The Small Business Administration published a final rule implementing section 870 of the National Defense Authorization Act of 2020 regarding the requirements that apply to a federal contractor seeking to obtain subcontracting credit on certain types of federal contracts. The SBA notes that most federal contracts require the awardee to enter a subcontracting plan that includes percentage goals for using small businesses and subcategories of small businesses. For construction, subcontracting plans apply to federal contracts exceeding $1.5 million, unless the awardee is a small business, the contract does not offer subcontracting opportunities or will be performed entirely outside the United States and its outlying areas.

The SBA’s regulations previously permitted a prime contractor to count only its first-tier subcontracts toward the goals in its subcontracting plan. In December 2016, however, the SBA updated its regulations to mandate that prime contractors receive credit for lower-tier subcontracts under certain circumstances. Section 870 addressed the criteria for receiving credit for lower tier subcontracting and made three changes to subcontracting plan requirements. First, a prime contractor may elect to receive credit toward its subcontracting plan for lower-tier subcontracts to small businesses. Second, agencies are prohibited from setting tier-specific goals for prime contractors that use lower-tier credit. Third, subcontracting plans are required to recite the records that contractors will maintain to substantiate lower-tier credit. The final rule implements section 870 by permitting a prime contractor with an individual subcontracting plan to apply credit for subcontracts to small businesses at lower tiers toward its subcontracting goals. To do so, the prime contractor will incorporate the lower tier subcontracting performance into its subcontracting plan goals.

The final rule is effective as of Nov. 13.