Proposed Legislation to Increase Small/Minority/Disadvantaged Subcontracting Goals

On May 4th, companion bills were introduced in the Senate and House that are designed to increase participation of small businesses in Government contracting. Both bills are titled the same - Assuring Contracting Equity (ACE) Act of 2017.

The Bills contain several provisions to raise the SBA (Small Business Administration) contracting goals and (supposedly) to increase transparency. These include:

• Raising the SBA's government-wide small business contracting goal from 23 to 25 percent.
• Increasing the contracting goal from 5 percent to 10 percent for businesses owned by veterans, women, and economically disadvantaged individuals.
• Making the reporting requirements more transparent and prohibiting reporting practices that artificially inflate the appearance of contracting to minority-owned businesses (good luck on that effort).
• Requiring the SBA to disclose the percentage of contracts that are awarded to small business from all federal contracting dollars.
• Consider past subcontracting compliance in award decisions.

Raising small business, minority, and disadvantaged subcontracting goals are pretty straight-forward provisions. The reporting requirements designed to increase transparency however are bound to be controversial if for no other reason than it adds more, perhaps onerous, reporting requirements on prime contractors and upper-tier subcontractors. This runs counter to efforts of the current administration to reduce regulations that create barriers to sound business practices and cause many businesses to eschew Government work.  Also, the provisions that past subcontracting compliance can affect award decisions sounds very similar to the so-called "black-listing" provisions that were so controversial in the Fair Pay and Safe Workplaces rules that were overturned earlier this year by Congress and the President.

We have no idea how far these Democrat-sponsored bills will progress through the legislative process. If it were limited to increasing thresholds instead of laying on a lot of new reporting requirements as well, it might have a better shot.

New FAR Rules for Small Business Subcontracting Plans

A little over a year ago, DoD, GSA, and NASA (the FAR Councils) published a proposed FAR rule to implement small business subcontracting improvements among Government contractors. A number of commentators provided written comments and suggestions to the proposed regulations, most of them positive. Yesterday, the FAR Council's made it formal by publishing the rules in final form.

The new rule in intended to provide for the following items (among many other provisions).

• It will require prime contractors to make good faith efforts to utilize their proposed small business subcontractors during performance of a contract to the same degree the prime contractor relied on the small business in preparing and submitting its bid or proposal. In other words, if you proposed it, you've must award it. If the prime contractor cannot make a good faith effort, it must explain, in writing, to the contracting officer the reasons for its failures.
• The rules authorize contracting officers to calculate subcontracting goals in terms of total contract dollars in addition to the required goals in terms of total subcontracted dollars.
• It provides contracting officers with the discretion to require a subcontracting plan in instances where a small business represents its size as an other than small business.
• It requires subcontracting plans for modifications under the subcontracting plan threshold if the modification causes the contract to exceed the plan threshold.
• It restricts prime contractors from prohibiting a subcontractor from discussing payment or utilization matters with the contracting officer.
• It allows contracting officers to establish subcontracting goals at the order level on ID/IQ (Indefinite-delivery, indefinite-quantity) contracts.

Perhaps the most problematic of the foregoing requirements is the "good faith effort" provision because it, by its very nature, requires the exercise of judgment. Whenever the exercise of judgment is involved, two sides can have differing opinions and they can both appear reasonable positions.

FAR does not provide a definition for the phrase "good faith effort" but FAR 19.705(d) offers some insight into the Government's thinking. FAR states:

In determining whether a contractor failed to make a good faith effort to comply with its subcontracting plan, a contracting officer must look to the totality of the contractor's actions, consistent with the information and assurances provided in its plan. The fact that the contractor failed to meet its subcontracting goals does not, in and of itself, constitute a failure to make a good faith effort. For example ... factors such as unavailability of anticipated sources or unreasonable prices may frustrate achievement of the contractor's goals. However, when considered in the context of the contractor's total effort in accordance with its plan, the following, though not all inclusive may be considered as indicators of a failure to make a good faith effort:

• a failure to attempt to identify, contact, solicit, or consider for contract award small businesses

• a failure to designate and maintain a company official to administer the subcontracting program and monitor and enforce compliance with the plan

• a failure to maintain records or otherwise demonstrate procedures adopted to comply with the plan

• the adoption of company policies or procedures that have as their objectives the frustration of the objectives of the plan.

