OldHickory

Subcontracts & Subcontracting Management

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We are a subcontractor currently performing construction work on public facility. The project is fully funded through federal funds administered by the GSA. About a year into the project, the prime contractor notified us that a Small Business Subcontracting Plan was required of the subcontractor but never submitted.

Our subcontract with the prime expressly incorporates FAR Clause at 52.219-9. Subsection (d)(9) of that Clause states, "(d) The offeror's subcontracting plan shall include the following . . . (9) Assurances that the offeror will include the clause of this contract entitled 'Utilization of Small Business Concerns' in all subcontracts that offer further subcontracting opportunities, and that the offeror will require all subcontractors (except small business concerns) that receive subcontracts in excess of $650,000 ($1.5 million for construction of any public facility) with further subcontracting possibilities to adopt a subcontracting plan that complies with the requirements of this clause."

The base price of our subcontract was $137,000, a sum well below the $1.5 million threshold trigger requiring Small Business Subcontracting Plans from subcontractors. However, over the course of the project, the prime contractor issued changes orders that increased the scope and the price of the subcontract. By the time the prime contractor got around to demanding our Small Business Subcontracting Plan, the subcontract price had increased through change orders to over $2 million.

So, my question is whether we are obligated to submit a Small Business Subcontracting Plan under the circumstances I described above. My initial inclination is say no, since the base subcontract amount was far less than the $1.5M threshold set forth in FAR Clause 52.219-9(d)(9) and FAR 19.708( B)(1). But, I'd like to get your thoughts on this issue.

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Preliminarily, is your client a small business? If so, see FAR 19.702(B)(1). The government does not require subcontracting plans from small businesses. Another question is whether there are further subcontracting opportunities in the work remaining to be done by your client. If not, the terms of the clause do not require a plan.

Those things having been said, what you have is not a matter of the proper application of a government regulation, but of the interpretation of a contract between private parties. Since the prime flowed FAR 52.219-9 to the subcontract, the question is how the clause should be interpreted. The government would not have expected the prime to include the clause in a subcontract valued at only $137,000. However, there is no law or regulation prohibiting a prime from doing so, even if the subcontractor is a small business, and since the prime did do so and is demanding a subcontracting plan the question is whether your client is contractually obligated to provide one. What was the intent of the parties?

It may be that the prime thinks that it must obtain a plan in order to stay out of trouble with the government. If so a conference with the contracting officer might reveal that the government does not expect a plan under the circumstances and persuade the prime that it does not have to pursue the matter. Maybe you should call the contracting officer, find out what his or her stand is on the matter, and proceed accordingly. That is probably what I would do.

If the matter goes to court the issue will be decided on the basis of the prevailing contract law, which I suspect is state law. Personally, I would not think it reasonable to interpret FAR 52.219-9 as being dormant initially but kicking in if and when the subcontract grew to more than $1.5 million. But I don't know what argument the prime would make in court and what argument you would make on behalf of your client, and I don't know how a state court judge might rule.

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Preliminarily, is your client a small business? If so, see FAR 19.702( B)(1). The government does not require subcontracting plans from small businesses. Another question is whether there are further subcontracting opportunities in the work remaining to be done by your client. If not, the terms of the clause do not require a plan.

Those things having been said, what you have is not a matter of the proper application of a government regulation, but of the interpretation of a contract between private parties. Since the prime flowed FAR 52.219-9 to the subcontract, the question is how the clause should be interpreted. The government would not have expected the prime to include the clause in a subcontract valued at only $137,000. However, there is no law or regulation prohibiting a prime from doing so, even if the subcontractor is a small business, and since the prime did do so and is demanding a subcontracting plan the question is whether your client is contractually obligated to provide one. What was the intent of the parties?

It may be that the prime thinks that it must obtain a plan in order to stay out of trouble with the government. If so a conference with the contracting officer might reveal that the government does not expect a plan under the circumstances and persuade the prime that it does not have to pursue the matter. Maybe you should call the contracting officer, find out what his or her stand is on the matter, and proceed accordingly. That is probably what I would do.

If the matter goes to court the issue will be decided on the basis of the prevailing contract law, which I suspect is state law. Personally, I would not think it reasonable to interpret FAR 52.219-9 as being dormant initially but kicking in if and when the subcontract grew to more than $1.5 million. But I don't know what argument the prime would make in court and what argument you would make on behalf of your client, and I don't know how a state court judge might rule.

