New SBA Rule: Past Performance Ratings for JV Members and First-Tier Subs, Impacts Large Primes

The Small Business Administration ("SBA") recently issued a final rule implementing new regulations regarding past performance ratings. Specifically, SBA's rule provides a mechanism for small businesses to use past performance ratings from work the company performed as a member of a joint venture and as a first-tier subcontractor in certain circumstances. The rule is welcome news because it will bolster competition in prime contracts where critical past performance is tied to work a small business performed as a first-tier subcontractor or as member of a joint venture.

The rule takes effect on August 22, 2022.

As the final rule notes, the National Defense Authorization Act for Fiscal Year 2021 ("2021 NDAA") addressed a common obstacle that small businesses may face in federal contracting: possessing qualifying past performance for prime contract opportunities. Under Section 868, the 2021 NDAA added a new section 15(e)(5) to the Small Business Act to address past performance ratings of joint ventures for small business concerns and amended section 8(d)(17) of the Small Business Act to address past performance ratings of first-tier subcontractors on a prime contract with a subcontracting plan.

The SBA rule, in turn, makes regulatory changes to implement the provisions of the 2021 NDAA by providing small businesses with two new avenues for obtaining qualifying past performance. The primary changes under the final rule are to SBA's regulation at 13 C.F.R. § 125.11, which is entitled "Past performance ratings for certain small business concerns."

Quick Take

For work performed as a member of a joint venture

• The rule provides that a small business may "elect to use the experience and past performance of the joint venture (whether or not the other joint venture partners were small business concerns) where the small business does not independently demonstrate past performance necessary for award." To do so, the small business concern must identify the joint venture, identify the contract(s) performed, and inform the contracting officer what duties and responsibilities it carried out as part of the joint venture.
• Notably, the rule says this past performance is available where the small business "does not independently demonstrate past performance necessary for award." In comments to the rule, SBA said that where a solicitation requires three past performance examples, the rule authorizes the small to submit two in its own name and one from a joint venture "if the small business cannot independently provide the third example of past performance on its own." The "necessary" language in the rule, however, begs the question: what if the small business has a third example that is not strong, but has a fourth example from its joint venture that has a better rating? In that case, can the third past performance example really be deemed "necessary for award" simply because it is from the small's own contract? It will be interesting to see how this plays out in practice.
• Lastly, the rule prohibits a small business from using as its own experience and past performance any work that was performed exclusively by other partners to the joint venture. Thus, so long as the small business performed the identified work, the rule provides that the small business will be able to utilize the joint venture's past performance rating when competing for prime contracts.

For work performed as a first-tier subcontractor

• The rule provides that a small business may request (within 30 days after the completion of the period of performance for the prime's contract with the government) a first-tier subcontractor past performance rating from its prime contractor under a contract that included a subcontracting plan. In response, the prime is required to provide the small business with a rating within 15 calendar days of the request. The rating must follow the the ratings system found in FAR 42.1503 (Exceptional, Very Good, Satisfactory, Marginal, and Unsatisfactory). The prime is also required to use the following factors as part of its rating: technical, cost control, schedule/timeliness, management or business relations, and other details (as applicable). Where a joint venture performed as a first-tier subcontractor, the small business member may also request a past performance rating from the prime contractor.
• Notably, in comments to the final rule, SBA said that it doesn't agree that first-tier subcontractor past performance should be weighted differently than prime contractor past performance. According to SBA, treating past performance differently would be inconsistent with SBA's intent, which is to help small businesses to have qualifying past performance.
• Some commenters were concerned about disputes and suggested that subcontractors should be able to challenge a rating from its prime. SBA said that while the rule does not include a rebuttal process because the statute does not require it, subcontractors may be able to negotiate a rebuttal procedure in their subcontracts.
• Finally, some commenters were worried about enforcement should a prime fail to provide the requested rating to its small business subcontractor. Because the rule impacts subcontracting plans under the FAR, SBA noted that there are consequences for a prime's failure to comply with subcontracting plans, including: termination for default, withholding award fees, assigning a lower past performance rating, liquidated damages, and debarment. Given the criticality of timely receiving a rating, the final rule also provides that "the subcontractor may notify the contracting officer in the event that the prime contractor does not comply with its responsibility to submit a timely rating."

Takeaway

SBA's rule is welcome news for small businesses that have critical past performance that is tied to work performed as a first-tier subcontractor (under a prime contract with a subcontracting plan) or as a member of a joint venture. In either scenario, the rule provides a mechanism to obtain past performance ratings, which will ultimately enable a number of small business concerns to be more competitive in prime contract opportunities.

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