If your company is required to develop and implement a subcontracting plan, you need to ensure that you have someone in charge of compliance to preclude a non-good-faith effort assessment.

Best Practices for Meeting Small Business Subcontracting Goals

Most Government contractors have difficulty meeting their small business subcontracting goals. The Government has its own set of goals for awarding contracts to small and disadvantaged contractors. Similar goals are inserted into prime Government contracts and in some cases, flow down to subcontractors who in turn have their small and disadvantaged subcontracting goals. Sometimes, these goals are incorporated into "award fee" criteria as a means of incentivizing contractors (and subcontractors) to do a better job of finding these small and disadvantaged firms and then awarding them subcontracts. Perhaps the  push to meet these goals causes the Government and its contractors to perform less than thorough verification that small and disadvantaged firms are truly that. We've reported many times on cases involving companies that fraudulently claim small business (or veteran-owned or minority-owned, or woman-owned) status. True, these firms are robbing others of the program benefits but in reality, its sometimes nearly impossible to find qualified small businesses for particular tasks.

DCMA (Defense Contract Management Agency) is the agency with responsibility for monitoring and reviewing Defense contractor progress toward meeting small business goals. The Agency has seen first hand many of the successes and failures in the program. Based on those reviews, DCMA has compiled a listing of the "best practices" within the prime contractor community for achieving small business subcontracting goals, and in particular, small disadvantaged subcontractors. These best practices, although directed to prime contractors, would equally apply to subcontractors who also need to meet small business subcontracting goals. Lets look at this list of best practices.

• Establish team or working group to assign advocates that act as extension of supplier diversity program office. This, according to DCMA will "spread the gospel" throughout the company.
• Utilization of manufacturing engineer to visit SDBs (Small Disadvantaged Businesses) that had contracted SBLO (Small Business Liaison Officer) regarding business opportunities. Develop a form to allow clear rating of capabilities of each prospective source visited. A high rating resulted in business opportunities on both commercial and Government contracts. Also, increased buyer confidence that new companies being added to the bid list will perform.
• Publication of supplier diversity news. Internal communication used to motivate staff to keep supplier diversity in mind. Articles are written and published regularly and targeted to reach those who often make sourcing decisions.
• Appointment of business advocate. A woman employee is appointed to a temporary, one-year term as the women-owned small business advocate for the company. Person attends procurement conferences and meetings. This rotational assignment increases awareness among employees.
• SBLOs formed a committee to better prepare subcontractors to do business with their companies. Group provides free training to small business on business etiquette, how to fill out interest applications, and any topic determined to help small businesses that attend. They have a graduation ceremony for small businesses that attended five of the six scheduled training sessions. The SBLOs have their Vice Presidents of Purchasing attend the graduation and the small businesses are given an opportunity to provide an oral presentation of the company to the audience.
• Inclusion of small, disadvantaged and woman-owned business in every procurement. Company procedures require solicitation of at least one company from each SB category on every procurement. If buyer doesn't solicit at least one, authorization to proceed can only be obtained by going through the SBLO.
• Identification of where expenditures occur so everyone, not only the buyer, knew to be on the lookout for small business sources in those areas. Analyzed procurement cycle and categorized purchases and suppliers involved. Identified opportunity areas and then focused outreach efforts to optimize spending impact.
• Approval to award to SDBs that were not low bidder. Approval given by a Corporate VP committed to success of the SDB program which gave approval to award to SDBs that were not the low bidder. Not an open checkbook, but reasonable application.
• Formation of re-sourcing team to establish policy and procedures to resource materials from one supplier to another. Team consisting of members from quality assurance, purchasing and SBLO evaluate parts to be re-sourced, analyze impact to subcontract goals and attempt to include at least one supplier capable of qualification in each of the small business categories.
• Technology utilization. Outreach to small businesses using the internet and electronic application processes to do business.

