On October 5, 2011, the Small Business Administration issued a proposed rule implementing the small business subcontracting plan provisions of the Small Business Act of 2010 (the 2010 Act). Among other things, the rule implements Section 1322 of the 2010 Act and requires an offeror to make a representation that in performing the contract it will make a good faith effort to acquire articles equipment, supplies, services or obtain the performance of construction work from small business concerns used in preparing and submitting the bid or proposal in the same amount and quality used in preparing and submitting the proposal. Section 1322 also requires the prime contractor to notify the contracting officer in writing whenever the prime contractor does not utilize a subcontractor that was used in preparing its proposal.

The purpose of Section 1322 of the 2010 Act is to support and enhance opportunities for small businesses by addressing so-called “bait and switch” tactics in small business subcontracting. The Coalition supports efforts to reduce “bait and switch” practices. Unfortunately, Section 1322 will likely create a much more challenging environment for small businesses seeking subcontracting opportunities under federal prime contracts.

Here’s why. The new statutory requirement that an offeror represent that it will make good faith efforts to subcontract with small business in the same amount and quality as indicated in the proposal creates a new avenue for potential Civil False Claims Act liability. Under the Civil False Claims Act qui tam, lawsuits could be filed alleging that a prime contractor falsely represented in its proposal that it would a make a good faith effort to utilize small business subcontracts in the same amount and quality as indicated in its proposal if it turns out that the prime contractor ultimately does not use a particular subcontractor. The statute creates a new risk factor for other than small businesses (large, medium and new graduated small businesses) regarding their government contracts. In order to reduce this risk, large business prime contractors may have no choice but to develop business strategies that reduce their small business subcontracting opportunities. At a minimum, the vetting process by prime contractors and the corresponding marketing efforts by small business concerns will be much more challenging and complex. Subcontracting opportunities for small businesses will suffer.

Section 1322 is a prime example of the law of unintended consequences. Public comments on the proposed rule are due January 6, 2012. The Coalition will be submitting comments.