[Federal Register Volume 69, Number 243 (Monday, December 20, 2004)]
[Rules and Regulations]
[Pages 75820-75826]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 04-27765]


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SMALL BUSINESS ADMINISTRATION

13 CFR Part 125

RIN 3245-AF12


Small Business Government Contracting Programs; Subcontracting

AGENCY: U.S. Small Business Administration.

ACTION: Final rule.

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SUMMARY: This final rule amends the U.S. Small Business Administration 
(SBA) regulations government small business subcontracting to address 
comments received in response to SBA's proposed rule on subcontracting, 
which was published in the Federal Register on October 20, 2003. The 
final rule also addresses comments in response to SBA's earlier 
proposed rule on contract bundling, which was published in the Federal 
Register on January 31, 2003. Specifically, this final rule provides a 
list of factors to consider in evaluating a prime contractor's 
performance and good-faith efforts to achieve the requirements in its 
subcontracting plan. The final rule also authorizes the use of goals in 
subcontracting plans, and/or past performance in meeting such goals, as 
a factor in source selection when placing orders against Federal Supply 
Schedules, government-wide acquisition contracts, and multi-agency 
contracts. In addition, this final rule implements statutory provisions 
and other administrative procedures relating to subcontracting goals 
and assistance. In particular, the final rule lists the various 
categories of small businesses that must be afforded maximum 
practicable subcontracting opportunities, and clarifies the 
responsibilities of prime contractors and SBA's Commercial Market 
Representatives (CMRs) under the subcontracting assistance program. The 
final rule also supplies guidance on Subcontracting Orientation and 
Assistance Reviews (SOARs), which CMRs perform to assist prime 
contractors in their efforts to understand and comply with the 
requirements governing the small business subcontracting assistance 
program.

DATES: This rule is effective on December 20, 2004.

FOR FURTHER INFORMATION CONTACT: Dean Koppel, Assistant Administrator, 
Office of Policy and Research, (202) 401-8150 or <a href="/cdn-cgi/l/email-protection#97f3f2f6f9b9fcf8e7e7f2fbd7e4f5f6b9f0f8e1"><span class="__cf_email__" data-cfemail="d2b6b7b3bcfcb9bda2a2b7be92a1b0b3fcb5bda4">[email protected]</span></a>.

SUPPLEMENTARY INFORMATION:

A. Background

    On January 31, 2003, SBA published a proposed rule in the Federal 
Register, 67 FR 47244, to solicit comments on its proposal to implement 
several recommendations included in the Office of Management and 
Budget's October 2002 report, entitled ``Contract Bundling: A Strategy 
for Increasing Federal Contracting Opportunities for Small Business.'' 
Several of the responding commenters identified the need for more 
guidance on evaluating large prime contractor performance in awarding 
subcontracts to small businesses and their efforts to achieve 
subcontracting plans, including examples of what types of conduct 
constitute ``good-faith'' efforts to comply with subcontracting plans. 
SBA thought that this suggestion was valid; accordingly, on October 20, 
2003, the agency published a proposed rule addressing these as well as 
other major issues in subcontracting.
    In response to the proposed rule published on October 20, 2003, 
which had a 60-day public-comment period, SBA received 19 written 
comments. The commenters included three members of Congress (two 
letters, one signed by two members), three Federal agencies (including 
SBA's own Office of Advocacy), two prime contractors, seven trade 
associations or small-business advocacy groups, four small businesses, 
and one private citizen

[[Page 75821]]

formerly employed by the Congress who is now working in academia. The 
specific comments are addressed in the section-by-section analysis of 
comments below. However, two of the commenters' responses may require 
additional review through a different venue. One of these responses was 
from a participant in the Department of Defense (DoD) Test Program for 
Comprehensive Subcontracting Plans (DoD Test Program), and the other 
was from a major U.S. corporation that currently operates under a 
commercial subcontracting plan. In both cases, their concerns are 
unique to their own situations and do not justify substantial changes 
to this rule.
    The comments received from the corporation with a commercial 
subcontracting plan were far-reaching, and some of the suggestions 
would result in radical changes to the subcontracting program. For 
example, the commenter suggests a new formula for computing 
subcontracting goals for companies with commercial subcontracting 
plans. SBA did not adopt this suggestion because it is outside the 
scope of this rule.
    The two references to SBAS's PRO-Net in the proposed rule have been 
changed to the Central Contractor Registration (CCR) in this final 
rule, to reflect the fact that SBA's PRO-Net was folded into the CCR 
effective January 1, 2004. In addition, the fourth exception to the 
requirement for a subcontracting plan cited in the proposed rule at 
Sec.  1225.3(c)(3)(iv) has been deleted in this final rule because this 
exception applies primarily to contracts awarded prior to October 24, 
1978, the date that Public law 95-507 was enacted by the Congress. That 
exception involved modifications to contracts that did not originally 
contain the clause at 48 CFR 52.219-8. It is SBA's conclusion that this 
exception is no longer needed.

