An Overview of Small Business Subcontracting: In Brief
An Overview of Small Business Subcontracting: April 10, 2024
In Brief
R. Corinne Blackford
For small businesses, participating in federal contracts as subcontractors can offer an important
Analyst in Small Business
pathway to government contracting work and is one of the ways that the federal government can
and Economic
help maintain a diversity of suppliers. Congress may be interested in the policies and regulations
Development Policy
surrounding small business subcontracting because the Small Business Act requires certain
contractors to provide subcontracting opportunities for small businesses and because subcontracts
are an access point for small firms seeking to provide goods and services to the government.
The federal government maintains a policy of “maximum practicable” subcontracting opportunities for small businesses via
prime contracts above $250,000, a value known as the simplified acquisition threshold. Regulations outline the details of
agency and contractor obligations when subcontracts are awarded, and are implemented by agency purchasing officials
across the government such as contracting officers, as well as SBA personnel that specialize in contracting support for small
businesses.
Other federal policies that foster small business subcontracting include monetary incentives to encourage prime contractors to
subcontract with small businesses; legal protections for subcontractors such as assurances of timely payments; and
“limitations on subcontracting” to prevent contracts intended for small businesses from being subcontracted to larger firms.
This report discusses major components of small business subcontracting policy and select issues of congressional concern:
contractor compliance with subcontracting regulations, and subcontracting reporting and data availability. It also provides
recent legislative proposals that would affect subcontracting policy.
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Contents
Introduction ..................................................................................................................................... 1
Subcontracting Opportunities for Small Businesses ....................................................................... 1
Directories and Databases ......................................................................................................... 2
Assistance for Subcontractors ................................................................................................... 3
Federal Subcontracting Policy ......................................................................................................... 4
Government-wide Subcontracting Goals .................................................................................. 4
Subcontracting Regulations ...................................................................................................... 5
Subcontracting Plans ........................................................................................................... 7
Issues for Congress .......................................................................................................................... 9
Contractor Compliance ............................................................................................................. 9
Subcontracting Data Reporting ............................................................................................... 10
Issues for Subcontractors ......................................................................................................... 11
Selected Legislative Proposals ................................................................................................ 12
Conclusion ..................................................................................................................................... 13
Figures
Figure 1. Prime and Subcontractor Relationships ........................................................................... 2
Tables
Table 1. Statutory Contracting Goals .............................................................................................. 5
Contacts
Author Information ........................................................................................................................ 14
Congressional Research Service
An Overview of Small Business Subcontracting: In Brief
Introduction
For small businesses, participating in federal contracts as subcontractors can offer an important
pathway to government contracting work. Subcontracting also helps the federal government
maintain a diversity of suppliers. Congress may be interested in the policies and regulations
surrounding small business subcontracting because the Small Business Act requires certain
contractors to provide subcontracting opportunities for small businesses.
Agency purchasing officials, including contracting officers, implement federal subcontracting
policy across the government, and Small Business Administration (SBA) personnel specialize in
contracting support for small businesses. While there is not a statutorily required subcontracting
goal for small businesses, the Small Business Act requires that 5% of federal subcontract award
dollars each fiscal year go to small disadvantaged businesses and 5% go to women-owned small
businesses; 3% of federal subcontract award dollars each fiscal year must go to service-disabled
veteran-owned small businesses and 3% must go to Historically Underutilized Business Zone
(HUB Zone) small businesses.1
In addition to regulations designed to enable subcontracting with small businesses, federal
policies supporting small business subcontracting include monetary incentives for prime
contractors to subcontract with small businesses; legal protections for subcontractors; and
“limitations on subcontracting” that prevent contracts intended for small businesses from being
subcontracted to larger firms. This report discusses major components of small business
subcontracting policy and select topics of congressional concern: contractor compliance with
subcontracting regulations, subcontracting data availability, and issues facing small business
subcontractors. It also provides recent legislative proposals that would affect subcontracting
policy.
Subcontracting Opportunities for Small Businesses
Small businesses may have the opportunity to sell goods and services to the federal government
through “prime” contracting as well as through subcontracting. While prime contractors contract
directly with agencies that procure goods and services, subcontractors may work for other
government contractors and further subcontract with other businesses.2 For small firms, working
directly with the federal government as a prime contractor can require prohibitive amounts of
staff, capital, and in-depth technical knowledge of contracting policies and regulations.
