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April 22, 2021 - Small Business

Levels of Accountability: What Federal Contractors Should Know About Small Business Subcontracting Plans and Compliance Reviews

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Every year, the U.S. federal government establishes goals for the awards of prime contracts and subcontracts to small business concerns. While agencies are responsible for achieving these goals by awarding prime contracts to small businesses, contractors that are “other than small” are obliged to ensure that the small business subcontracting goals are met. Contractors that compete for a contract worth $750,000 or more ($1.5 million for construction contracts) must submit a small business subcontracting plan that specifies how a contractor will attract small businesses and will ensure that such businesses have a maximum practicable opportunity to subcontract. FAR 19.702. In the plan, contractors must indicate separate dollar and percentage goals for small businesses, provide a list of services and supplies to be subcontracted, and describe methods for securing small business subcontracts. FAR 19.704.

A contractor’s work does not end with successful submission of the small business contracting plan; it must also implement the plan in good faith. To that end, the federal government periodically audits contractors’ adherence to their submitted plans through a small business subcontracting plan compliance review.

What is a small business subcontracting plan compliance review?

A small business contracting plan compliance review is a federal agency’s evaluation of a contractor’s adherence to its subcontracting plan and determines whether a contractor has complied with the roles and responsibilities outlined therein. The Small Business Administration (SBA) has the overall lead authority to conduct these evaluations, but can delegate this authority to other federal agencies.  For example, the Defense Contract Management Agency (DCMA) primarily conducts these evaluations for Department of Defense (DoD) contracts.

How often are compliance reviews conducted?

Compliance reviews are conducted periodically and randomly; any contractor with a subcontracting plan can be selected for a subcontracting compliance review and we often see these reviews every few years. However, certain agencies do prioritize which contracts to review and consider the following factors:

  • Number and size of the contractor’s government contracts
  • Length of time since the last compliance review
  • Results of the most recent compliance review
  • Sensitivity and heightened importance of the project
  • Reporting compliance in the electronic subcontracting reporting system

Renewed federal interest may also increase the frequency of compliance reviews as Congress has raised concerns over oversight and lack of subcontract monitoring and GAO also flagged the limited nature of existing small business subcontracting reviews at several agencies in a May 2020 audit. The DoD Office of Inspector General is also currently conducting an audit to determine whether DoD contracting officials have awarded contracts to contractors that complied with small business subcontracting plans.

What can contractors expect during a compliance review?

A compliance review can take place on-site at the contractor’s place of business, at the contracting agency, or virtually, and usually lasts one to two days. During the review, an agent will review the contractor’s contract files, any correspondence related to the contract, IT systems, and documentation on subcontracting methods and procedures. The agent will review whether the contractor ensures that all small businesses are properly certified, whether the contractor is adhering to its negotiated subcontracting goals, whether the contractor is properly monitoring its subcontractors and other-than-small subcontractors with regard to flowed down subcontracting plans, and whether the contractor is completing and submitting its subcontracting reports.

The agent will generate a compliance report based on compliant and noncompliant items found during the review, and the contractor will receive a rating based on this review, from unsatisfactory to outstanding. If a contractor receives a rating of satisfactory or above, no further action is necessary. However, if a contractor receives a rating below satisfactory, the contractor must create a corrective action plan (CAP) within 30 days of the report, indicating how it expects to become compliant. The contractor must attend multiple mandatory trainings and prepare for a follow-up visit to be conducted six months to a year later. If the contractor does not create an acceptable CAP within the allotted time frame, the noncompliance can be escalated to the awarding federal agency for resolution, or the contract can be assessed for liquidated damages.

How can contractors prepare for an upcoming compliance review?

Contractors should start collecting the necessary documents now. These include but are not limited to:

  • Small business certification paperwork (See SBA Issues New Certification Regulations for Women-Owned Small Businesses)
  • Subcontracting program policies and procedures providing guidance on small business utilization
  • Prior compliance reviews
  • Organizational charts
  • Policy letters from the CEO supporting the subcontracting program
  • Marketing documents for locating small businesses as subcontractors
  • Historical summary subcontract reports for the past five years
  • Copies of agendas and rosters for small business training provided to individuals at the company with purchasing authority
  • Outreach programs: Lists of conferences and trade fairs for small businesses attended in the past year (virtually or in-person); lists of activities in local small business organizations and councils during the past year
  • Success stories: Documentation of success stories that resulted in an award of a contract to a firm met through outreach activities
  • Designation letter identifying small business liaison officer

What are common small business subcontracting plan compliance mistakes?

  • Inaccuracies in methodology when preparing subcontracting reports
  • Size issues: Certification form does not contain all small business and subset categories; firms are not properly verified; or company is not properly including subcontractors in all qualified categories
  • Company is not including all transactions, purchase orders, subcontracts, and agreements in its submitted subcontract reports
  • Unrealistic subcontracting goals
  • Insufficient or inadequate training or outreach
  • Lack of written procedures