We are not a small business. There are no further subcontracting opportunities in the work to be done (assuming the prime doesn't come back to us again with a change directive that dramatically increases the scope of the work). Given that the prime didn't require us to submit a plan in the first place (even though it was in the contract T&Cs) and is only now demanding one at the conclusion of the project when there are no more sub-subcontracts to be awarded, it seems rather disingenuous to create some plan with goals that cannot practically be achieved since the all the work as already been sub-subcontracted out. Creating goals after all the work has been subbed out is somewhat like closing the barn door after all the horses have bolted. As far as state law is concerned and how a trier of fact might rule on the failure to submit a subcontracting plan after the fact, I am pretty confident that we'd be successful in arguing that the prime waived its right to enforce the clause by passively permitting the subcontractor to nearly complete the job without having submitted it. Principles of estoppel would likely also come into play for similar reasons and on the basis that a plan with subcontracting goals fails of its essential purpose when it isn't required until after all the sub work has already been completed or nearly completed. Finally, what could the prime's damages arising from this breach of contract (assuming failure to submit the plan is, in fact, a breach) possibly be when the prime has no liability for a sub's failure to submit a plan that was never required in the first place? Since damages are an essential element to a breach of contract action, and the prime would have none under the circumstances assuming that the CO does not require a plan from us, I'm very confident that the prime would lose any arguments arising from breach of contract under state law.

Nonetheless, I will take you advice and contact the CO on the project to confirm. Thanks for all your helpful advice in response to my inquiries.

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Have you written a letter to the prime on your client's behalf saying what you said here and telling them to pound sand?

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While I agree with Vern, there is another way I have used in the past.

If the prime demands a subcontracting plan, just issue one with a subcontracting goal of Zero, saying that there are no subcontracting opportunities.

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All fun responses, but not very practical. I suspect the prime may be trying to require the plan of the sub, because the CO is requiring it of the prime. If that is the case, arming the prime with the valid reasons to excuse a plan, so that it may likewise provide justification to the CO, might settle the issue without argument or animus. If the CO thinks he/she needs a plan, a trick plan with a zero goal will just send ire up the line. Zero is not a goal.

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In fact, isn't there some exculpating language somewhere in the small business utilization clause that just agrees to use small businesses to the extent it's consistent with effective or efficient performance (or am I thinking of Commercial Items language)? If so, why not just use that? It seems reasonably easy to make a case that if a project is 9/10 complete before the threshold is triggered, it's inconsistent with efficient and effective performance to disrupt existing subcontract arrangements.

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Here's another approach: Prepare a subcontracting plan that sets out as the goals the actual amount of subcontracts you awarded.

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Thank you for everyone's responses. I did not intend to come across as forcefully is I might have in my response to Vern's initial reply. Our relationship with the prime contractor is important to us and we'd like to maintain our good relations. I suppose what I really want to knows a lot more simple: does the $1.5 million threshold at which point a subcontractor is required to submit a small business subcontracting plan apply at subcontract signing or can it be triggered by virtue of change orders that increased the subcontract price to 1.5 million?

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Well, here we are, back to contract interpretation. The clause should not have been included in the subcontract in the first place. Like many primes, this one probably just flowed down everything. The sub should have known what it was doing and should have asked the prime to take it out. The sub didn't do that, for any number of reasons, and now there is an issue.

You cannot look to the government's regulations for an answer to this. They do not tell private parties how to interpret the clauses they put in their contracts. The clause could be interpreted to kick in if the subcontract crosses the dollar threshold through contract modification. I would not consider that a reasonable interpretation, but it is a possible one, and who cares what any of us think. In any case, I think you made good arguments against the enforceability of the clause in your response to my first post.

Find out what the CO's position is, if he or she even has one. If the CO's position is in your favor take that to the prime. Again, it is likely that the prime wants the plan because it thinks it needs it. If that is the case, why does the prime think that? A talk with the CO might help you make your case that a subcontracting plan is not necessary. Despite my response to Loul, I would not be inclined to submit anything that has potential legal effect if I didn't have to submit it.

Your client will find a way to deal with this. The lesson they need to learn is to read and think before they sign.

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Well, here we are, back to contract interpretation. The clause should not have been included in the subcontract in the first place. Like many primes, this one probably just flowed down everything. The sub should have known what it was doing and should have asked the prime to take it out. The sub didn't do that, for any number of reasons, and now there is an issue.

You cannot look to the government's regulations for an answer to this. They do not tell private parties how to interpret the clauses they put in their contracts. The clause could be interpreted to kick in if the subcontract crosses the dollar threshold through contract modification. I would not consider that a reasonable interpretation, but it is a possible one, and who cares what any of us think. In any case, I think you made good arguments against the enforceability of the clause in your response to my first post.

