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Tom Petruska
President
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SMALL BUSINESS SUBCONTRACTING PLANS –
NEW RULES?

For many years, government policy1 has encouraged prime contractors receiving a Federal Government contract to issue a subcontract to small business concerns for a portion of the work required by the prime contract. Any large business contractor receiving a Federal Government prime contract had to agree to offer small business concerns the “maximum practicable opportunity” to participate in contract performance, unless there were no further subcontracting opportunities. Large business firms usually must submit a Small Business Subcontracting Plan (the “Plan”) with their proposals, when the value of the prime contract or contract modification is expected to exceed $650,0002.

Since 1978, the Plan has usually been prepared with a set of goals in the form of percentages of dollars that could potentially be awarded, by subcontract, to various classifications of small business concerns over a year or other contract period, depending on the type of plan3.  The prime contractor first determines the amount of work and corresponding estimated amount of dollars that would be subcontracted to, and divided between, large and small business concerns. The total dollars expected to be subcontracted to small businesses is then allocated among the different classifications of small business concerns, generally based on the government’s small business goals4. GSA promulgated a model small business subcontracting plan for contractors to use for calculating the goals. The prime contractor was required to develop a reasonable estimate of the work under the prime contract that would be performed by subcontractors, in instances where the prime contractor did not have the resources to perform the work or produce the products.

Now, this system, which has worked so well for decades, may be revised based upon judicial action. In a pre-award bid protest filed in the United States Court of Federal Claims (“CFC” or the “Court”) by FirstLine Transportation Security, Inc. in the case of “FirstLine” v. United States, No. 12-601C, released November 27, 2012, the CFC approved a new method for calculating proposed subcontracting dollars in a small business subcontracting plan.

The case came about as result of FirstLine’s work as an incumbent contractor to the Transportation Security Administration (“TSA”) at the Kansas City Missouri International Airport under the Screening Partnership Program (“SPP”) to provide passenger and baggage security screening services at the airport. FirstLine prepared a proposal for a Fixed Price Award Fee (“FPAF”) contract to be awarded on a best value basis. The proposal was originally due to be submitted to the TSA on September 21, 2012. Section L.6 of the RFP stated the government anticipated an overall small business subcontracting plan of 40%, subsequently clarified by TSA to mean 40% of total contract value. This was very different from the usual process; whereby the prime contractor identified the total dollars to be subcontracted and established the goals.

As a result of the government’s revised guidance, FirstLine filed a pre-award protest to the CFC5.  The TSA further stated that failure to negotiate a Plan acceptable to the Contracting Officer (presumably with 40% of contract value as the small business participation goal) would render the proposal non-responsive and result in rejection of the proposal.

Federal acquisition regulations, on the other hand, refer to small business goals as a percentage of total subcontracting dollars6.  Moreover, in negotiated acquisitions, subcontracting goals should be established at a level that the prime contractor reasonably expects can result in work performed by small business concerns7 . The government responded to the FirstLine protest by stating nothing in law or regulation prohibits an agency from setting a small business goal as a percentage of total contract price. The government argued that the 40% goal is not a regulatory requirement but that it implements Federal Government policy to enable small business concerns to participate as subcontractors to prime contractor awards8

The Court agreed with the TSA that the 40% standard is a goal – not a requirement9.  The Court also agreed with TSA to uphold TSA’s position of requiring a prime contractor to state small business goals in terms of a percentage of total subcontracting dollars, and agreed that nothing in the regulations or the law prohibits an agency from establishing a goal in terms of the total value of the contract, including options. The court stated that the FAR10 does not provide an implicit bar to the 40% goal. At the review stage, the Contracting Officer reviews factors related to reasonableness and feasibility of the proposed subcontracting plan without identifying small business concerns that should perform the work.

The CFC agreed that the 40% small business participation is a goal, not a requirement, and is within the bounds of reasoned decision-making; and therefore, is a rational expression of the Government’s policy of affording small business concerns the “maximum practicable opportunity” to participate as subcontractors. Although FirstLine was concerned about higher costs that it would incur; thereby making their offer uncompetitive, the Court stated that TSA was willing to pay higher costs to achieve greater small business participation. However, the upper limit to how much the government will accept, consistent with efficient performance, is unknown11.

It is unknown whether the court decision will be upheld on appeal or be implemented in the FAR or by agencies. The court decision may result in the requirement for prime contractors to prepare Plans with goals that are directed in the RFP as a percent (%) of total contract value rather than determined by the large business prime contractor based on their ability to perform the work. Large contractors may face a conundrum before a RFP is released of combining in-house skills with those of team members sufficient to perform the work, yet not knowing how the small business subcontracting goals will be established in the actual RFP until the RFP is released. This creates an awkward situation for the offeror.  If the RFP sets goals higher than originally planned, then contractor employees may have to be released to make room for the additional small business subcontractors. Although we are not clairvoyant, CUI can help you prepare compliant Plans. And please let us know if you need additional support.

Tom Petruska
Contracts Unlimited, Incorporated

The foregoing discussion is not intended to be legal advice or a legal opinion.  Please see your attorney for legal support.

Footnotes:

  1. FAR 19.702
  2. FAR 19.702(a)
  3. There are three types of plans – individual contract, commercial, and master plans
  4. 13 U.S.C. 644(g)
  5. Blue & Gold Fleet, L.P., F.3d 1308 (Fed. Cir. 2007)
  6. FAR 52.219-9(d)(1) and FAR 19.704
  7. FAR 19.705-4(c)
  8. FAR 19.201(a)
  9. FAR 19.705-4
  10. FAR 19.705-4
  11. FAR 19.705-4 and FAR 19.201(a)

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