Preparation of an offer in response to a prime contract solicitation can be a complex and lengthy
process, making it costly and time-intensive for a firm, regardless of the potential contract
award’s value. For a small business, the payoff from a prime contract award might not justify the
level of investment required to secure the contract. Prime contract solicitations may also weight
the importance of a firm’s experience and performance record as a contractor, which might
present a particular challenge for a small business, especially a start-up business.
By participating in the federal marketplace as subcontractors, small businesses can benefit from
federal procurement, and potentially expand and position themselves to become prime
contractors. Subcontracts can offer less burdensome opportunities to sell to the government. They
1 15 U.S.C. §644(g)(1).
2 It is also possible for a firm to perform as a prime contractor on one federal contract and as a subcontractor on
another.
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An Overview of Small Business Subcontracting: In Brief
also offer exposure to federal agency requirements and give firms a chance to establish their
qualifications, necessary to prepare for future prime contract proposals.
Figure 1. Prime and Subcontractor Relationships
Source: Developed by Jamie Hutchinson, Visual Information Specialist, CRS.
To help foster small business subcontracting, agencies directly support prospective and current
subcontractors, and indirectly support them through regulations affecting procurement personnel
and prime contractors (see the section “Subcontracting Regulations”). Direct subcontractor
assistance includes directories and databases of subcontracting opportunities (as described
below), as well as technical assistance provided by the Small Business Administration (SBA) and
Department of Defense (DOD).
Since FY2017, government-wide subcontracting to small businesses has remained near 30% of
subcontract award dollars, which in FY2021 approximated $72 billion (prime contract award
dollars to small businesses was $154 billion, roughly 27% of prime award dollars).3
Directories and Databases
For prospective subcontractors, the SBA and many other agencies provide databases and
directories of subcontracting work. The SBA hosts an online Subcontracting Network website,
“SubNet,” where prime contractors post subcontracting opportunities, by geographic location,
and list their contact information and industry.4 In addition, SBA offers its Directory of Federal
Government Prime Contractors with a Subcontracting Plan,5 which lists federal prime contractors
required to develop a subcontracting plan for small business participation (see the section
“Federal Subcontracting Policy” for information about subcontracting plan requirements).
3 SBA, FY2021 Small Business Procurement Scorecard, at https://www.sba.gov/agency-scorecards/scorecard.html?
agency=GW&year=2021. This is the most recent scorecard currently available.
4 SubNet is available at https://subnet.sba.gov/client/dsp_Landing.cfm.
5 This directory is available at https://www.sba.gov/document/support-directory-federal-government-prime-contractors-
subcontracting-plans.
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Although many agencies offer prime contractor directories for prospective small business
subcontractors, those provided by the General Services Administration (GSA), Department of
Transportation (DOT), and Department of Defense (DOD) are extensive:
• GSA offers a Subcontracting Directory using information from its Federal
Procurement Data System, which small businesses can search by state and North
American Industry Classification System (NAICS) code.6
• DOT updates its Subcontracting Directory each fiscal year and includes “major
DOT prime contractors” that have approved subcontracting plans along with their
address, a company subcontracting liaison, and descriptions of the work or
products needed.7
• DOD’s Prime Contractor Directory lists the department’s prime contractors
required to have subcontracting plans and goals, including phone numbers and
emails for company points of contact as well as industry NAICS codes.8
Assistance for Subcontractors
The SBA and DOD have programs dedicated to individually assisting federal contractors; these
services may serve prospective subcontractors as well. SBA advertises online courses as well as a
Subcontracting Assistance Program that are available by contacting the SBA directly.9 SBA’s
offerings also include its standard suite of “technical assistance,” which can assist small
businesses with federal contracting as well as other kinds of counseling and training. Small
Business Development Centers, dispersed across the country and U.S. territories, are the SBA’s
flagship technical assistance resource for small businesses. In addition, the SBA’s Procurement
Center Representatives “conduct market research, assist small businesses with payment issues,
provide counseling on the contracting process, and more.”10
DOD’s Under Secretary of Defense for Acquisition and Sustainment oversees the APEX
Accelerators program for contractors. Formerly known as Procurement Technical Assistance
Centers, APEX Accelerators help small businesses “determine whether they are ready for
government opportunities,” complete necessary registration processes, network with procurement
staff and other contractors, “navigate solicitations,” and even “resolve [contract] performance
issues.”11 The program “focuses on building a [sic] strong, sustainable, and resilient U.S. supply
chains by assisting a wide range of businesses that pursue and perform under contracts with the
DoD, other federal agencies, state and local governments and with government prime
contractors.”12
6 This directory is available at https://www.gsa.gov/small-business/register-your-business/subcontracting-and-other-
partnerships.
