The Department of Defense (DoD), General Services Administration (GSA), and National Aeronautics and Space Administration (NASA) published a final rule, effective September 10, 2021, that updates the Federal Acquisition Regulation to conform to two changes regarding small business subcontracting, namely by providing examples of what does—and what does not—constitute good faith efforts to comply with a small business subcontracting plan, as well as when indirect costs must be used in commercial subcontracting plans.

The NDAA at issue: Section 1821 of the National Defense Authorization Act (NDAA) for Fiscal Year (FY) 2017 (section 1821(c) of Pub. L. 114–328; 15 U.S.C. 637) requires the Small Business Administration (SBA) to amend its regulations to provide examples of activities that would be considered a failure to make a good faith effort to comply with a small business subcontracting plan.

SBA Implementation: SBA issued a final rule at 84 FR 65647, dated November 29, 2019, to implement section 1821 of the NDAA for FY 2017. SBA added a non-exclusive list of examples of what could and could not be considered good faith efforts to comply with a small business subcontracting plan at 13 C.F.R. § 125.3(d)(3).

Proposed Rulemaking: DoD, GSA, and NASA published a proposed rule on June 3, 2020, at 85 FR 34155, to implement section 1821 of the FY 2017 NDAA.

Key Change of the Rule:

As noted above, SBA updated 13 C.F.R. § 125.3(d)(3) in 2019 to provide contracting officers guidance on evaluating whether a prime contractor made a good faith effort to comply with its small business subcontracting plan. The final rule updates FAR 19.705-7, Compliance with the subcontracting plan, to provide similar examples of activities that contracting officers may consider when evaluating whether the prime contractor made a good faith effort to comply with its small business subcontracting plan. Per commentary in the rule, this change provides contracting officers with consistent and uniform examples to identify and hold large prime contractors accountable for failing to make a good faith effort to comply with their subcontracting plans.

Similar to the SBA final rule, FAR 19.705-7(d) now discusses the corrective actions available to contracting officers when a contractor fails to make a good faith effort to comply with the subcontracting plan and that, in this context, “a failure to make a good faith effort to comply with a subcontracting plan is a material breach, sufficient for the assessment of liquidated damages, and also for other remedies the Government may have.” The final rule also updates FAR 19.705-6 to address the contracting officer’s responsibilities vis-à-vis a small business subcontracting plan, including initiating action to assess liquidated damages in accordance with FAR 19.705-7.

Commentary in the final rule makes clear that it does not implicate when a small business subcontracting plan is required—merely what activities would be considered a failure to make a good faith effort to comply with such a plan. That means that the rule does not change (1) whether a small business subcontracting plan is required in the acquisition of commercial items, including commercially available off-the-shelf items, nor (2) does it expand the applicability of the small business subcontracting plan requirement to contracts at or below the simplified acquisition threshold.

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