United States: Small Business Subcontracting Plans: Do Lessors Need Them, And What Do They Do?

First-time landlords to the government are often overwhelmed by the number of Federal Acquisition Regulation (FAR) and General Services Acquisition Regulation (GSAR) clauses included in government leases. The compliance requirements can seem arcane – and indeed they often are – and intimidating for lessors who are unfamiliar with them.

One of these compliance requirements – the requirement to include a small business subcontracting plan – incorporates a number of FAR clauses and statutory requirements, and generates a lot of uncertainty as to compliance obligations and the liability associated with noncompliance. Thankfully, there are a number of ways to limit the obligations and risk associated with this requirement, and to flow these requirements down to property managers and subcontractors.

Below, this blog provides a brief analysis of the requirements around small business subcontracting plans, as well a discussion of the associated size representations in the System for Award Management and the risks associated with misrepresentation of size status and noncompliance with a subcontracting plan.

What Is a Small Business Subcontracting Plan and Do I Have to Have One?

The Small Business Act provides that "it is the policy of the United States that small business concerns. . . shall have the maximum practicable opportunity to participate in the performance of contracts let by any Federal agency, including contracts and subcontracts." 15 U.S.C. § 637(d). Pursuant to this statutory policy, the FAR provides that "[a]ny contractor receiving a contract with a value greater than the simplified acquisition threshold must agree in the contract that [certain] small business[es] . . . . will have the maximum practicable opportunity to participate in contract performance consistent with its efficient performance." 48 C.F.R. § 19.702.

A "Small Business Subcontracting Plan" is a plan, incorporated into a lease or contract, "that separately addresses subcontracting with small business, veteran-owned small business, service-disabled veteran-owned small business, HUBZone small business, small disadvantaged business, and women-owned small business concerns." 48 C.F.R. § 52.219-9(a). This plan must include goals for subcontracting with the various types of small businesses outlined above, as well as a commitment to make "good faith efforts" to meet these goals. The plan must also include an obligation to submit several annual reports, described below.

The test for whether you need to have a small business subcontracting plan is twofold: 1) Is the lessor itself a non-small business? And 2) Do the rental payments of the lease over the firm term plus any options total $750,000 or more?¹ If the answer to both of these questions is yes, then the lessor will need to develop, execute and administer a Small Business Subcontracting Plan throughout the term of the lease.

How Do I Determine My Size, and What Is the Risk of a Misrepresentation?

All lessors – and all parties to all government contracts of any kind – must register in the System for Award Management (SAM.gov). As a part of this registration process, lessor entities must represent whether they are or are not "small," as defined in the U.S. Small Business Administration's (SBA) regulations. This determination requires lessor entities to take into consideration not only their own revenues, but also the revenues of their affiliates. Affiliates are defined as follows:

Concerns and entities are affiliates of each other when one controls or has the power to control the other, or a third party or parties controls or has the power to control both. It does not matter whether control is exercised, so long as the power to control exists. . . . SBA considers factors such as ownership, management, previous relationships with or ties to another concern, and contractual relationships, in determining whether affiliation exists.

13 C.F.R. § 121.103 (emphasis added).

The current² standard for lessors of commercial office space and other nonresidential commercial property is $47 million. This number represents the average annualized gross receipts for the past five years, taking into account all affiliated entities. So in short, to determine whether a lessor exceeds the size standard, lessors must look to their entire corporate family's average revenues over the past five years, to include all parent and sibling entities falling under the same ultimate parent company.

As a practical matter, what this means is that many lessors – even those that are single-purpose entities (SPEs) – will exceed the size standard because they must take into account the revenues of all affiliated entities, and must therefore represent in SAM.gov that they are other than small. If there is any doubt, lessors should engage with counsel to help ensure they do not make any misrepresentations.

The risk of misrepresenting your size status can be substantial. First, for lessors with set-aside leases or contracts, ³ misrepresentation of size status constitutes fraud and could subject the lessor to civil and even criminal prosecution under the False Claims Act and other civil and criminal fraud statutes. The U.S. Department of Justice (DOJ) and the SBA are extremely active in enforcing these rules, and the damages are calculated "treble" damages, equal to three times the total value of the lease.

In addition to the enforcement risk from the DOJ, size misrepresentations are typically automatically referred to the Suspension and Debarment Official (SDO). The SDO has the authority to suspend or debar a lessor from government business for a period of years if they find that the lessor is not a responsible partner to the government. Importantly, this authority extends to the entire corporate family, to include the ultimate owner and all of its subsidiaries.

And even for lessors without set-aside leases, there is still a risk of negative impacts for misrepresentation, including the reputational risk associated with making misrepresentations to the government.

What Does the Small Business Subcontracting Plan Entail?

