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Primes Can Now Take Credit for Lower-Tier Subcontracts Under New SBA Final Rule Effective 11/13/2023

On October 11, 2023, SBA issued a final rule effective November 13, 2023, revising the Small Business Subcontracting Plan regulations in 13 CFR 125.3. This final rule allows prime contractors with individual subcontracting plans to apply credit for subcontracts to small businesses at lower tiers toward its subcontracting goals. Prior to this rule, a prime contractor could only count its first-tier subcontracts toward the subcontracting plan goals. Changes under this rule were enacted under Section 870 of the NDAA of 2020 (Public Law 116-92).

The final rule requires a prime contractor that chooses to used lower tier subcontracts toward subcontracting goals to identify the records it will maintain to substantiate the use of lower-tier credit.

The final rule also prohibits agencies from setting tier-specific goals for prime contractors that use lower-tier credit.

BACKGROUND: Federal contracts require the awardee to enter into a subcontracting plan that includes percentage goals for using small businesses and subcategories of small businesses. Subcontracting plans apply to Federal contracts exceeding $750,000 ($1.5 million for construction), unless the awardee is a small business, the contract does not offer subcontracting opportunities, or the contract will be performed entirely outside the United States and its outlying areas.

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