Last month, the Government Accountability Office issued a report at the request of Senator Claire McCaskill, who asked the GAO to review how federal agencies monitor the work performed by subcontractors under 8(a) contracts, and the potential effects from recent changes to the Small Business Act. After examining a representative sample of ten 8(a) prime contracts and interviewing both Government and 8(a) contractor representatives, the GAO concluded that 8(a) prime contractors are not complying with the federal limitations on subcontracting requirements, and Contracting Officers are not adequately monitoring compliance. The GAO thus recommended that the FAR be amended to include the three following requirements:

1. At the time of contract award, contracting officers shall conduct and document an assessment of the 8(a) firm’s ability to comply with subcontracting limitations;

2. Contracting officers shall include monitoring and oversight provisions in all 8(a) contracts to ensure that the contractors comply with the subcontracting limitations; and
3. Prime 8(a) contractors shall periodically report to the contracting officer on the percentage of work being performed.

What are 8(a) contractors likely to see as a result of these recommendations?

• More rigorous requirements regarding subcontracting limitations in solicitations.

In connection with 8(a) contracts, procuring agencies execute “partnership agreements” with the SBA that outline the responsibilities of both parties in the 8(a) contracting process. These agreements delegate much of the SBA’s responsibilities to the procuring agencies, including overseeing the contractor’s performance. In addition, partnership agreements explicitly address subcontracting limitations and require agencies to conduct and document an assessment of the 8(a) firm’s ability to comply with subcontracting limitations at the time of award.

Of the ten contracts in the GAO’s sample, in only four cases did the contracting officer document and assess if the offeror could comply with the subcontracting limitations prior to award. As such, I expect that offerors on 8(a) contracts will soon see unique provisions in solicitations through which they must certify compliance with limitations on subcontracting and self-performance regulations (in addition to the contractor’s standard on-line representations and certifications) and, in addition, provisions that require an explanation of the particular work that the prime contractor will self-perform to achieve compliance.

• More post-award reporting requirements, monitoring and oversight.

Among the top reasons cited by contracting officers for not meeting all subcontracting limitations responsibilities in their agencies’ partnership agreements was that they “did not have access to information on the extent of subcontracted work performed.” Contracting officers also stated that they were “primarily concerned with contractors satisfactorily performing the services in the contract but not compliance with the subcontracting limitations.” In other words, COs typically regarded information necessary to monitor performance as not readily available, and, if such information were available, COs were typically more concerned with contract performance than compliance with subcontract limitations.

Given the significance of the GAOs findings and the likelihood of Congressional and regulatory action, this mindset will not last much longer. Notably, the GAO issued reports similar to this one in 2006 and 2012, which contained similar findings and recommendations. Yet, the problem still persists (or is perceived to persist). Although it might not occur right away, I expect contracting officers will request from 8(a) contractors specific information regarding self-performance with greater frequency, and that these requests will be supported by amendments to the FAR that impose new reporting and compliance obligations upon 8(a) contractors, and new monitoring obligations upon contracting officers. These reporting requirements will likely require 8(a) prime contractors to obtain from their subcontractors elements of subcontract cost or price (e.g., labor, materials equipment) that can be individually identified.

• More rigorous enforcement, and monetary penalties for violations.

Last year, Congress amended the Small Business Act to impose a monetary penalty on contractors that violate subcontracting limitations. The minimum penalty is $500,000, and a contractor would be required to pay up to the difference between the amount of subcontracted work allowed and the actual amount of subcontracted work, whichever is greater. Thus, if only $5 million of work were allowed to be subcontracted out, but the actual amount of subcontracted work was valued at $6 million, the penalty could be up to $1 million. Prior to this change, no such monetary penalty existed.

The SBA reported earlier this year that it plans to incorporate the monetary penalty into federal regulations and to provide protection to small businesses that, despite good faith efforts, exceed the subcontract limitations. Although contractors should welcome the notion of a safe harbor from a penalty with proof of good-faith efforts, this should not be taken to mean that an unintentional violation will protect a contractor from the imposition of a penalty. In practice, this means that 8(a) contractors should prepare to document comprehensively their efforts toward compliance and timely inform the contracting officer if compliance becomes an issue despite such efforts.

One additional note regarding the recent amendments to the Small Business Act. Notwithstanding the monetary penalty provision, several changes to the Small Business Act were favorably received by 8(a) prime contractors. For instance, under the present regulations, work performed by 8(a) subcontractors is counted toward subcontracting limitations; however, per the amendments, work performed by 8(a) subcontractors is not counted toward subcontracting limitations, which makes it easier for 8(a) prime contractors to meet minimum self-performance requirements.

Although Congress amended the Small Business Act, the implementing regulations have not yet been enacted by the SBA or the FAR Council. When asked which rule contractors should follow (the amendments or the current regulations), procurement officials told GAO that “contracting officers are to enforce the current subcontracting limitations, that is, those that went into effect before the amendment.” It can take years for the SBA and the FAR Council to implement statutory directives. As such, while the contracting community is waiting, 8(a) contractors seeking to satisfy subcontracting limitations pursuant to the amendments should bear in mind that the present regulations remain in full effect, and would be well-advised to confirm with the contracting officer the controlling compliance requirements prior to award.