Historically, small contractors in the construction business have found it difficult to break into the federal market not because of a lack of skill or knowledge, but because they could not demonstrate the past performance required by many federal solicitations. On July 22, the Small Business Administration (SBA) released a final rule that will hopefully provide greater opportunity for contractors to compete for federal construction procurements.

The genesis of the SBA’s new regulations is from Section 868 of the National Defense Authorization Act for Fiscal Year 2021. That bill required the SBA to develop regulations that permit small businesses, when submitting offers in response to federal procurements, to use their past performance as a member of a joint venture or as a subcontractor to a prime contractor. The SBA’s new regulations, located at 13 CFR § 125.11, implement Section 868 by making two significant changes to federal procurement policies and processes: they require agencies to consider the past performance of small businesses that have been members of a joint venture or a first-tier subcontractor while also requiring certain prime contractors to provide performance ratings to first-tier subcontractors upon request.

These new regulations are an important advancement for small businesses. Historically, some small businesses have not had the necessary past performance as a prime contractor to compete for federal construction contracts. As such, they have been forced into joint ventures with other small businesses, or large businesses under the SBA’s Mentor-Protégé program, that have the necessary past performance. But some solicitations and procurement officers would then not count as valid past performance performed under a joint venture, requiring the small business to have performed as a prime contractor. This led to some small businesses being denied the opportunity to compete for federal construction contracts (and service contracts) because their past performance was limited to contracts where they were a joint venture or a subcontractor.

For joint ventures, the new regulations require procurement officers to consider a small business’ past performance in a joint venture when evaluating proposals and offers.
Notably, small businesses can use the joint venture’s experience regardless of whether their joint venture partner was also a small business. As such, past performance realized from joint ventures formed under mentor-protégé agreements can be used on future procurements. The only requirement is that the past performance relied upon must have been the small business’ own performance and not work that was performed exclusively by other partners in the joint venture. This will significantly expand the scope of past performance available to many small businesses.

The other new change in the SBA’s requirements is a new program requiring prime contractors on certain federal contracts to give performance evaluations to their first-tier subcontractors. These performance evaluations can then be used by the subcontractor to establish its past performance when competing for new federal procurements. The prime contractor must provide the performance rating to the subcontractor within 15 days of the subcontractor’s request. The prime contractor must also use the same five-scale rating system contained in FAR 42.1503 – Exceptional, Very Good, Satisfactory, Marginal, and Unsatisfactory – in the following categories: technical (quality of product or service); cost control (not applicable for firm-fixed-price or fixed-price with economic price adjustment arrangements); schedule/timeliness; management or business relations; and other (as applicable). Prime contractors and subcontractors are free to agree on deadlines by which the prime contractor must provide the performance evaluation, but such deadlines cannot be any sooner than 30 days after completion of the contract.

The regulations do not mandate any specific form be used by the prime contractors to provide performance ratings to their subcontractors. The prime contractor’s evaluation of the subcontractor is not submitted to the Contractor Performance Assessment Reporting System (CPARS) but rather is directly provided to the subcontractor. The subcontractor can then elect to use, or not use, the performance evaluation in future procurements. Contracting officers are to treat first-tier subcontractor past performance evaluations as equivalent to CPARS ratings. The new subcontractor performance evaluations will provide another new avenue for small businesses to document their successful past performance and compete for new federal contracts.

While the SBA’s new regulations will provide a greater opportunity for small businesses to compete for federal construction contracts, some uncertain issues remain. The SBA declined to include any specific process to enforce the prime contractor’s obligation to provide the performance evaluation. The SBA noted that subcontractors can submit complaints to the contracting officer in cases where the prime contractor has refused or failed to provide a request for performance evaluation. More concerning, the SBA did not establish any process for a subcontractor to challenge a poor performance rating given by the prime contractor, under the rationale that the subcontractor could simply choose to not use the poor evaluation. For small contractors seeking to break into the federal market as a prime contractor, that is not much help, and subcontractors might want to consider a process for resolving any disputes over the ratings provided by the prime contractor.

More positively, while the SBA did not mandate that procurement officers give any specific weight to a small business’ joint venture past performance, the agency did reverse course from its initial proposed regulations that specifically declined to define or limit the timeframe in which joint venture or subcontractor past performance could be used. Instead, the SBA noted that procurement agencies retained the discretion to determine what is relevant regarding past performance and could accept older past performance.

The new SBA regulations provide a new tool for small businesses to develop and document their past performance for use in future procurements. Small businesses that are considering submitting responses to solicitations should revisit their joint venture past performance to determine if the new regulations will permit them to bolster their proposals and take advantage of this new opportunity to demonstrate their capability to complete construction projects.

This column is intended to provide readers with general information and not legal advice. Consult professional counsel for help regarding specific situations.

Column first appeared in the Oregon Daily Journal of Commerce on August 12, 2022.