B. Section-by-Section Analysis of Comments

1. Comments on the General Requirement

    SBA received two comments on Sec.  125.3(a), General. One commenter 
suggested adding the phrase ``unless otherwise exempt'' before the 
phrase ``other-than-small'' in the second sentence to clarify the fact 
that there are some exceptions to the requirement that prime 
contractors submit subcontracting plans for certain Federal contracts. 
(The exceptions are listed in the regulation at the beginning of the 
following paragraph, Sec.  125.3(b).) The same commenter also suggested 
changing the word ``firms'' to ``business concerns'' and adding the 
word ``appropriate'' before ``contracting agency'' in the same 
sentence. SBA considers all of these suggestions to be constructive and 
has revised the language accordingly. The other commenter expressed 
concern that SBA was changing the phrase ``maximum utilization'' in the 
current version of the regulation to ``maximum practicable 
subcontracting opportunities'' and said that this change would convey a 
dangerous message to those who are required to participate in the 
Subcontracting Assistance Program. SBA reviewed the statute and found 
that the Congress itself had used the phrase ``maximum practicable 
opportunity'' in the legislation; therefore, SBA decided against making 
this change.

2. Comments on the Responsibilities of Prime Contractors

    SBA received ten comments on Sec.  125.3(b), Responsibilities of 
prime contractors. All of these commenters misunderstood the proposed 
rule to mean that SBA was either intending to require small businesses 
to submit subcontracting plans and/or planning to impose new reporting 
requirements on them. In fact, the Small Business Act specifically 
excludes small business concerns from the requirement to submit a 
subcontracting plan. Several commenters criticized SBA for its failure 
to perform an Initial Regulatory Flexibility Analysis (IRFA). One 
commenter suggested that SBA require subcontracting plans from small 
businesses only when the small business intends to subcontract some of 
the contract. In other words, if a small-business prime contractor 
performs 100 percent of the contract with its own labor, a 
subcontracting plan would not be required. This suggestion cannot be 
implemented without an amendment to the legislation (15 U.S.C. 
637(d)(4)), which currently prohibits the Government from requiring 
small businesses to submit subcontracting plans under any 
circumstances. Therefore, SBA cannot adopt this suggestion. Since SBA 
does not intend to require subcontracting plans or reports from small 
business, no IRFA is required.
    It was never SBA's intent to require small businesses to submit 
subcontracting plans or to impose new reporting requirements on them. 
However, since the language in the proposed rule has apparently caused 
some confusion, SBA has added language to Sec.  125.3(b) clarifying 
that a small business cannot be required to submit a formal 
subcontracting plan or a subcontracting report (see Sec.  125.3(b)(2)). 
Since the clarifying language has been added as Sec.  125.3(b)(2), 
Sec.  125.3(b)(2) in the proposed rule has been redesignated Sec.  
125.3(b)(3) in the final rule.
    It should be noted that, under Sec.  19.1202 of the Federal 
Acquisition Regulation (FAR), 48 CFR 19.1202, all offerors, including 
small business offerors, submit targets for small disadvantaged 
business (SDB) participation, and the successful offeror must submit a 
final report on SDB participation at contract completion. The 
requirement to submit targets for SDB participation does not constitute 
a subcontracting plan; in any case, that provision and related 
reporting requirement are separate and apart from the subcontracting 
plan requirements discussed in this regulation.
    One commenter suggested revising Sec.  125.3(b)(1) in its entirety 
to state: ``While a small businesses prime contractor is exempt from 
the requirement to establish a subcontracting plan, it is encouraged to 
provide maximum practicable opportunity for small businesses to 
participate in the performance of the contract, consistent with the 
efficient performance of the contract.'' SBA thinks that this 
suggestion is excellent; however, we believe that the suggested wording 
serves its purpose better under Sec.  125.3(b)(2), rather than under 
Sec.  125.3(b)(1), and we have therefore added it as a second sentence 
under Sec.  125.3(b)(2).
    The same commenter suggested revising the proposed Sec.  
125.3(b)(2) (Sec.  125.3(b)(3) in the final rule) to add the phrase 
``as appropriate for the procurement.'' SBA agrees with this suggestion 
and has made the change. SBA has also added the word ``may'' and ``one 
or more of the following actions'' to the same sentence to clarify the 
face that each of the items in the list (Sec.  125.3(b)(2)(i) through 
(viii) of the proposed rule, Sec.  125.3(b)(3)(1) through (ix) of the 
final rule) will not necessarily be applicable to every procurement. To 
ensure consistency throughout the final rule, SBA also added similar 
language to Sec.  125.3(d)(1).
    One commenter questioned the omission of the mentor-
prot[eacute]g[eacute] program from the list at the proposed Sec.  
125.3(b)(2). Under 15 U.S.C. Sec.  637(d)(11), prime contractors acting 
as mentors are allowed to receive credit towards their subcontracting 
goals for developmental assistance to their prot[eacute]g[eacute]s. It 
is noted that many Federal agencies, such as the DoD, have Federal 
Acquisition Regulation Supplements addressing their mentor-
prot[eacute]g[eacute] programs, and in fact SBA has a separate 
regulation dealing with its own

