Federal Changes to Small Biz Subcontracting Rules

Not all small businesses can take care of everything in house -- some of us need to subcontract out different pieces of our business, whether that be advertising, construction, production, or distribution. And if you're one of the many small businesses that regularly uses subcontractors, or a small business that regularly acts as a subcontractor, you may want to pay attention to some new federal rules imposing additional obligations on prime contractors and what happens if they fail to satisfy those obligations.

Here's a breakdown of what the Small Business Administration decided, and how it could affect your small business.

New Rules

Well, these are actually regulations adopted by the SBA in 2013, but the Federal Acquisition Regulation (FAR) Council has issued a Final Rule as to their implementation and there are three areas of concern for small businesses and subcontractors:

1. Use of Small Business Subcontractors Identified in a Bid or Proposal: When prime contractors identify small business subcontractors in their small business subcontracting plans, they must use "good faith efforts" to use those subcontractors;
2. NAICS Codes on Subcontracts: Prime contractors are also required to provide assurances in their subcontracting plan that they will assign each subcontract the North American Industry Classification System (NAICS) code that "best describes the principal purpose of the subcontract"; and
3. Change in Size Status: While a change in size status does not change the terms and conditions of the underlying contract, if the change in status is from small to other than small it does allow the contracting officer to require a new subcontracting plan.

New Consequences

If a contractor fails to make "good faith efforts" to use a small business subcontractor identified in the bid or proposal and does not contractor inform its contracting officer of the failure within 30 days of contract completion, it may result in a material breach of the contract and possibly liquidated damages. The big issue might be that the final rules did not specifically define "good faith efforts," so what level of effort a contractor needs to make has yet to be determined.

The new rules go into effect on November 1, 2016. So if you have more questions or need legal help making sure your small business is compliant, contact an experienced business operations attorney in your area.

Related Resources:

• Find Business & Commercial Lawyers Near You (FindLaw's Lawyer Directory)
• Changes to Small Business Subcontracting On the Horizon (National Law Review)
• Basic Contract Principles Apply to CERCLA Subcontractor's Claim (FindLaw's U.S. Second Circuit Blog)
• 3 Tips for Hiring Independent Contractors (FindLaw's Free Enterprise)