SBA Issues Final Rule Addressing Credit for Lower-Tier Subcontracts on Federal Contracts

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The U.S. Small Business Administration (SBA) has amended its regulations to align with the National Defense Authorization Act (NDAA) for Fiscal Year 2020. Effective November 13, 2023, the final rule allows federal prime contractors to apply credit for subcontracts to small businesses at lower tiers toward subcontracting goals. This change involves incorporating lower-tier subcontracting performance into the subcontracting plan goals.

The final rule responds to changes in section 870 of the NDAA of 2020, affecting section 8(d) of the Small Business Act regarding the requirements that apply to a Federal contractor seeking to obtain subcontracting credit on certain types of Federal contracts. The amendments permit prime contractors to elect to receive credit for lower-tier subcontracts, eliminate tier-specific goals for such contractors, and require subcontracting plans to specify the records maintained for lower-tier credit substantiation. The changes replace the prior mandate with an election and streamline subcontracting goals for all prime contractors.

In the past, the final rule had allowed contractors to receive lower-tier subcontracting credit only if they had two sets of subcontracting goals: one for small-business subcontracting at the first tier and an additional goal for small-business subcontracting at lower levels. Section 870 prohibits agencies from setting tier-specific goals for prime contractors utilizing lower-tier credit. Consequently, the SBA has revised the regulations to streamline subcontracting goals, ensuring that prime contractors have only one set of goals.

These adjustments provide prime contractors greater flexibility in receiving credit for lower-tier subcontracts and eliminate tier-specific goals. Additionally, it represents a shift away from the prior mandatory practice of recognizing lower-tier subcontracts, moving towards an optional framework. Prime contractors now have the option to receive recognition for either first-tier subcontracts alone or for subcontracts at any tier. This flexibility reflects the stipulations outlined in the NDAA of 2020.