SBA rule offers more protection for subcontractors

July 28, 2013

The Small Business Administration earlier this month approved a new rule meant to give small-business subcontractors more rights in their dealings with prime contractors.

The rule, which implements part of the Small Business Jobs Act of 2010, requires a prime contractor on designated programs to notify the contracting officer if it opts not to use the small-business contractor presented in its proposal.

Prime contractors must also let the government official know if they reduce their payments to a small-business subcontractor or make late payments.

“It will have a big effect on both large companies and small businesses,” said Alan Chvotkin, executive vice president and counsel at the Professional Services Council, an industry group.

Before finalizing the policy, the SBA held meetings across the country to gather companies’ feedback, said Ken Dodds, SBA’s director of government contracting.

“Subcontractors weren’t being paid on time, and they believed that they’re being used to prepare bids and not being used for performance,” he said.

Chvotkin said that in some cases, failing to use designated subcontractors isn’t a sign of bad behavior. For instance, a prime contractor might bid on a contract vehicle and then not receive any work related to a particular area — meaning both the prime and the small business are left without orders.

But in other cases, small businesses have raised legitimate concerns about bait-and-switch techniques.

In those cases, “companies have aggressively sought out small businesses because they have a capability,” Chvotkin said. “The prime contractor wins ... and then the small-business partner never sees any work coming out of it.”

Some small businesses are even reluctant to act as subcontractors because of this practice, said Richard Oliver, a partner in McKenna Long & Aldridge’s government contracts practice. He said the new rule might encourage these companies to reconsider.

Dodds said the SBA sought to look out for small businesses without creating additional work for both large contractors and for contracting officers.

Also included in the new rule, he said, is a provision that allows government officials to take into account when awarding contracts whether a company stuck to its subcontracting plan in past efforts.

“We think subcontracting and how subs are treated should be part of that evaluation,” Dodds said.

Oliver said he expects that element of the new rule to give large companies incentive to treat their smaller subcontractors more favorably.

“That will be a tool,” he said. “It may take large businesses a little while to figure that out, but I think that will have a very positive effect.”

Still, Chvotkin said the rule could have some adverse consequences. A large company may feel less inclined to sign an agreement with a small one, if they’re concerned about getting caught up in the rule, he said.

“Small businesses may get some protection ... but they may also miss out on some opportunities,” Chvotkin said.

The new policy goes into effect in mid-August.

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