This week, the U.S. Small Business Administration released a long-awaited Final Rule about the consequences that a large business federal contractor may suffer if it treats its small businesses subcontractors poorly. The Final Rule implements certain policies set forth in the Small Business Jobs Act of 2010. The rule will become effective on August 15, 2013. It is unclear when the rule's policies will be incorporated into the Federal Acquisition Regulation.

The new regulations are extensive and detailed. However, one new feature will have a significant impact on the way that large and small businesses work together on preparing proposals for government contracts, and the way that they work together after award.

Beginning next month, a large business offeror (one that is to be awarded a contract in excess of $650,000, or $1,500,000 for construction of a public facility) must “represent to the contracting officer that it will make a good faith effort to acquire articles, equipment, supplies, services, or materials, or obtain the performance of construction work from the small business concerns that it used in preparing its bid or proposal, in the same scope, amount, and quality used in preparing and submitting the bid or proposal.” Under the rule, an offeror “uses” a particular small business in its bid or proposal if:

• The large business referenced the small business as a subcontractor in its bid or proposal;
• The large business referenced the small business as a subcontractor in its small business subcontracting plan;
• The large business has a subcontract or “agreement in principle” to subcontract with the small business to perform a portion of the contract work;
• The small business drafted any portion of the bid or proposal; or
• The large business used the small business’s cost/pricing information or technical expertise in preparing the bid or proposal.   

This rule was written to deal with a common, industry-wide problem where small businesses “help” large businesses win contract work, but then are cut out of all or a portion of the ultimate performance after award of the prime contract.

Now, if the large business does not ultimately use the small business as a subcontractor, then it must provide the Contracting Officer with a written explanation. Similarly, if the large business does use the small business as a subcontractor to perform a portion of the contract work, but it pays the subcontractor less than the amount set forth in the subcontract, or payments to the small business subcontractor are more than 90 days past due, then the large business prime contractor is obligated to notify the Contracting Officer.

Contracting Officers are directed to consider compliance with this new rule when rating a large business’s past performance. In extreme cases, Contracting Officers are directed to report non-compliance with this rule in the Federal Awardee Performance and Integrity Information System (FAPIIS).  

The Bottom Line: Large businesses, which are required to hire small business subcontractors, must incorporate this new rule into their small business subcontracting practices (including their pre-award strategic associations, such as teaming arrangements). And, small businesses finally have the benefit of some additional government oversight of the subcontracting relationships between the prime contract awardees and the small businesses working under them.