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October 13, 2023 - Small Business

SBA Updates Its Regulations on Lower-Tier Small Business Subcontracting Credit

The Small Business Administration (SBA) has issued a final rule amending its regulation on lower-tier small business subcontracting credit to account for statutory changes introduced in the National Defense Authorization Act for Fiscal Year 2020. 

Most Federal contracts performed in the United States require large-business awardees to adopt subcontracting plans with specified small business subcontracting goals. Since 2016, SBA’s regulations have allowed prime contractors to receive credit for some small business subcontracts below the first tier under certain conditions. The new rule leaves the 2016 regulation largely intact, with a few tweaks. The key features of the amended lower-tier subcontracting rule are the following:

  • A prime contractor may elect to take credit for lower-tier subcontracts only when its subcontracting plan applies to a single contract with one Federal agency. Thus, a prime contractor cannot receive subcontracting credit for lower-tier awards under a Government-wide acquisition contract. Nor can it receive lower-tier credit when using a commercial subcontracting plan applicable to multiple contracts. 
  • Receiving lower-tier subcontracting credit is at the prime contractor’s option. Prime contractors are not required to avail themselves of this option. 
  • Prime contractors will be required to report only their own first-tier awards. Lower-tier awards will be reported by the subcontractors that award them. 
  • Prime contractors will have only one set of subcontracting goals. This removes a complication of the 2016 rule, which required the contractor to maintain one set of goals for first-tier awards and a second set for lower-tier awards. 
  • Prime contractors will be required to maintain records of the procedures they use to substantiate the lower-tier credit they elect to receive. 

The new rule goes into effect on November 13, 2023. We note, however, that the FAR Council still has not gotten around to implementing the 2016 regulation and, earlier this year, restarted that effort from scratch. So, if one reads the SBA regulations, lower-tier subcontracting credit is permitted under the above conditions, but if one reads the FAR, credit is still restricted to first-tier subcontracts. This regulatory mismatch will continue to create confusion for both contractors and procuring agencies until the FAR is updated to reflect current statutes and SBA rules.