[[Page 75822]]

mentor-prot[eacute]g[eacute]; program (13 CFR 124.520). However, SBA 
agrees that adding a separate item to the list at the proposed Sec.  
125.3(b)(2) strengthens this regulation, and we have made this change 
by adding a new item as Sec.  125.3(b)(3)(ix).
    Two commenters said that the provisions at the proposed Sec.  
125.3(b)(2)(vii) (Sec.  124.3(b)(2)(vii) of the final rule), which 
addresses assistance to small business in obtaining bonding, lines of 
credit, required insurance, necessary equipment, supplies, materials, 
or services, could lead to improper arrangements between large and 
small businesses in terms of control, conflicts of interest, and fair 
dealing. SBA has carefully considered this argument and concluded that, 
where any impropriety in this regard is alleged, it should be referred 
to the contracting officer for review under the procedures set forth in 
Part 121 of this regulation or other applicable procedures. However, 
when the assistance is properly structured so as to comply with 
applicable legal authority, a large business may provide this type of 
assistance without violating any laws or regulations. Therefore, SBA 
has retained this provision as written.

3. Comments on the Additional Responsibilities of Large Prime 
Contractors

    One commenter took issue with the word ``utilization'' in the 
phrase ``maximum practicable utilization'' at Sec.  125.3(c)(1)(i). SBA 
agrees with this comment and has changed the phrase to read ``maximum 
practicable opportunity,'' which, as noted above, is consistent with 
the language in the statute.
    Two commenters complimented SBA on changing the dollar threshold 
for the mandatory pre-award written notification to unsuccessful 
offerors from $10,000 to $100,000, which is the simplified acquisition 
threshold. (Sec.  125.3(c)(1)(v)). Another commenter disagreed with 
this proposed change, saying it would be harmful to small businesses. 
Two other commenters disagreed with the requirement altogether, saying 
that there is no rationale for such a rule. One of the commenters in 
favor of the change suggested that the final rule could encourage prime 
contractors, as a good business practice, to provide the same written 
notification to unsuccessful offerors below this threshold. SBA agrees 
with this suggestion and believes that it will address the concerns of 
the commenter who said that this change would be harmful to small 
businesses. SBA did not adopt the comments of the two commenters who 
said that there is no rationale for such a rule. If unsuccessful 
offerors are notified in advance of the proposed awardee, they may 
protest or bring eligibility issues to the attention of the prime 
contractor. In addition, this requirement is also applicable to 
contracting officers in the Federal government (see 48 CFR 15.503(a)(2) 
and SBA strives to make its prime and subcontracting programs 
consistent where practical. SBA has added a provision at Sec.  
125.3(c)(1)(vi) to encourage prime contractors, as a good business 
practice, to provide written notification to unsuccessful offerors 
below $100,000. Two commenters questioned SBA's reference to an 
electronic database in Sec.  125.3(c)(1)(iii). In fact, as part of the 
Integrated Acquisition Environment (IAE), the Government is working 
aggressively to develop and implement such a database. Therefore, SBA 
has made no change to Sec.  125.3(c)(1)(iii).
    In response to Sec.  125.3(b)(2), which addresses commercial 
subcontracting plans, one commenter pointed out that the plan template 
required by the Federal government for contractors with commercial 
subcontracting plans is based on the contractor's fiscal year (usually 
the calendar year), but the reports are required for the Federal 
government's fiscal year. SBA is aware of this problem and has 
addressed it separately by means of a formal case submitted to the 
Federal Acquisition Regulation (FAR Council). The electronic database 
mentioned above is also being designed to correct this problem.
    Another commenter questioned the policy set forth in Sec.  
125.3(c)(2) that permits the contracting officer of the agency that 
originally approved a commercial plan to exercise the functions of the 
contracting officer on behalf of all agencies that award contracts 
covered by the plan. This is a practical approach since a choice must 
be made as to which agency administers the plan and the appropriate 
choice is the agency that originally approved it. This policy has been 
in effect for some time and no significant problems or issues have 
arisen as a result. Moreover, an almost identical provision currently 
exists in the Federal Acquisition Regulation (48 CFR) (see 48 CFR 
19.705-7(f). For these reasons, SBA has not changed the wording of this 
provision.