Find out what the CO's position is, if he or she even has one. If the CO's position is in your favor take that to the prime. Again, it is likely that the prime wants the plan because it thinks it needs it. If that is the case, why does the prime think that? A talk with the CO might help you make your case that a subcontracting plan is not necessary. Despite my response to Loul, I would not be inclined to submit anything that has potential legal effect if I didn't have to submit it.

Your client will find a way to deal with this. The lesson they need to learn is to read and think before they sign.

But then construction-public procurement lawyers wouldn't have any work! Thanks for the sound advice, Vern. I really appreciate it.

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It's not always politic for a sub to go straight to a CO. Some subcontracts prohibit it, and some CO's won't talk to subs. If that's your client's situation, I don't know why they can't just ask the prime whether it's a CO request. If it's not, what would the prime even do with it? I've never seen a lower tier plan as a contract submittal, and it's goals aren't reportable in eSRS unless the CO puts the plan in from his/her end.

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Thank you for everyone's responses. I did not intend to come across as forcefully is I might have in my response to Vern's initial reply. Our relationship with the prime contractor is important to us and we'd like to maintain our good relations. I suppose what I really want to knows a lot more simple: does the $1.5 million threshold at which point a subcontractor is required to submit a small business subcontracting plan apply at subcontract signing or can it be triggered by virtue of change orders that increased the subcontract price to 1.5 million?

Does the subcontract have a choice of law provision in it? If so, what does it say?

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Probably. That the law of State X applies.

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Probably. That the law of State X applies.

Maybe. I also have seen subcontracts that state that FAR provisions included in them will be interpreted in accordance with Government contract law or words to that effect.

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Do you have any advice for Old Hickory if there is a choice of law? If there is not? If there is a clause like the ones you have seen? You must have asked the question for a reason. What are you thinking?

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My client is not a small business. There are no further subcontracting opportunities in the work to be done by my client (assuming the prime doesn't come back to us again with a change directive that dramatically increases the scope of the work). Given that the prime didn't require us to submit a plan in the first place (even though it was in the contract T&Cs) and is only now demanding one at the conclusion of the project when there are no more sub-subcontracts to be awarded, it seems rather disingenuous to create some plan with goals that cannot practically be achieved since the all the work as already been sub-subcontracted out. Creating goals after all the work has been subbed out is somewhat like closing the barn door after all the horses have bolted. As far as state law is concerned and how a trier of fact might rule on my client's failure to submit a subcontracting plan after the fact, I am pretty confident that we'd be successful in arguing that the prime waived its right to enforce the clause by passively permitting the subcontractor to nearly complete the job without having submitted it. Principles of estoppel would likely also come into play for similar reasons and on the basis that a plan with subcontracting goals fails of its essential purpose when it isn't required until after all the sub work has already been completed or nearly completed. Finally, what could the prime's damages arising from this breach of contract (assuming failure to submit the plan is, in fact, a breach) possibly be when the prime has no liability for a sub's failure to submit a plan that was never required in the first place? Since damages are an essential element to a breach of contract action, and the prime would have none under the circumstances assuming that the CO does not require a plan from my client, I'm very confident that the prime would lose any arguments arising from breach of contract under state law.

Nonetheless, I will take you advice and contact the CO on the project to confirm. Thanks for all your helpful advice in response to my inquiries.

The clause states in part (taking the liberty to substitute "subcontractor" in place of "offeror"): "The subcontractor, upon request by the Contracting Officer [or Contractor, if that is applicable], shall submit and negotiate a subcontracting plan."

The plan discusses "planned" subcontracting, right? The sub wasn't required or requested to submit a plan at subcontract award and wasn't requested to submit one while the mods were being issued. If the request came after there were no further subcontracting opportunities, as stated, then how can the sub be in non-compliance or breach?

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This was a post in another topic - but I am hoping someone can provide the answer and a FAR that applies: Large Prime Subcontracts to small business, but small business subcontracts large and vital work to large subcontractor. If most of the subcontract cost incurred for personnel goes to large-business for its 2nd tier subs, can you (as large prime contractor) still count the full value of the small-business 1st-tier subcontract toward your small business subcontracting goals?

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While I don't agree with any type or any kind of pass-thru for small business, the goverment seems to allow the concept of pass-thrus (although the issue of small business is not addressed) see

52.215-22 LIMITATIONS ON PASS-THROUGH CHARGES--IDENTIFICATION OF SUBCONTRACT EFFORT (OCT 2009)

(a) Definitions. Added value, excessive pass-through charge, subcontract, and subcontractor, as used in this provision, are defined in the clause of this solicitation entitled ``Limitations on Pass-Through Charges''

(FAR 52.215-23).

(B) General. The offeror's proposal shall exclude excessive pass-through charges....

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