We cannot attest to the effectiveness of these practices but DCMA is convinced that they will help contractors achieve their small and disadvantaged business subcontracting goals. Who knows, maybe some of them will resonate with you.

Failure to Meet Subcontracting Goals Could Result in Lost Opportunities

In Fiscal Year 2013, the federal government met, for the first time in eight  years, its small-business subcontracting goals (23 percent). Government contractors as a whole, did not meet their targets, and do not usually meet their targets. They often get close. In the last scorecard, Government contractors earned a "B" rating.

Goals are goals and there never seemed to be any consequence for contractors that failed to meet those goals. No one ever seemed to take seriously a contractor's failure to meet them. We can recall numerous meetings where contractors would project their flashy PowerPoint's in front of assembled Government officials with furrowed brows explaining why they didn't meet their goals and explaining all the corrective actions planned to rectify the situation. Those Government officials, dazzled by the glibness, would nod in understanding and return to their desks. But they would return the next year, and the next, and the year after that for the same razzle-dazzle.

A recent Comptroller General (GAO) bid protest decision suggests that there will be consequences for contractors failing to meet their subcontracting goals. Last month, the GAO published a decision where a contractor lost out on a $50 million contract because their past performance rating was downgraded as a result of not meeting its small business subcontracting goals.

SAIC (Science Applications International Corporation) protested the award of a major contract to its competitor based on various deficiencies in DLA's evaluation of its proposal. Among those deficiencies was DLA's evaluation of past performance.

The solicitation provided that each contract would be awarded on a best value basis, considering three evaluation factors: past performance, technical merit, and price. With respect to past performance, offerors were directed to submit information regarding up to six prior contracts and that DLA would evaluate both relevancy and contractor performance. Past performance ratings could be one of five levels, substantial confidence, satisfactory confidence, limited confidence, no confidence and unknown (or neutral) confidence.

The solicitation provided that past performance was more important than technical merit, and that the non-price factors were significantly more important than price.

In December 2013, proposals were submitted. In May 2014, DLA conducted discussions with the offerors. At the meeting with SAIC representatives, DLA advised SAIC that its failures to meet socio-economic and/or subcontracting goals on four prior contracts were viewed as weaknesses. The solicitation expressly put offerors on notice that DLA's evaluation of past performance would include consideration of the degree to which of offeror met socio-economic goals. Elsewhere, the solicitation advised offerors that DLA would rate how well the offeror met its subcontracting goals. Ultimately, the contract was awarded to another contractor.

SAIC protested the award asserting that it was unreasonable for the agency to assign it a "satisfactory confidence" rating, noting that DLA appears to have disregarded ratings of "exceptional" for many of its prior contracts. More specifically, SAIC complained that it was unreasonable for the agency to downgrade SAIC's past performance for what SAIC characterized as four minor weaknesses pertaining to SAIC's failure to meet its socio-economic and subcontracting goals. SAIC asserted that such failures should have been offset by other positive aspects of SAIC's past performance and SAIC's ongoing efforts to substantially increase small business participation.

The GAO disagreed. GAO stated that consistent with DLA's assessments, the evaluation record showed that SAIC failed to meet its socio-economic and/or subcontracting goals in four of the five contracts it submitted for past performance evaluation. DLA concluded that SAIC's multiple failures to meet its socio-economic and/or subcontracting goals were past performance weaknesses. Accordingly, DLA rated SAIC's performance as good" but not outstanding for four of the five contracts, and assigned an overall past performance rating of satisfactory confidence.

The GAO found no basis to question DLA's determination that SAIC's failure to meet its socio-economic and/or subcontracting goals in four of five prior contracts constituted weaknesses, nor did the GAO question DLA's overall rating of satisfactory confidence. The assessment was consistent with the solicitation's stated evaluation criteria, supported by the evaluation record, and reasonable.

The entire GAO decision is available here.