The latest updates and analysis from Morrison Foerster
July 26, 2022 - Small Business

New Small Business Regulation: Reliance on Past Performance Gained as a Subcontractor or Joint Venture Member

The U.S. Small Business Administration (SBA) recently promulgated a final rule addressing past performance ratings for small business joint venture members and small business first-tier subcontractors. The rule, which will go into effect on August 22, 2022, is a welcome implementation of requirements of the National Defense Authorization Act for Fiscal Year 2021 (2021 NDAA). The new rule should make it simpler for small businesses to get past performance credit for relevant work they performed as part of any joint venture or as first-tier subcontractors under certain contracts. 

The Problem Being Addressed

Congress has recognized that small businesses with relevant past performance often do not receive appropriate evaluation credit for that experience. That is because the Government’s own repository of past performance information tracks prime contractors, not subcontractors and joint venture members, and the Government frequently has limited insight into how well a subcontractor performed under another company’s prime contract. In addition, prime contractors may not always be motivated to oblige their subcontractors’ requests for past performance evaluations, or to provide them promptly.  

Existing regulations have only partially addressed these problems. Although Federal regulations prohibit agencies from treating an absence of documented past performance as unfavorable, agencies understandably are not prohibited from treating a rival with a positive record more favorably than a company with no record. And, although agencies are required to consider the past performance of individual joint venture members when considering a proposal submitted by a small business joint venture, the opposite has not been true: no regulation previously required agencies to consider the experience that a small business offeror gained by participating in a joint venture. 

To close some of these loopholes, Section 868 of the 2021 NDAA directed the SBA to issue regulations to allow small business offerors to rely upon their joint venture and first-tier subcontractor experience under certain circumstances. 

Principal Features of the New Rule

  • New Duties for Prime Contractors: Under prime contracts with subcontracting plans, prime contractors will be required to provide past performance ratings, upon request, to first-tier subcontractors, as long as the first-tier subcontractor requests the ratings no later than 30 calendar days after the completion of the prime contractor’s contract with the Government. The parties may negotiate a later deadline but may not shorten the 30-day period. The prime contractor must provide the ratings to the subcontractor within 15 calendar days of the request. The ratings must follow the familiar evaluation format the Government currently uses to evaluate prime contractor performance.    
  • New Duties for Agencies: When a small business offeror provides a procuring agency with its joint venture and first-tier subcontractor past performance information, the agency must consider the information to the extent it is relevant and recent. In practice, agencies often (although not always) consider this information when it is available. 
  • Electing to Rely on Performance as a Joint Venture Member: A small business offeror may “elect” to rely upon past performance it gained as a joint venture member. For purposes of this rule, the past performance is not limited to that of All Small or Mentor-Protégé joint ventures: even past performance gained as part of a large business joint venture will count. If the offeror elects to use joint venture past performance, its proposal must identify: (i) the joint venture; (ii) the contract(s) of the joint venture that the small business elects to use; and (iii) what duties or responsibilities the small business carried out as a joint venture member. The rule expressly prohibits the small business from claiming credit for work performed exclusively by other joint venture member(s). 
  • Past Performance as a First-Tier Subcontractor: A small business offeror that was or is a first-tier subcontractor under a contract with a subcontracting plan may request a past performance evaluation from its prime contractor. As above, a covered prime contractor must provide the past performance ratings to the subcontractor within 15 calendar days of the request. The small business then may, at its discretion, include the information with its proposal for a prime contract and the procuring agency must consider it. The rule does not set a limit on how recent the evaluated first-tier subcontract performance must be, although individual solicitations likely will. 
  • Joint Ventures That Performed as First-Tier Subcontractors: The rule expressly includes consideration of a small business’s past performance as a joint venture member where the joint venture was itself a first-tier subcontractor under a prime contract with a subcontracting plan. 

What the Rule Does Not Do

 There are a few nuances one should not miss:

  • The new rule does not create a general presumption that any offeror may rely upon its past performance as a subcontractor or as a joint venture member. Small business offerors are the only beneficiaries of this rule. As is already the case, agencies are permitted to consider a large business offeror’s past performance as a subcontractor or joint venture member (and they regularly do so), but they generally are not required to do so. The new rule does not change that. 
  • Even small business offerors are not always entitled to rely upon past performance as a subcontractor. The regulation does not apply to subcontract experience under prime contracts without subcontracting plans. Thus, for example, a prime contractor that is itself small (and thus would not have a subcontracting plan of its own) is not required to provide past performance evaluations to its subcontractors. Similarly, prime contractors with recently completed prime contracts (which would not have a subcontracting plan with these new requirements) are not required to provide subcontractor past performance evaluations either. In these situations, a subcontractor is free to ask for a past performance rating, a prime contractor has the discretion to provide it, and an agency is free to consider an evaluation if submitted. But all of this is discretionary, not required. 
  • The regulation does not necessarily permit a small business to claim the entirety of the past performance of joint ventures in which it participated. In fact, the rule prohibits an offeror from claiming credit for work performed exclusively by its other joint venture member(s). For example, consider a contract where a joint venture built an aircraft carrier, but one joint venture member did nothing but polish the rivets. That member may cite the contract for past performance in polishing rivets, but not as experience in building aircraft carriers. There is room for mischief here. One wonders to what extent and how procuring agencies will verify the accuracy of the scope of work one member claims for itself. 
  • The regulation suggests, but does not dictate, that an agency should treat past performance gained as a subcontractor or joint venture member as being of equal weight with past performance gained as a prime contractor. In prefatory comments, the SBA declined to require agencies to weight past performance obtained as a subcontractor differently from that obtained as a prime contractor. The SBA suggested that applying different weightings “would be inconsistent with [the underlying statute’s] intent, which is to help small businesses to have qualifying past performance.” All of this verbiage, however, is in prefatory comments, which lack the force of law, rather than in the text of the promulgated regulation itself. Depending on the terms of a particular solicitation and the nature of the work, one can imagine scenarios where an agency reasonably might find work performed as a subcontractor to be less relevant than similar work performed as a prime contractor. 
  • There may be limits on a small business’s ability to rely on its joint venture experience. The regulation states that a small business offeror may elect to rely on joint venture past performance “where the small business does not independently demonstrate past performance necessary for award.” What does the quoted language mean? (This language, which tracks the statute, is reminiscent of the current 13 C.F.R. § 125.2(g), which caused us to pose a similar question back in 2020.) Does this clause mean an offeror may not rely upon its joint venture past performance if it does otherwise have the necessary past performance and experience? For example, in its prefatory comments, the SBA gives an example of a solicitation requiring at least three past performance examples. If the offeror has only two examples of its own as a prime contractor, the “final rule authorizes the small business offeror to submit two examples from performance in its own name and one example from performance of a joint venture of which it was a member if the small business cannot independently provide the third example of past performance on its own.” (Emphasis added.)  What if the small business has a third relevant contract, but does not want to cite it because the rating is lower than the rating for a third joint venture contract? What if all its relevant prime contracts have poor ratings, and it wants to use only its joint venture contracts as references? It is not clear from the regulation (or the prefatory material) whether that is allowed or forbidden under the new rule.