The Small Business Subcontracting Plan has a number of requirements, and it is typically drafted as a stand-alone document incorporated by reference as an exhibit to a government lease. The U.S. General Services Administration (GSA) will typically provide a template⁴ during the procurement process or during the negotiation phase of the lease execution, but under the terms of the FAR clause incorporated into the Lease – 48 C.F.R. § 52.219-9 – the plan must include a number of items, including, but not limited to, the following:

• Separate goals, expressed in terms of total dollars subcontracted, and as a percentage of total planned subcontracting dollars, for the use of small business, veteran-owned small business, service-disabled veteran-owned small business, HUBZone small business, small disadvantaged business, and women-owned small business concerns as subcontractors. For individual subcontracting plans – and GSA lease plans are individual plans – goals shall also be expressed in terms of percentage of total contract dollars.
• Three annual reporting requirements to provide the government with a self-assessment of performance as measured against the goals in the plan. Any failure to meet the goals must be explained.
• Flowdown requirements for the lessor to flow this obligation down to any subcontractor with a subcontract over certain thresholds.

As a practical matter, SBA will typically approve the standard template provided by the Contracting Officer, even when there have been substantive edits to the narrative language, as long as the target goals meet a certain threshold and the reporting requirements are included.

What Is the Risk of Noncompliance?

If a lease includes a small business subcontracting plan, then the lessor must make a good faith effort to meet the plan's goals. If the lessor fails to make a good faith effort – which the regulation⁵ defines as "willful or intentional failure to perform in accordance with the requirements of the subcontracting plan . . . or willful or intentional action to frustrate the plan" – then there are two potential remedies for the government: liquidated damages – which are expressly provided in a clause in the lease – and a negative review of contract performance.

However, the U.S. Government Accountability Office (GAO) has recently investigated the federal government's enforcement of small business subcontracting plans,⁶ and found that there is very little enforcement for noncompliance across the various agencies of the government. First, GAO acknowledged the high standard – "willful or intentional failure" – and then noted the difficulty that agencies face in establishing that such a high standard has been met. "Contracting officials said it is difficult to determine that a contractor has not made a good faith effort because doing so requires evidence that the contractor has acted willfully or intentionally in not complying with the subcontracting plan."

Next, GAO noted that even if this high standard were met, agencies were reluctant to impose either liquidated damages or any sort of punitive review:

In addition, none of the contracting officers or contracting agency officials we spoke with could recall a time that their office imposed liquidated damages related to a contractor's lack of good faith effort. Further, some contracting officers said the process of applying liquidated damages in this situation was unfamiliar, vague, or confusing for them.⁷

In short, lessors that make an effort to consider size and disadvantaged status in awarding contracts for construction, maintenance, landscaping and janitorial services as well as all other services required to meet lease requirements and submit the required annual reports are unlikely to face adverse action for failing to meet subcontracting goals. This enforcement risk stands in stark contrast with the risk of misrepresenting size status outlined above.

Conclusion

The first, and most important, takeaway is that most lessors will be non-small businesses due to the affiliation rules. Given the SBA's affiliation rules, any corporate family of any size will meet and exceed the size standard and should therefore be required to submit a Small Business Subcontracting Plan. The penalties for misrepresenting size can be substantial.

However, the compliance burden associated with small business subcontracting can be limited with thoughtfully negotiated language incorporated into the plans, and penalties are rare for lessors making good faith efforts to provide small and disadvantaged businesses with subcontracting opportunities. The key is to engage early and ensure that the language in the final plans reflects only what is required by the applicable statutes and regulations.

Finally, lessors should strive to ensure that the obligations in the plan are flowed down to the property manager, and ensure that there is a mechanism in place to meet the annual reporting requirements.

Footnotes

1. The regulations (found at FAR Part 19.702) distinguish between construction contracts (with a $1.5 million threshold) and non-construction contracts (with a $750,000 threshold) for applicability of the clause. GSA and the SBA take an inconsistent approach to the calculation of the value of a lease, sometimes including the cost of the initial lease buildout, and sometimes limiting their analysis to the total fixed rental rate over the term of the lease.

2. Table of Size Standards, U.S. Small Business Administration.

3. As of this writing, the U.S. Department of Veterans Affairs is the only government agency setting aside lease procurements for small businesses, specifically veteran-owned small businesses (VOSBs) and service-disabled veteran-owned small businesses (SDVOSBs).

4. GSA currently maintains a sample template on its website. Lessors should familiarize themselves with the terms and conditions of these plans. While there is room for negotiation and modification of the narrative language in the template, the plan must include goals (with dollar values) and reporting requirements.

5. The relevant FAR clause – 48 C.F.R. § 52.219-16 – is incorporated by reference into all GSA leases (and any lease entered into pursuant to delegated authority) via GSA Form 3517B, the General Clauses, the most current version available as of this writing.

6. Full report, U.S. Government Accountability Office.

7. Id. The report also noted that it only uncovered one instance of an adverse performance evaluation being assessed, and only after the contractor was provided with notice and an opportunity to correct its actions.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.