Alex Gorelik Associate, Smith Currie & Hancock LLP.
March 6, 2023

There may be a new opportunity for small businesses to expand their book of business when it comes to their pursuit of federal contracts.  In the summer of 2022, the Small Business Administration (SBA) released a final rule that may offer a wider range of opportunities for contractors to compete in federal construction procurement.  While it has previously been challenging for smaller contractors to substantively break into the market, predominantly due to an inability to demonstrate past performance required by federal solicitations, this newly-minted rule should alleviate some of those burdens.

The origin of the SBA’s new regulation extends from the National Defense Authorization Act for Fiscal Year 2021.  The bill required the SBA to develop regulations that allow small businesses to use their past performance, including memberships in joint-ventures or as subcontractors to prime contractors, when issuing proposals in response to federal procurements.  The new SBA regulation is located at 13 CFR § 125.11, and it calls for two demonstrative changes to the federal procurement policies and practices: (i) requiring agencies to consider the past performance of small businesses who have performed as members of joint-ventures or first-tier subcontractors, while also (ii) requiring certain prime contractors to provide performance ratings to first-tier subcontractors as requested.

Formerly, some small businesses have not had the requisite performance experience, acting as prime contractor, to properly compete for federal procurement contracts.  As a result, many of those contractors have found it necessary to participate in joint ventures with other small businesses, or larger businesses under the SBA Mentor-Protégé program, that possess the necessary past performance prerequisite.  As a result, many governmental project solicitations and procurement officers would not acknowledge these small businesses as having valid past performance experience, requiring qualifications to be contingent on serving as a “prime contractor.”  This process led to certain small businesses being denied opportunities to bid on federal construction and service contracts, due to their limited performance serving in joint-venture/subcontractor roles.

The new regulations require these federal procurement officers to consider small businesses’ previous performance in joint ventures when evaluating qualifications and proposals.  Of note, small businesses may use their joint venture experiences even if a joint venture partner was also a small business.  Additionally, partnerships formed with larger contractors under a mentor-protégé agreement can be submitted as experience for future procurement.  The applicability is only subject to a singular requirement: the previous experience relied on must have actually been performed by the small business and not exclusively by their partner.  The implementation of this rule expands the tools available for small businesses to show the past performance necessary to effectively compete for federal work.

The second change acknowledged in the SBA requirement is a new process which requires prime contractors to give evaluations to first-tier subcontractors under certain federal contracts.  The evaluations can be leveraged by subcontractors to build a book of previous performance when competing for newer federal projects.  These requests must be made to the prime contractor, and the response is due within fifteen (15) days of the subcontractor’s request.  The rating system is contained in FAR § 42.1503 – Exceptional, Very Good, Satisfactory, Marginal, and Unsatisfactory.  The ratings are supplied for the following categories: technical (quality of product or service); cost control (not applicable for firm-fixed-price or fixed-price with economic price adjustment arrangements); schedule and/or timeliness; management or business practices; and “other” (where applicable).  Deadlines to provide and supply the evaluations may be negotiated between the prime contractor and subcontractor per project; however, completion cannot take place sooner than thirty (30) following completion of the contract.

No specific form is required to be used by the prime contractor to supply the rating, and the evaluation is submitted directly to the subcontractor.  It is then at the discretion of the subcontractor to decide whether to use, or not use, the reports in future proposals.  The ratings are to be used and evaluated by procurement officers in a manner similar to Contractor Performance Assessment Reporting System (CPARS) usage for first-tier contractors.  The goal of the rule is to allow alternative means for small businesses to leverage their successful performances to be able to compete for new federal contracts.

Although a wider range of opportunities will become available for these small businesses, there are procedural issues that persist.  The SBA provided neither a formal means to enforce prime contractors’ participation in the evaluation nor disciplinary action for compliance failure.  The only recourse available to subcontractors for lack of compliance is to issue complaints to contracting officers when evaluation refusal takes place.  A negative implication of the current rule renders a subcontractor helpless when they disagree with a particular evaluation rating.  As is, the rule only encourages a subcontractor to avoid using an unfavorable evaluation, rather than challenging its validity.  A way to mediate a dispute over an evaluation may addressed in the contract.

More favorably, the SBA changed a detail in its initial rule proposal that declined to include or substantiate a firm timeframe for evaluation consideration.  Although the administration did not require procurement officers to give or consider a specific weight to the subcontractor evaluations, they do allow positive evaluations from older projects to remain valid for submission.

This SBA rule has yet to be incorporated into the Federal Acquisition Regulation (FAR), which provides a minimal incentive for federal contractors to formally adopt the practice.  However, this allows small businesses that qualify under the rule to begin planning for the future once codified and the implementation goes into effect.  An offensive strategy may prove beneficial when the adoption takes place – qualifying businesses that have previously integrated these practices can positively separate themselves from their competitors.

While this new rule does not solve all the issues that surround the federal contracts procurement process, it ultimately provides a compelling solution for small business owners to grow in the market in a new way with minimal risk or exposure.  With some preemptory legwork conducted during the prequalification and preconstruction phases, clients may yield a helpful tool that proves useful when navigating the challenging world of federal procurement.

The author acknowledges and appreciates the significant contributions of Smith, Currie legal intern Cortland Walton, in developing this article.

Smith Currie provides comprehensive legal services to all parts of the construction industry across the nation. Smith Currie lawyers have decades of demonstrated success representing construction and federal government contracting clients “From the Ground Up,” including procurement matters, contract formation and negotiation, project administration, claims prosecution and, when necessary, in litigation and other forms of dispute resolution.

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