4. Comments on Determination of Good-Faith Efforts

    At least eight commenters, including two members of Congress, 
objected to the provision at Sec.  125.3(d)(2) that would include, in 
the determination of good-faith efforts evidence that other contractors 
awarded contracts of similar scope, size or dollar value had not 
achieved or exceeded the goals stated in their subcontracting plans. 
One commenter pointed out that the Federal government, using this 
guidance, could penalize a company that is in complete compliance based 
on a comparison to other companies that are performing better; or, 
alternatively, the federal government could compare a company that is 
barely complying to companies that are complete failures and conclude 
that it is making a good-faith effort when it is not. SBA agrees with 
these comments and has stricken this provision from the final rule.
    One commenter pointed out that prime contractors are often 
penalized for failing to achieve their goal in one socio-economic 
category, even though they may have exceeded their goal in another 
area. SBA believes that this is a valid concern, and we have replaced 
the provision stricken from Sec.  125.3(d)(2), as noted above, with a 
statement addressing this point. This subparagraph now reads, in part:

    Evidence that a large business prime contractor has made a good-
faith effort to comply with its subcontracting plan or other 
subcontracting responsibilities includes supporting documentation 
that:
    (1) The contractor performed one or more of the actions 
described in paragraph (b) of this section, as appropriate for the 
procurement; and
    (2) Although the contractor may have failed to achieve its goal 
in one socio-economic category, it exceeded its goal by an equal or 
greater amount in one or more of the other categories.

    One commenter from another Federal agency pointed out that the 
Federal Acquisition Regulation (48 CFR) defines the failure to make a 
good-faith effort to comply with a subcontracting plan as the ``willful 
or intentional failure to perform in accordance with the requirements 
of the subcontracting plan, or willful or intentional action to 
frustrate the plan.'' This commenter recommends using this language in 
the final rule. SBA has decided not to adopt this suggestion because it 
believes that the language is too narrow and could be subject to 
misinterpretation. For example, a prime contractor could argue that its 
failure to make any effort to comply with its subcontracting plan was 
not willful but merely negligent or unintentional. SBA believes that 
the nine-item list of actions a prime contractor could take in order to 
demonstrate good faith efforts provides sufficient guidance concerning 
the meaning of this term.

[[Page 75823]]

5. Comments on CMR Responsibilities

    SBA received only two comments on Sec.  125.3(e), CMR 
Responsibilities, and the commenters were generally in favor of the 
additional responsibilities. The commenters inquired about the 
accountability and chain of command, and one commenter suggested that 
the CMRs should report to either the SBA District Directors or to other 
SBA managers at the same level. SBA did not make this change, as it is 
outside the scope of this rule and an established reporting structure 
is already in place.
    A commenter that is a participant in the DoD Test Program asked how 
SOARs would work for contractors participating in that program. The 
memorandum of understanding (MOU) between the Defense Contract 
Management Agency (DCMA) and SBA (see next section) does not prohibit 
SBA's CMRs from conducting SOARs of contractors participating in the 
DoD Test Program. Therefore a participant may request a SOAR visit at 
any time. SBA sees no need to change the subject regulation in response 
to this comment.

6. Comments on Compliance Reviews

    SBA received few comments on Sec.  125.3(f), Compliance Reviews. 
Most of these were favorable. One commenter said, ``We support the 
inclusion of this new coverage in the regulations to aid in the 
understanding of the elements of the compliance review, the ratings to 
be evaluated, and the standards to be used. This coverage will also 
help standardize the reviews across the covered contractor base.'' 
Another commenter pointed out that the regulation does not address what 
corrective or punitive steps should be taken when a prime contractor 
receives an unsatisfactory rating. SBA believes that this is addressed 
adequately in other regulations (e.g., 48 CFR 19.705-7); however, we 
have added two new subparagraphs, Sec.  125.3(f)(4) and (5), to address 
this concern and clarify existing policy. We have renumbered the 
remaining subparagraphs in this section.
    One commenter suggested the need for subcontractor input into the 
evaluation process. SBA believes that this idea may have some merit, 
but it could not be accomplished without imposing a new reporting 
requirement on industry, which SBA prefers not to do at this time.
    The commenter that is a participant in the DoD Test Program 
suggested that the regulation be clarified to state that the compliance 
review would be for the entire company (or for the level of the company 
participating in the DoD Test Program), not for a particular site or 
location. This may be true in an individual case, but is not always 
true. SBA believes that it is impractical to answer this question in a 
broad regulation. Most, if not all, of the participants in the DoD Test 
Program also have contracts with civilian agencies that do not fall 
under that program. For those companies, SBA performance compliance 
reviews on the divisions and sites/locations that have contracts 
containing subcontracting plans, regardless of the corporate level 
approved for the DoD Test Program. Since the division or level of the 
company subject to the compliance review would vary depending on the 
particular plan or plans the concern is operating under, it is not 
possible to adopt this comment.
    In response to the provision at Sec.  125.3(f)(5), which authorizes 
SBA to enter into agreements with other agencies to conduct compliance 
reviews, two commenters questioned why SBA has entered into a 
memorandum of understanding (MOU) with the DCMA to assist SBA in 
performing compliance reviews. These commenters said that SBA ``should 
see how to reconfigure its work force to add more commercial marketing 
representatives'' rather than delegate this function to other agencies. 
SBA has chosen to enter into the MOU with DCMA because that agency has 
more than two decades of experience conducting compliance reviews and 
employs a strong cadre of experienced compliance specialists. Nothing 
is lost by giving DCMA a role in the reviews since SBA is actively 
involved and retains ultimate responsibility. Therefore, SBA has not 
adopted this suggestion.

