United States: Back To The Drawing Board: Far Councils Withdraw Long-delayed Proposed Rule For Lower-tier Small Business Subcontracting Credit

Some of you may recall the National Defense Authorization Act (NDAA) for Fiscal Year (FY) 2014 from nearly a decade ago. It amended the Small Business Act (SBA) to allow a contractor, under certain circumstances, to receive credit towards its subcontracting plan goals for awards made to small businesses at any tier under the contract. The Small Business Administration issued a final rule in 2016 to implement this reform. The Federal Acquisition Regulation (FAR), however, has significantly lagged behind the SBA regulations, and continues to restrict small business subcontracting credit to first-tier awards.

Although the FAR Councils issued a proposed rule in 2019 to implement the same reform in the FAR, that rule has still not been finalized. It turns out it never will be.

On March 30, 2023, the FAR Councils announced the withdrawal of the 2019 proposed rule. The Councils explained that, in 2020, Congress further tweaked the lower-tier subcontracting regime, and the SBA subsequently updated its own regulation in 2022 to reflect those statutory adjustments, mooting the proposed FAR rule from 2019. Rather than tweak the existing proposed FAR rule and finish the job, the FAR Councils will scrap the 2019 rule, open a new FAR case, and start over at some unspecified date in the future. In the meantime, the FAR continues to reflect the pre-2014 version of statutory rules for small business subcontracting, contrary to the current statutory regime and contrary to current SBA regulations.

Until the FAR Councils promulgate an up-to-date final rule, contractors should note that new contracts with small business subcontracting plan requirements will continue to impose restrictions that are nearly a decade out of date: "Credit cannot be taken for awards made to lower tier subcontractors, unless the Contractor or subcontractor has been designated to receive a small business or small disadvantaged business credit from an ANC or Indian tribe." FAR 52.219—9(l) (emphasis added).

Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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