owned Small Business Concerns, in all purchases/contracts over the simplified acquisition threshold that offer subcontracting opportunities. The legislation requires certain prime contractors and subcontractors to prepare formal subcontracting plans. The law also specifically requires submission and implementation of a subcontracting plan for contracts exceeding $550,000, including options, $1 million for construction, as well as reporting and record keeping for contractors with plans.
Offerors submitting a proposal in response to the government´s solicitation shall submit a small business subcontracting plan that complies with the requirements of FAR Clause 52.219-9. The following outline for a subcontracting plan satisfies the requirements implemented by public law and supplemented by the FAR.
Subcontracting plans in federal government contractshas been an ongoing problem throughout the United States. FAR Sub-part 19 of the Federal Acquisition Regulations require government contracts awarded to larger business and over $550K to have a mandatory subcontracting plan included in the prime contract. The reason is to ensure that some of the contracting dollars are passed down to small businesses that are service disabled veteran-owned, HUBZone, Small Disadvantaged Businesses, Woman-owed and Veteran-owned.
Goals Versus Legal Obligations
Although it is true that subcontracting plans only set forth goals, each prime contractor now has a legal obligation (through the expressed terms of the prime contract) to demonstrate a good faith effort to seek out qualified subcontractors in the various socio-economic categories (service disabled veteran-owned, HUBZone, Small Disadvantaged Businesses, Woman-owned and Veteran-owned).
To amplify the legal obligation, primes have to submit reports ( SF 294 and 295) in addition to other reports showing their interaction with small businesses. Good faith must be present or the prime contractor runs the risk of breaching the contract. As stated in 15 U.S.C. 637(d)(8), any contractor or subcontractor failing to comply in good faith with the requirements of the subcontracting plan is in material breach of its contract.
Further, 15 U.S.C. 637(d)(4)(F) directs that a contractor’s failure to make a good faith effort to comply with the requirements of the subcontracting plan shall result in the imposition of liquidated damages.
Example
A good example is when a prime contractor uproots an existing subcontractor and awards to another large business that offers better pricing. The prime will more than likely argue that it has a right to seek cheaper bids, and has no guaranty of work to the existing subcontractor.
A closer look at this response introduces the very heart of the problem. Although the prime has the right to seek cheaper bids, this right is still subject to any limitations set forth in the prime contract with the agency.
To amplify even more, the example of a prime that has a prime contract for $1 Million dollars has a subcontracting goal of 3% to a service disabled veteran small business. It then places bids out and receives a quote from a large business for $28,000.00 and a bid from the small business for $30,000.00 who should prime award to? If the prime awards to the large business simply to save $2,000.00 is there a bad faith argument? The answer should be apparent.
Legal Rights for Small Businesses
Revisiting the lack of privity of contract excuse from government agencies, one has to ask what rights the small subcontractor actually has. Given the language of federal statutes and Federal Acquisition Regulations (FAR), it appears that subcontractors are third party beneficiaries to the terms of the prime contract. For small businesses that attempt to, or have already secured, work under the subcontracting plan, bad faith on the prime contractor’s part triggers the small businesses’ legal rights. In other words, third party beneficiaries have legal rights in contract law ( when their rights vest).
More importantly, the rules tend to give rise to the contracting officer’s legal obligation to enforce the terms of the contact. More specifically, to ensure that large prime contractors do no just ‘blow off’ their responsibility to pass on work to small businesses. For small businesses effected, having a government contracts lawyer that understands the underlying principles of subcontracting plans can be the difference between getting work or not.
The Problem
Large businesses that bid on full and open government contracts have no problem submitting a subcontracting plan. However, when the bid is awarded, most large prime contractors know that government agencies genuinely do not follow up or enforce the statutory requirements for subcontracting plans. Therefore, after the contract is awarded, a significant amount of problems occur. As a result, small businesses are left to fend for themselves.
Privity of Contract Excuse
When small subcontractors are placed in a tough situation, the contracting agency typically responds by claiming that the problem is out of its hands because there is no privity of contract. As a result, small subcontractors are left to fend for themselves.
Upon careful review, it can be quite easy to see that the contracting officer (the teeth for the government) does in fact have legal authority to inquire into the prime contractor’s good faith effort to meet an expressed requirement within the prime contract.
For the government to claim there is no privity of contractand authority to inquire into the prime’s actions is neither supported by law nor has any plausibility. The statute in essence confers privity when it states that if the prime does not in good faith meet its requirements for subcontracting plans, then it is in material breach of contract. If the contracting offer does not oversea this ( and enforce legal rights ) then who will?
GAO Reports
The Government Accounting Office (GAO) has submitted reports addressing this very problem. In fact, it made stern recommendations to at least two agencies to implement more oversight into their government contract subcontracting goal obligations.
Nationwide Problem for Small Businesses
As primes start to perform the contract, they undoubtedly seek ways to increase profit. However, although this may be a sound business judgment decision, they must still act within the boundaries and obligations as set forth in the four corners of the prime contract. Without oversight small business across the nation fall prey to bad business practices and are left without assistance from agencies such as the Small Business Administration (SBA).
Minimizing the Problem
Small businesses should seek to enforce their rights under subcontracting plans. Having a government contract attorney that can help to enforce your rights is a viable solution. In addition, small businesses should seek out federal contracts awarded to large primes and market more aggressively for subcontracting work.
Keeping the agency aware of the issues in writing can also put the agency on notice to act. Although enforcing subcontracting plans has become a national problem, the solution has to start at some point. Education and training to small businesses make them more aware of their rights.
For additional information or help, contact the government contract law attorneys at Theodore Watson & Associates, LLC or call 720.941.7200.