7. Comments on Subcontracting Consideration in Source Selection

    SBA received several comments on this section reflecting widely 
differing points of view. One commenter who supported the approach said 
that Sec.  125.3(g)(1), (2) and (3) should be modified to make clear 
that the contracting officer must disclose to all competitors which one 
(or more) of the three elements will be evaluated as an important 
source selection evaluation factor in any subsequent procurement 
action. SBA agrees with this suggestion and has added it to Sec.  
125.3(g).
    Another commenter suggested that the word ``may'' in this paragraph 
be changed to ``should,'' so that contracting officers would be 
required to establish an evaluation factor for subcontracting as part 
of the source selection criteria. SBA believes that this suggestion has 
merit, except that such approach cannot be made mandatory without 
providing specific guidance for measuring success in subcontracting, 
particularly when offerors on the same order or agreement operate under 
different types of subcontracting plans (commercial, individual or DoD 
Test Program). Until SBA establishes specific guidance for evaluating a 
business concern's goals and performance in this area, it is neither 
practical nor fair to impose this requirement on Federal agencies. 
However, SBA is working on establishing such guidance and will consider 
imposing mandatory evaluation factors in future revisions to its 
subcontracting regulations. We also note that in individual cases the 
evaluation factor may be simple to utilize without additional guidance, 
particularly in cases where all of the offerors operate under the same 
type of subcontracting plan. Therefore, based on the above, SBA 
believes that making the use of the evaluation optional until specific 
guidance is provided is the best course at this time.
    SBA has changed the word ``important'' to ``significant'' and made 
other minor changes in this paragraph. The new language appears in 
Sec.  125.3(g).
    Another commenters said that it would be inappropriate for the 
Federal government to use subcontracting plans in the source selection 
for schedule purchases, Government-wide acquisition contracts, and 
multi-agency contracts because the members that the commenter 
represents ``are not sure how this appropriately could be 
accomplished.'' SBA notes that contracting officers are already 
required to establish an evaluation factor for subcontracting in 
negotiated acquisitions involving bundling (48 CFR 15.304). This is 
simply taking the concept one step further. SBA believes that the 
potential advantage of this approach to the small business community 
outweigh the concern expressed in this comment.
    Another commenter pointed out that small businesses will be at a 
disadvantage because they do not have a subcontracting plan or evidence 
of subcontracting past performance; therefore, a small-business offeror 
should receive ``full/exemplary'' credit in each of the relevant 
categories. SBA agrees with this point and has added a similar 
statement to Sec.  125.3(g).
    Another commenter that is a participant in the DoD Test Program 
argued that this would be a problem for participant in the DoD Test 
Program, since they do not submit subcontracting goals for individual 
contracts and do not have contract-specific past performance. The DoD 
Test Program applies only to

[[Page 75824]]

contracts with the DoD. The vast majority of schedule contracts are 
with the General Services Administration (GSA) and the Department of 
Veterans Affairs. A participant in the DoD Test Program must provide 
civilian agencies with individual or commercial subcontracting plans 
and must then submit semi-annual or annual reports against these plans. 
SBA sees no need to revise the regulation to address this concern.

Compliance With Executive Orders 13132, 12988 and 12866, the Regulatory 
Flexibility Act (5 U.S.C. 601-612), and the Paperwork Reduction Act (44 
U.S.C. Ch. 35)