7 This directory is available at https://www.transportation.gov/osdbu/procurement-assistance/dot-subcontracting-
directory.
8 This directory is available at https://business.defense.gov/Acquisition/Subcontracting/Subcontracting-For-Small-
Business/.
9 Ibid.
10 SBA, “Counseling and Help,” https://www.sba.gov/federal-contracting/counseling-help.
11 APEX Accelerators, “What We Do,” https://www.apexaccelerators.us/#/about-us.
12 Ibid.
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Federal Subcontracting Policy
The federal government implements subcontracting policies through agency regulations. These
policies are executed through acquisition regulations, directed towards procurement officials as
well as prime contractors. Described below, such regulations aim to create opportunities for small
businesses to participate in procurement and support them once employed by prime contractors
(see “Subcontracting Regulations”). They are also designed to help agencies reach subcontracting
goals, including those established by legislation (see “Government-wide Subcontracting Goals”).
When the Small Business Act of 1953 authorized the SBA, Congress declared its policy to
promote the interests of small businesses, in order to “preserve free competitive enterprise.”
Congress specified that one of the ways to do this was to ensure that small businesses received a
“fair proportion” of federal contracts and subcontracts.13 The Small Business Act currently
requires contractors with contracts greater than $250,000 (the “simplified acquisition
threshold”)14 to provide the “maximum practicable opportunity” for small businesses to
participate in contracts as subcontractors.15
Furthermore, all non-small contractors and subcontractors16 performing contracts with a value of
more than $750,000—or $1.5 million for construction contracts—must submit what is known as a
small business subcontracting plan.17 Further discussion of the regulations surrounding
subcontracting plans can be found under “Subcontracting Plans.”
Those implementing federal subcontracting policy include agency purchasing officials across the
government such as contracting officers, as well as SBA personnel that specialize in contracting
support for small businesses.
In addition to government-wide subcontracting policy, there is a unique Department of Defense
(DOD) subcontracting policy, the Indian Incentive Program. Under that program, DOD
“encourages prime contractors with a subcontract worth at least $500,000 to subcontract with
qualified Indian tribes, Native American-owned and -controlled businesses, and Native Hawaiian
small businesses by providing a 5% rebate on the amount subcontracted to these businesses.”18
Government-wide Subcontracting Goals
The statutory small business procurement goals reflect a government-wide commitment to
helping small firms compete as both prime contractors and subcontractors, shown in Table 1.
13 Ibid.
14 48 C.F.R. §2.101, “Simplified Acquisition Threshold.”
15 “Any contractor receiving a contract with a value greater than the simplified acquisition threshold must agree in the
contract that small business, veteran-owned small business, service-disabled veteran-owned small business, HUBZone
small business, small disadvantaged business, and women-owned small business concerns will have the maximum
practicable opportunity to participate in contract performance consistent with its efficient performance. It is further the
policy of the United States that its prime contractors establish procedures to ensure the timely payment of amounts due
pursuant to the terms of their subcontracts with small business, veteran-owned small business, service-disabled veteran-
owned small business, HUBZone small business, small disadvantaged business, and women-owned small business
concerns.” 48 C.F.R. §19.702.
16 Non-small entities would be those that do not meet the SBA size standards for small businesses.
17 48 C.F.R. §19.702(a)(1).
18 Defense Federal Acquisition Regulation Supplement (DFARS) Subpart 252.226-700. Information from DOD on this
program is available at https://business.defense.gov/Programs/Indian-Incentive-Program.
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Various pieces of legislation established these goals, the earliest of which were created in 1988.19
Although prime contracting goals receive the majority of the attention in small business policy
discussions, subcontracting goals direct agency buyers to consider the indirect participation of
small businesses in prime contracts as well.
There is no statutorily required subcontracting goal for small businesses generally, as there is for
“socioeconomic” small businesses, such as small disadvantaged businesses, women-owned small
businesses, service-disabled veteran-owned small businesses, and Historically Underutilized
Business Zone (HUB Zone) small businesses. Table 1, below, shows the statutorily required
small business prime contracting and subcontracting goals.
Table 1. Statutory Contracting Goals
Type of Firm
Goal
Measure of Contract Awards
Small Businesses
23% Dol ar value of prime contract awards
Small Disadvantaged Businesses
5% Dol ar value of prime and subcontract awards
Women-Owned Small Businesses
5% Dol ar value of prime and subcontract awards
Service-Disabled Veteran-Owned Small Businesses
5% Dol ar value of prime and subcontract awards
HUB (Historically Underutilized Business) Zone
3% Dol ar value of prime and subcontract awards
Small Businesses
Source: 15 U.S.C. §644(g)(1)(A); P.L. 118-31.
