A LEGAL VIEW: Is a plan needed for subcontracting?

A contractor raised the following topic: We have been told that our company needs to develop a plan for subcontracting with small businesses to receive a government contract. Is this true? What should be in the plan?

Under Federal Acquisition Regulation 19.702, nearly every government solicitation valued at more than $500,000 ($1 million for construction) requires the apparently successful offeror to submit an acceptable subcontracting plan to be eligible for contract award. However, small-business concerns are excepted from this requirement.

A company is considered to be a small business if it meets the criteria established by the Small Business Administration for the Standard Industrial Classification code identified in the solicitation for the particular procurement. For most SIC codes, a company is considered small if its work force does not exceed 500 employees or if its annual revenue does not exceed $18 million. [See FAR 19.102(g).]

For a subcontracting plan to be acceptable, it must specify separate percentage goals for subcontracting with small; small, disadvantaged; and small, women-owned businesses in performing the prime contract. The plan also must identify an individual who will administer the plan and meet a number of other requirements. [See FAR 19.704(a).] As an alternative to contract-specific plans, a company may establish a master subcontracting plan on a plant- or divisionwide basis that includes the same items as a contract-specific plan. [See FAR 19.704(b).]

The regulations do not identify a minimum percentage of work that must be subcontracted, although some agencies establish minimums in particular solicitations. [See, for example, Research Analysis&Maintenance Inc., (B0272261, Sept. 18, 1996, 96-2 CPD

: 131), in which a solicitation required subcontracting goals of 20 percent for small businesses and 5 percent for small, disadvantaged businesses.]

Because the requirement is applicable only to the apparently successful offeror, issues involving an offeror's plan ordinarily are considered matters of "responsibility," and the agency may consider any information provided by the offeror right up until the time for award. Moreover, communications regarding the plan are not considered the type of "discussions" that must be conducted with all offerors before the submission of best and final offers. [See CH2M Hill Ltd., (B-259511, April 6, 1995, 95-1 CPD : 203).]

By contrast, some agencies require all offerors to submit their subcontracting plans as part of their formal proposals so that they can be reviewed before the selection of the apparently successful offerors. Sometimes, an agency may even evaluate the offerors' proposed subcontracting goals in selecting the apparently successful offeror. When an agency chooses to evaluate subcontracting plans in selecting the successful offeror, communications regarding the plans will be considered "discussions." [See Fritz Co., (B-246736, May 13, 1992, 92-1 CPD : 443).]

Even when all offerors are required to submit plans, only the awardee will be required to comply with its plan. A company is not legally required to subcontract with small and small, disadvantaged firms until it has been awarded a government contract that incorporates the subcontracting plan set forth in its proposal. [See Renow Inc., (B-251055, March 5, 1993, 93-1 CPD : 210).]

To be considered a small business, a proposed subcontractor does not necessarily have to meet the size standard for the SIC code specified in the solicitation for the contract as a whole. Rather, it must meet the standard "for the product or service it is providing on the subcontract." According to the General Accounting Office, "The fact that [a subcontractor] does not meet the size standard in the [solicitation] for the whole contract is irrelevant to the issue of whether [the subcontractor] was reasonably considered [a small or small, disadvantaged business] for the services for which it was proposed." [NSI Technology Services Corp., (B-253797.4, Dec. 29, 1993, 93-2 CPD : 344).]

Because the size criteria vary so much among SIC codes and descriptions can be susceptible to differing interpretations, there is potential for game-playing in selecting the codes for subcontracts.

A particularly common example is seen in procurements of computer-related services. Most government procurements of computer-related services are classified under SIC Code 7379, for which the size standard is $18 million, which is particularly stringent.

In such cases it is common for contractors to use SIC Code 4813 for telephone communications, except radiotelephone, for their technical support subcontractor and/or their wide-area network support subcontractor to take advantage of the more favorable 500-employee standard applicable to that code. However, a fair reading of the description for Code 4813 in the SIC Manual (Executive Office of the President, 1987) makes this approach highly questionable.

Any contractor who fails to comply in good faith with the requirements of a subcontracting plan may be found to be in material breach of its contract and may be subject to the imposition of liquidated damages. [See FAR 19.702(c).] Other penalties also may apply.

Clearly, contractors have considerable incentive to understand and comply with these requirements.

Peckinpaugh is a member of the government contracts section of the law firm Winston&Strawn, Washington, D.C. Readers are encouraged to submit topics by e-mail to carl@carl.com or by voice mail to (703) 876-5151, Ext. 2965. This column discusses legal topics of general interest only and is not intended to provide legal advice.