    This regulation will not have substantial direct effects on the 
States, on the relationship between the national government and the 
States, or on the distribution of power and responsibilities among the 
various levels of government. Therefore, for the purposes of Executive 
Order 13132, SBA determines that this final rule has no federalism 
implications warranting preparation of a federalism assessment.
    The Office of Management and Budget (OMB) has determined that this 
rule constitutes a significant regulatory action under Executive Order 
12866. the rule revises the SBA regulation governing small business 
contracting assistance to define good faith effort.
    This action meets applicable standards set forth in section 3(a) 
and 3(b)(2) of Executive Order 12988, Civil Justice Reform, to minimize 
litigation, eliminate ambiguity, and reduce burden. The action does not 
have retroactive or preemptive effect.
    SBA has determined that this final rule does not impose additional 
reporting or recordkeeping requirements under the Paperwork Reduction 
Act, 44 U.S.C. Chapter 35.
    The Regulatory Flexibility Act (RFA), 5 U.S.C. 601, requires 
administrative agencies to consider the effect of their actions on 
small entities, small non-profit enterprises, and small local 
governments. Pursuant to the RFA, when an agency issues a rulemaking, 
the agency must prepare a regulatory flexibility analysis which 
describes the impact of the rule on small entities. However, section 
605 of the RFA allows an agency to certify a rule, in lieu of preparing 
an analysis, if the rulemaking is not expected to have a significant 
economic impact on a substantial number of small entities. Therefore, 
within the meaning of RFA, SBA certifies that this rule will not have a 
significant economic impact on a substantial number of small entities.
    The rule does not impose any new substantive responsibilities, nor 
does it require any new reporting or recordkeeping requirements on 
small business. Instead, this rule clarifies the existing statutory 
responsibilities under the subcontracting assistance program, including 
the responsibilities of prime contractors to maximize small business 
subcontracting opportunities. It also provides guidance to government 
officials in monitoring and determining the achievements of 
subcontracting goals.
    In fiscal year 2002, the most recent year for which the Government 
has reliable subcontracting data, small business received nearly $34.4 
billion in subcontract awards, representing more than 35 percent of all 
subcontracts. As a result of this regulation, subcontracting 
opportunities for small business should expand, and this figure may be 
expected to increase in the year(s) following publication of the Final 
Rule.
    The Government does not maintain a database of small business 
subcontractors, but the Central Contractor Registration (CCR) 
maintained by the Department of Defense contains 175,209 small 
businesses. All of these firms are, or wish to become, prime 
contractors or subcontractors on Federal contracts. In most cases, a 
firm in the CCR is willing to perform on Federal contracts in either 
capacity--i.e., as a prime contractor or subcontractor. Accordingly, 
this figure may be considered representative of the universe of small 
business concerns impacted by this regulation. For the record, the 
175,209 includes 9,752 small disadvantaged business concerns; 8,714 
HUBZone small business concerns; 40,755 women-owned small business 
concerns; 24,292 veteran-owned small business concerns (VOPSBs); and 
4,416 service-disabled VOSBs.
    From the foregoing discussion, it should be evident that the rule 
is primarily procedural in nature and would not have a significant 
economic impact on small entities. As a result, no further regulatory 
flexibility analysis (other than that stated above) is required under 5 
U.S.C. 605(b).

List of Subjects in 13 CFR Part 125

    Government contracts, Government procurement, Reporting and 
recordkeeping requirements, Small businesses, and Technical assistance.


0
For the reasons set forth in the preamble, SBA amends 13 CFR part 125 
as follows:

PART 125--GOVERNMENT CONTRACTING PROGRAMS

0
1. The authority citation for 13 CFR part 125 continues to read as 
follows:

    Authority 15 U.S.C. 634(b)(6), 637 and 644; 31 U.S.C. 9701 and 
9702.


0
2. Revise Sec.  125.3 to read as follows:


Sec.  125.3  Subcontracting assistance.

    (a) General. The purpose of the subcontracting assistance program 
is to provide the maximum practicable subcontracting opportunities for 
small business concerns, including small business concerns owned and 
controlled by veterans, small business concerns owned and controlled by 
service-disabled veterans, certified HUBZone small business concerns, 
certified small business concerns owned and controlled by socially and 
economically disadvantaged individuals, and small business concerns 
owned and controlled by women. The subcontracting assistance program 
implements section 8(d) of the Small Business Act, which includes the 
requirement that, unless otherwise exempt, other-than-small business 
concerns awarded contracts that offer subcontracting possibilities by 
the Federal Government in excess of $500,000, or in excess of 
$1,000,000 for construction of a public facility, must submit a 
subcontracting plan to the appropriate contracting agency. The Federal 
Acquisition Regulation sets forth the requirements for subcontracting 
plans in 48 CFR 19.7, and the clause at 48 CFR 52.219-9.
    (b) Responsibilities of prime contractors. (1) Prime contractors 
(including small business prime contractors) selected to receive a 
Federal contract that exceeds the traditional simplified acquisition 
threshold of $100,000, that will not be performed entirely outside of 
any state, territory, or possession of the United States, the District 
of Columbia, or the Commonwealth of Puerto Rico, and that is not for 
services which are personal in nature, are responsible for ensuring 
that small business concerns have the maximum practicable opportunity 
to participate in the performance of the contract, including 
subcontracts for subsystems, assemblies, components, and related 
services for major systems, consistent with the efficient performance 
of the contract.
    (2) A small business cannot be required to submit a formal 
subcontracting plan or be asked to submit a formal subcontracting plan, 
a small-business prime contractor is encouraged to provide maximum