Notes: For reporting purposes, the “amount” annually contracted to businesses is measured by the dol ars
obligated in a fiscal year, although contracts may span multiple years.
The SBA oversees small business procurement goal-making for individual federal agencies,
consulting with agencies to establish annual goals for small business participation in contracting
that collectively add up to the statutory, government-wide goals shown above,20 as required by
Section 15(g)(2) of the Small Business Act.
While the SBA sets agency-level prime contracting goals for HUBZone businesses, women-
owned small businesses, and service-disabled veteran-owned small businesses at the statutory
level, it bases agency subcontracting goals on an agency’s recent small business subcontracting
achievements. As seen in the table above, regardless of agency-specific goals, the total value of
annual subcontract dollars going to socioeconomic small businesses through contracts across the
government must collectively add up to either 5% or 3% for the socioeconomic categories. There
are no punitive consequences for failure to meet goals but agencies that fail to meet them must
submit a “corrective action report” to the SBA and propose a “corrective action plan.”21
Subcontracting Regulations
The origins of regulations surrounding small business subcontracting can be found in a 1978 law
amending the Small Business Act and the Small Business Investment Act of 1958, P.L. 95-507.
That legislation directed the SBA to encourage major businesses to subcontract with specified
19 P.L. 100-656, the Business Opportunity Development Reform Act of 1988. The government-wide minimum
participation goal for small businesses was increased from 20% to 23% by P.L. 105-135, the Small Business
Reauthorization Act of 1997.
20 Small Business Administration Office of Policy, Planning and Liaison, FY2024 Goaling Guidelines, p. 5,
https://www.sba.gov/document/report-sba-goaling-guidelines.
21 Ibid. Additional information on small business contracting goals is available in CRS Insight IN12018, Federal Small
Business Contracting Goals, by R. Corinne Blackford.
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categories of small businesses, required some contractors to submit a “subcontracting plan” along
with their offers, and required certain information to be included in these subcontracting plans.
The law also authorized agencies to provide incentives to encourage subcontracting opportunities
for small businesses owned or controlled by disadvantaged individuals.22
Today, the federal government maintains a policy of “maximum practicable” subcontracting
opportunities for small businesses and socioeconomic small businesses via prime contracts above
$250,000, the simplified acquisition threshold.23 For contracts of this size, prime contractors must
agree to maximize participation by small businesses, veteran-owned small businesses, service-
disabled veteran-owned small businesses, HUBZone small businesses, small disadvantaged
businesses, and women-owned small businesses, “consistent with its [the contract’s] efficient
performance.”24 Acquisition regulations outline the details of agency and contractor obligations
when subcontracts are awarded, including those surrounding the “subcontracting plans”
submitted by prime contractors (see “Subcontracting Plans”).
In order to incentivize the creation of small business subcontracting opportunities, regulations
also permit contracting officers to encourage prime contractors financially. Monetary incentives
may include “payments based on the actual subcontracting achievement” where a contractor
exceeds their subcontracting plan goals, as long as the goals are “realistic” and the “rewards for
exceeding the goals are commensurate with the efforts the contractor would not have otherwise
expended.”25 Incentives are “negotiated after [a contracting officer has] reach[ed] final agreement
with the contractor on the subcontracting plan.”26
Federal subcontracting policy also aims to provide some legal protections to subcontractors, as
well as to prevent large firms from effectively performing contracts intended for small businesses.
Because subcontractors do not have a direct contractual relationship with federal purchasing
agencies the way that prime contractors do, they lack some of the legal protections that benefit
prime contractors. For example, prime contractors benefit from payment terms related to payment
timeliness and interest on late payments. To provide some protections to subcontractors, Congress
enacted laws such as the Miller Act and the 1988 amendments to Prompt Payment Act of 1982.27
The Miller Act helps ensure payment to subcontractors working on federal construction contracts,
while the 1988 amendments to Prompt Payment Act extended certain timely payment
requirements to subcontractors on federal construction contracts.28 Because construction projects
typically involve subcontracting, Congress recognized that “Subcontractors play a very
substantial role in the accomplishment of federal construction projects,” and believed that certain
22 P.L. 95-507.
23 48 C.F.R. §2.101. The simplified acquisition threshold means $250,000.
24 48 C.F.R. §19.702.
