New FAR Provision Will Disadvantage Small Businesses in MATOC Bids

For nine years, contracting officers have operated under an interim rule for setting aside or reserving task and delivery orders for small businesses under multiple award contracts.  That changed on March 30, 2020, when a final rule issued by the Federal Acquisition Regulation (FAR) Council went into effect.  The final rule installed significant changes from the interim policy.  The changes are a bit of a mixed bag for the small business community.  While the rule touts a “positive economic impact,” certain features appear likely to disadvantage some small businesses competing for task and delivery orders.  Even so, the rule offers potential benefits for small businesses in the form of greater contracting opportunities, possibly lower proposal costs, and a prohibition on most agencies’ use of tiered evaluations for multiple-award contracts. 

A Mixed Bag of Policy Changes

In November 2011, the FAR Council published its interim rule (cited above) in an effort to implement section 1331 of the Small Business Jobs Act of 2010.  In October 2013, the Small Business Administration (SBA) established its own set of procedures addressing the same.  Finally, in December 2016, the FAR Council published a proposed rule aimed at implementing the SBA’s procedures.  While the final rule tracks most closely with the SBA’s 2013 rule, notable differences persist.  Five of the most significant features of the final rule are outlined below.

1.     Application of the Limitations on Subcontracting and the Non-Manufacturer Rule at Task/Delivery Order Level

The final rule formalizes in the FAR what the SBA laid out in its 2013 rule—that agencies shall apply the limitations on subcontracting and the non-manufacturer rule (collectively, the “subcontracting requirements”) to reserves at the order level, not the contract level.  The subcontracting requirements are fundamental to the set-aside system; however, the FAR Council’s final rule represents a significant missed opportunity in its treatment of the same. 

It is well-understood that the subcontracting requirements considerably narrow a small business’s pool of potential subcontractors, thereby driving up certain performance costs.  While the requirements apply equally to all offerors in the context of a 100% set-aside, this is not always the case in a multiple-award contract.  By applying the subcontracting requirements at the order (rather than contract) level, agencies create an inherent disparity between large and small offerors and across the SBA’s various socioeconomic programs.  This disparity puts contracting officers in the unenviable position of evaluating dissimilar proposals and renders unsuitable many of the traditional price analysis techniques (i.e., direct comparison with a government estimate, historical pricing, or competitor proposals).  The final rule does nothing to resolve this disparity or provide direction for conducting equitable price analyses.  As a result, small business contractors can expect to have their prices compared directly to those offered by large and otherwise dissimilarly situated offerors.  This reality may prompt an increase in protests alleging improper evaluations and disparate treatment.

Importantly, the likelihood of an agency applying inappropriate price comparisons is lower in the context of a set-aside or partial set-aside, even at the order level.  Small businesses can improve the chance that a contract or order is set aside by diligently responding to the agency’s sources sought and requests for information and by highlighting their small business status and participation in any SBA socioeconomic programs, therein.

2.     Irregular Compliance Periods for the Limitations on Subcontracting

Under the interim rule, contracting officers verified compliance with the limitations on subcontracting at the contract level for all non-set-aside multiple-award contracts.  By contrast, the final rule grants contracting officers discretion to measure the compliance period at either the contract or the order level.  As commenters to the rule pointed out, compliance with the limitations on subcontracting is not always possible for every order and contracting officers are likely reduce competition for orders that require compliance within that timeframe.  Moreover, the irregularity created by this policy increases the risk of confusion or mistake in offerors’ proposals.  Going forward, small business contractors should closely examine the terms of each multiple-award contract to determine how the compliance period will be measured.

3.     HUBZone Price Evaluation Preference

Consistent with the 2013 SBA rule, the HUBZone price evaluation preference will not be used under the final rule for the reserved portion of a solicitation for a multiple-award contract.  However, the price evaluation preference will still be used in the portion of a solicitation for a multiple-award contract that is not reserved.  HUBZone contractors should reflect this nuanced approach in their total pricing.

4.     Discrete Proposals for Partial Set-Asides May Decrease Overall Proposal Costs for Some Small Businesses

Despite the above concerns, the final rule still offers certain benefits to the small business community.  One benefit is the removal of the current requirement for small business offerors to submit an offer for both the set-aside and non-set-aside portions of a partial set-aside.  This requirement often led to increased proposal costs for small businesses looking to perform only the set-aside portion(s).  Under the new policy, small businesses can submit an offer for only the set-aside portion they are interested in performing, likely decreasing firms’ overall proposal costs and increasing potential bid opportunities.

5.     “Prohibit[ion]” on Tiered Evaluations

Lastly, the final rule “prohibit[s]” agencies from conducting tiered (or cascading) evaluations for multiple-award contracts.  Tiered evaluations have been used to evaluate the offers of small businesses and SBA socioeconomic program participants alongside each other and large businesses.  Under this scheme, a contracting officer evaluates each “tier” of similarly situated offerors before moving onto the next grouping.  Presumably, this methodology saves the agency time and administrative effort, but it often leads to disparate evaluations and improperly applied source selection criteria.  While tiered evaluations were already proscribed for multiple-award contracts under the SBA’s 2013 rule, the FAR Council’s rejection of this evaluation methodology is a welcomed addition.  The prohibition does not apply to agencies that have specific statutory authority to use tiered evaluations.

Clearly, the FAR Council’s final rule offers potential benefits to small businesses competing for multiple-award contracts and orders, but the rule is not without certain concerns that appear likely to disadvantage many of the same businesses the rule purports to champion.  These concerns will require more vigilance from the small business community in the pre-solicitation stage, while some may even prompt an increase in protests alleging improper evaluation and disparate treatment.