[[Page 75825]]

practicable opportunity to other small businesses to participate in the 
performance of the contract, consistent with the efficient performance 
of the contract.
    (3) Efforts to provide the maximum practicable subcontracting 
opportunities for small business concern may include, as appropriate 
for the procurement, one or more of the following actions:
    (i) Breaking out contract work items into economically feasible 
units, as appropriate, to facilitate small business participation;
    (ii) Conducting market research to identify small business 
subcontractors and suppliers through all reasonable means, such as 
performing on-line searches on the Central Contractor Registration 
(NCR), posting Notices of Sources Sought and/or Requests for Proposal 
on SBA's SUB-Net, participating in Business Matchmaking events, and 
attending pre-bid conferences;
    (iii) Soliciting small business concerns as early in the 
acquisition process as practicable to allow them sufficient time to 
submit a timely offer for the subcontract;
    (iv) Providing interested small businesses with adequate and timely 
information about the plans, specifications, and requirements for 
performance of the prime contract to assist them in submitting a timely 
offer for the subcontract;
    (v) Negotiating in good faith with interested small businesses;
    (vi) Directing small businesses that need additional assistance to 
SBA;
    (vii) Assisting interested small businesses in obtaining bonding, 
lines of credit, required insurance, necessary equipment, supplies, 
materials, or services;
    (viii) Utilizing the available services of small business 
associations; local, state, and Federal small business assistance 
offices; and other organizations; and
    (ix) Participating in a formal mentor-prot[eacute]g[eacute] program 
with one or more small-business prot[eacute]g[eacute]s that results in 
developmental assistance to the prot[eacute]g[eacute]s.
    (c) Additional responsibilities of large prime contractors. (1) In 
addition to the responsibilities provided in paragraph (b) of this 
section, a prime contractor selected for award of a contract or 
contract modification that exceeds $500,000, or $1,000,000 in the case 
of construction of a public facility, is responsible for:
    (i) Submitting and negotiating before award an acceptable 
subcontracting plan that reflects maximum practicable opportunities for 
small businesses in the performance of the contract as subcontractors 
or suppliers. A prime contractor may submit a commercial plan, 
described in paragraph (c)(2) of this section, instead of an individual 
subcontracting plan, when the product or service being furnished to the 
Government meets the definition of a commercial item under 48 CFR 
2.101;
    (ii) Making a good-faith effort to achieve the dollar and 
percentage goals and other elements in its subcontracting plan;
    (iii) Submitting a timely, accurate, and complete SF-294, 
Subcontracting Report for Individual Contract, and SF-295, Summary 
Subcontract Report; or entering the same information into an electronic 
database approved by SBA;
    (vi) Cooperating in the reviews of subcontracting plan compliance, 
including providing requested information and supporting documentation 
reflecting actual achievements and good-faith efforts to meet the goals 
and other elements in the subcontracting plan;
    (v) Providing pre-award written notification to unsuccessful small 
business offerors on all subcontracts over $100,000 for which a small 
business concern received a preference. The written notification must 
include the name and location of the apparent successful offeror and if 
the successful offeror is a small business, veteran-owned small 
business, service-disabled veteran-owned small business, HUBZone small 
business, small disadvantaged business, or women-owned small business; 
and
    (vi) As a best practice, providing the pre-award written 
notification cited in paragraph (c)(1)(v) of this section to 
unsuccessful and small business offerors on subcontracts at or below 
$100,000 whenever it is practical to do so.
    (2) A commercial plan, also referred to as an annual plan or 
company-wide plan, is the preferred type of subcontracting plan for 
contractors furnishing commercial items. A commercial plan covers the 
offeror's fiscal year and applies to the entire production of 
commercial items sold by either the entire company or a portion thereof 
(e.g., division, plant, or product line). Once approved, the plan 
remains in effect during the contractor's fiscal year for all Federal 
government contracts in effect during that period. The contracting 
officer of the agency that originally approved the commercial plan will 
exercise the functions of the contracting officer on behalf of all 
agencies that award contracts covered by the plan.
    (3) The additional prime contractor responsibilities described in 
paragraph (c)(1) of this section do not apply if:
    (i) The prime contractor is a small business concern;
    (ii) The prime contract or contract modification is a personal 
services contract; or
    (iii) The prime contract or contract modification will be performed 
entirely outside of any state, territory, or possession of the United 
States, the District of Columbia, or the Commonwealth of Puerto Rico.
    (d) Determination of good-faith efforts. Evidence that a large 
business prime contractor has made a good-faith effort to comply with 
its subcontracting plan or other subcontracting responsibilities 
includes supporting documentation that:
    (1) The contractor performed one or more of the actions described 
in paragraph (b) of this section, as appropriate for the procurement;
    (2) Although the contractor may have failed to achieve its goal in 
one socio-economic category, it over-achieved its goal by an equal or 
greater amount in one or more of the other categories; or
    (3) The contractor fulfilled all of the requirements of its 
subcontracting plan.
    (e) CMR Responsibilities. Commercial Market Representatives (CMRs) 
are SBA's subcontracting specialists. CMRs are responsible for:
    (1) Facilitating the matching of large prime contractors with small 
business concerns;
    (2) Counseling large prime contractors on their responsibilities to 
maximize subcontracting opportunities for small business concerns;
    (3) Instructing large prime contractors on identifying small 
business concerns by means of the CCR, SUB-Net, Business Matchmaking 
events, and other resources and tools;
    (4) Counseling small business concerns on how to market themselves 
to large prime contractors;
    (5) Maintaining a portfolio of large prime contractors and 
conducting Subcontracting Orientation and Assistance Reviews (SOARs). 
SOARs are conducted for the purpose of assisting prime contractors in 
understanding and complying with their small business subcontracting 
responsibilities, including developing subcontracting goals that 
reflect maximum practicable opportunity for small business; maintaining 
acceptable books and records; and periodically submitting reports to 
the Federal government; and
    (6) Conducting periodic reviews, including compliance reviews in