25 48 C.F.R. §19.705-1(a).
26 Ibid.
27 CRS Report R41230, Legal Protections for Subcontractors on Federal Prime Contracts: In Brief, by Kate M.
Manuel. This report is nondistributable but available to congressional clients upon request.
28 The 1988 amendments “require that every construction contract awarded by a federal agency contain clauses
obligating the prime contractor to (1) pay the subcontractor for ‘satisfactory performance’ under the subcontract within
seven days of receiving payment from the agency and (2) pay interest on any amounts that are not paid within the
proper time frame. The contract must also obligate the prime contractor to include similar payment and interest penalty
terms in its subcontracts, as well as require its subcontractors to impose these terms on their subcontractors.” CRS
Report R41230, Legal Protections for Subcontractors on Federal Prime Contracts: In Brief, by Kate M. Manuel.
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An Overview of Small Business Subcontracting: In Brief
guarantees for these subcontractors would benefit the government by controlling project costs and
avoiding project delays.29
To limit the amount of small business contracting dollars flowing through small firms to larger
ones, prime contractors that receive a small business preference30 typically may not pay more
than 50%31 of the federal dollars they receive to firms that are “not similarly situated,” i.e., firms
that are not a small business or the specific type of small business that received the contract.32 A
small business that receives a contracting preference and subcontracts some of the work out to a
“similarly situated” firm however, does not need to count that work as subcontracted so long as
the subcontractor is using its own employees.33 These regulations, known as the “limitations on
subcontracting,” seek to maintain the integrity of contracting preferences intended for small and
socioeconomic small businesses, including contract set-asides and sole-source awards.34 They do
not apply to contracts that are set-aside for small businesses and fall between the micro-purchase
($10,000) and simplified acquisition ($250,000) thresholds.35 They also do not apply to
subcontractors, unless a prime contractor is “relying on a similarly situated entity” to adhere to
the limitations.36
Subcontracting Plans
Certain prime contractors must submit a subcontracting plan to their purchasing agency, in which
they describe their subcontracts and subcontractors. In general, offerors must submit
subcontracting plans to an agency when a contract value is greater than $750,000 (or $1.5 million
for construction contracts) and subcontracting possibilities exist.37 Per acquisition regulations,
these subcontracting plans must include the following:
29 A Senate report during deliberations over the amendments to the Prompt Payment Act included the following
statement from the testimony of a representative of the American Subcontractors Association: “[construction]
Contractors, of necessity, must recoup a portion of the negative cash flow created by late payments by increasing their
prices to the government.” U.S. Congress, Senate Committee on Governmental Affairs, Prompt Payment Act
Amendments of 1987, To Amend Chapter 39 of Title 31, United States Code, To Clarify and Strengthen the Prompt
Payment Act of 1982, 100th Cong., 2nd sess., June 19, 1987, pp. 21-23.
30 48 C.F.R. §52.219-14. This preference refers to partial or full contract set-asides and sole-source contract awards, as
well as to orders under multiple-award contracts that are set aside or issued directly to small businesses.
31 Per 13 C.F.R. §125.6(a)(3), this percentage rises to 85% in the case of construction contracts. Per 13 C.F.R.
125.6(a)(4), this percentage is 75% for special trade contractors.
32 13 C.F.R. §125.6 and 13 C.F.R. §125.1. Similarly situated “means a subcontractor that has the same small business
program status as the prime contractor. This means that: For a HUBZone contract, a subcontractor that is a certified
HUBZone small business concern; for a small business set-aside, partial set-aside, or reserve, a subcontractor that is a
small business concern; for a SDVOSB contract, a subcontractor that is a certified SDVOSB; for a VOSB contract, a
subcontractor that is a certified VOSB; for an 8(a) contract, a subcontractor that is a certified 8(a) BD Program
Participant; for a WOSB or EDWOSB contract, a subcontractor that is a certified WOSB or EDWOSB. In addition to
sharing the same small business program status as the prime contractor, a similarly situated entity must also be small
for the NAICS code that the prime contractor assigned to the subcontract the subcontractor will perform.”
33 13 C.F.R. §125.6(c).
34 Set-aside is a commonly used term to refer to a contract competition in which only small businesses, or specific types
of small businesses, may compete. Set-asides can be total or partial, depending on whether the entire procurement, or
just a segment of it, is restricted. Sole source awards are noncompetitive procurements made after soliciting and
negotiating with one source.
35 13 C.F.R. §125.6(e)(1).
36 13 C.F.R. §125.6(e)(2).
