For years, government policy has encouraged prime contractors receiving a federal government contract to issue subcontracts to small business concerns for a portion of the work.

Any large business receiving a federal government prime contract had to agree to offer small business concerns the “maximum practicable opportunity” to participate in contract performance, unless there were no further subcontracting opportunities.

Large firms usually submit a Small Business Subcontracting Plan with their proposals, when the value of the prime contract or contract modification is expected to exceed $650,000.

In a pre-award bid protest filed in the United States Court of Federal Claims by FirstLine Transportation Security, Inc. (“FirstLine” v. United States, No. 12-601C, released Nov. 27, 2012), the court approved a new method for calculating proposed subcontracting dollars in a small business subcontracting plan.

...the court approved a new method for calculating proposed subcontracting dollars in a small business subcontracting plan.

The case came about as result of FirstLine’s work as an incumbent contractor to the Transportation Security Administration at the Kansas City International Airport to provide passenger and baggage screening at the airport.

FirstLine prepared a proposal for a fixed price award fee contract to be awarded on a best value basis. The proposal was originally due to be submitted to TSA on Sept. 21, 2012.

Section L.6 of the Request for Proposals stated the government anticipated an overall small business subcontracting plan goal of 40%, subsequently clarified by TSA to mean 40% of total contract value.

This was very different from the usual process, whereby the prime contractor uses total dollars to be subcontracted as the basis. TSA stated that failure to negotiate a plan acceptable to the contracting officer would render the proposal non-responsive and result in rejection of the proposal.

FirstLine filed a pre-award protest to the court.

Federal acquisition regulations refer to small business goals as a percentage of total subcontracting dollars.

Moreover, in negotiated acquisitions, subcontracting goals should be established at a level that the prime contractor reasonably expects can result in work by small business concerns.

The government responded to the FirstLine protest by stating that nothing in law or regulation prohibits an agency from setting a small business goal as a percentage of total contract price.

The government argued that the 40% goal is not a regulatory requirement but that it implements federal government policy to enable small business concerns to participate as subcontractors. 

The court agreed with the TSA that the 40% is a goal – not a requirement.  The court also agreed with TSA to uphold TSA’s position of requiring a prime contractor to state small business goals in terms of a percentage of total dollars, and agreed that nothing in the regulations or the law prohibits an agency from establishing a goal in terms of the total value of the contract.

The court stated that the Federal Acquisition Regulation does not provide an implicit bar to the 40% goal. At the review stage, the contracting officer reviews factors related to reasonableness and feasibility of the proposed subcontracting plan without identifying small business concerns that should perform the work.

The court agreed that the 40% small business participation is a goal within the bounds of reasoned decision-making; and therefore, is a rational expression of the government’s policy of affording small business concerns the “maximum practicable opportunity” to participate as subcontractors.

Although FirstLine was concerned about higher costs that it would incur, the court stated that TSA was willing to pay higher costs to achieve greater small business participation.

...the court stated that TSA was willing to pay higher costs to achieve greater small business participation.

However, the upper limit to how much the government will accept, consistent with efficient performance, is unknown.

It is unknown whether the court decision will be upheld on appeal or be implemented in the FAR or by agencies. The court decision may result in the requirement for prime contractors to prepare plans with goals that are directed in the RFP as a percent of total contract value, rather than determined by the prime contractor based on its ability to perform the work.

Primes may face a conundrum before an RFP is released--seeking to combine in-house skills with those of team members sufficient to perform the work, yet not knowing how the small business subcontracting goals will be established until the actual RFP is released. This creates an awkward situation for the offeror.  If the RFP sets goals higher than originally planned, then the offeror may have to juggle work to make room for small business subcontractors.

Tom Petruska is president of Contracts Unlimited Inc. You may reach Tom at tpetruska@contractsunlimitedinc.com. The foregoing discussion is not intended to be legal advice or a legal opinion.