[[Page 75826]]

accordance with paragraph (f) of this section.
    (f) Compliance reviews. A prime contractor's performance under its 
subcontracting plan is evaluated by means of on-site compliance reviews 
and follow-up reviews. A compliance review is a surveillance review 
that determines a contractor's achievements in meeting the goals and 
other elements in its subcontracting plan for both open contracts and 
contracts completed during the previous twelve months. A follow-up 
review is done after a compliance review, generally within six to eight 
months, to determine if the contractor has implemented SBA's 
recommendations.
    (2) All compliance reviews begin with a validation of the 
contractor's most recent SF-295, Summary Subcontract Report, and SF-
294, Subcontracting Report for Individual Contracts, if applicable. The 
validation includes a review of the contractor's methodology for 
completing these reports and a sampling of specific documentation to 
substantiate small business status.
    (3) Upon completion of the review and evaluation of a contractor's 
performance and efforts to achieve the requirements in its 
subcontracting plans, the contractor's performance will be assigned one 
of the following ratings: Outstanding, Highly Successful, Acceptable, 
Marginal, or Unsatisfactory. The factors listed in paragraph (c) of 
this section will be taken into consideration, where applicable, in 
determining the contractor's rating. However, a contractor may be found 
Unsatisfactory, regardless of other factors, if it cannot substantiate 
the claimed achievements under its subcontracting plan.
    (4) Any contractor that receives a marginal or unsatisfactory 
rating must provide a written corrective action plan to SBA, or to both 
SBA and the agency that conducted the compliance review if the agency 
conducting the review has an agreement with SBA, within 30 days of its 
receipt of the official compliance report.
    (5) Any contractor that fails to comply with paragraph (f)(4) of 
this section, or any contractor that fails to demonstrate a good-faith 
effort, as set forth in paragraph (d) of this section, may be 
considered for liquidated damages under the procedures in 48 CFR 
19.705-7 and the clause at 52.219-16. This action shall be considered 
by the contracting officer upon receipt of a written recommendation to 
that effect from the CMR. The CMR's recommendation must include a copy 
of the compliance report and any other relevant correspondence or 
supporting documentation.
    (6) Reviews and evaluations of contractors with commercial plans 
are identical to reviews and evaluations of other contractors, except 
that contractors with commercial subcontracting plans do not submit the 
SF-294, Subcontracting Report for Individual Contracts. Instead, goal 
achievement is determined by comparing the goals in the approved 
commercial subcontracting plan against the cumulative achievements on 
the SF-295, Summary Subcontract Report, for the same period. The same 
ratings criteria set forth in paragraph (f)(3) of this section apply to 
contractors with commercial plans.
    (7) SBA is authorized to enter into agreements with other Federal 
agencies or entities to conduct compliance reviews and otherwise 
further the objectives of the subcontracting program. Copies of these 
agreements will be published on http://www.sba.gov/GC. SBA is the lead 
agency on all joint compliance reviews with other agencies.
    (g) Subcontracting consideration in source selection. When an 
ordering agency anticipates placing an order against a Federal Supply 
Schedule, government-wide acquisition contract (GWAC), or multi-agency 
contract (MAC), the ordering agency may evaluate subcontracting as a 
significant factor in its source selection process. In addition, the 
ordering agency may also evaluate subcontracting as a significant 
factor in source selection when entering into a blanket purchase 
agreement. At the time of contract award, the contracting officer must 
disclose to all competitors which one (or more) of these three elements 
will be evaluated as an important source selection evaluation factor in 
any subsequent procurement action. A small-business offeror 
automatically receives the maximum possible score or credit on this 
evaluation factor without having to submit a subcontracting plan and 
without having to demonstrate subcontracting past performance. The 
factors that may be evaluated, individually or in combination, are:
    (1) The subcontracting to be performed on the specific requirement;
    (2) The goals negotiated in previous subcontracting plans; and
    (3) The contractor's past performance in meeting the subcontracting 
goals contained in previous subcontracting plans.

    Dated: October 6, 2004.
Hector V. Barreto,
Administrator.
[FR Doc. 04-27765 Filed 12-17-04; 8:45 am]
BILLING CODE 8025-01-M


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