37 48 C.F.R. §19.704. Per 48 C.F.R. §19.702(b), prime contractors exempt from the requirement to submit a
subcontracting plan include small business concerns, personal service contractors, contractors performing work entirely
(continued...)
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• small business subcontracting goals, expressed as a percentage of subcontracted
award dollars;38
• the total number of dollars to be subcontracted;
• the number of dollars to be subcontracted to small businesses, as well as to each
type of socioeconomic small business;39
• descriptions of methods used to develop subcontracting goals; and
• a description of methods used to identify possible subcontractors.40
There are two types of subcontracting plans: “individual” and “commercial.” Individual
subcontracting plans apply to a specific contract whereas a commercial subcontracting plan
applies “to the entire production” of products or services sold by a firm.41 The type of plan used
depends on the particular contractor and its contracts; if a contractor sells commercial products
and services,42 commercial subcontracting plans are preferred.43 In general, commercial products
and services are those customarily used by the general public for non-governmental purposes.
DOD contracts may use a third type of subcontracting plan, known as a “comprehensive small
business subcontracting plan,” under what is referred to as the “Test Program for Negotiation of
Comprehensive Small Business Subcontracting Plans.”44 This test program is intended to “reduce
administrative burdens while enhancing subcontracting opportunities for small and small
disadvantaged business concerns,” by allowing plans to be submitted “on a corporate, division, or
plant-wide basis.”45
Contracting officers have a few obligations regarding subcontracting plans. They determine
whether a contract requires a subcontracting plan, depending on the contract value thresholds
mentioned above and analysis of the possibilities for subcontracts.46 In addition, they review
outside of the United States or its outlying areas. Per 48 C.F.R. §19.705 2(b), contracting officers determine whether
subcontracting possibilities exist by “considering relevant factors,” such as “whether firms engaged in the business of
furnishing the types of items to be acquired customarily contract for performance of part of the work or maintain
sufficient in-house capability to perform the work; whether there are likely to be product prequalification requirements;
and whether the firm can acquire any portion of the work with minimal or no disruption to performance.”
38 48 C.F.R. §19.704(a). In some cases, a contracting officer may require goals to be expressed as a percentage of total
contract dollars (in addition to as a percentage of subcontract dollars). Per 48 C.F.R. §19.705-2(e), although a contract
does not have more than one subcontracting plan, “a contracting officer may establish separate subcontracting goals for
each order under an indefinite-delivery, indefinite-quantity contract.”
39 48 C.F.R. §19.704(a)(2).
40 48 C.F.R. §19.704(a)(4-5).
41 48 C.F.R. §19.701.
42 Generally speaking, commercial products are those that are “customarily used by the general public or by
nongovernmental entities for purposes other than governmental purposes.” Commercial services are those procured to
support commercial products. 48 C.F.R. §2.101, “Commercial product,” and 48 C.F.R. §2.101, “Commercial service.”
43 Commercial subcontracting plans can cover multiple contracts. 48 C.F.R. §19.704(d)).
44 DFARS Subpart 219.702-70. Eligibility requirements apply for firms wishing to participate in the test program. An
eligible firm must have “furnished supplies or services (including construction) under at least three DoD contracts
during the preceding fiscal year, having an aggregate value of at least $100 million.”
45 Ibid.
46 48 C.F.R. §19.705-2. Per 48 C.F.R. §19.705-2(b), contracting officers determine whether subcontracting possibilities
exist by “considering relevant factors,” such as “whether firms engaged in the business of furnishing the types of items
to be acquired customarily contract for performance of part of the work or maintain sufficient in-house capability to
perform the work; whether there are likely to be product prequalification requirements; and whether the firm can
acquire any portion of the work with minimal or no disruption to performance.” Contracting officers also may
determine that subcontracting possibilities do not exist, in which case a “detailed rationale” is required and must be
approved “at a level above the contracting officer” (48 C.F.R. §19.705-2(c)).
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subcontracting plans during the pre-award process,47 determine whether a subcontracting plan is
“acceptable,”48 and may assess small business subcontracting plans as one evaluation factor when
choosing a contractor during the “source selection” process.49 Finally, contracting officers provide
SBA Procurement Center Representatives (PCRs) an opportunity to review a contract solicitation
that will require a subcontracting plan. According to the SBA, PCRs “view many federal
acquisition and procurement strategies before they’re announced.” This enables the PCRs to
“influence opportunities that should be set aside for small businesses.”50
Following an award, contracting officers must monitor a prime contractor’s compliance with its
subcontracting plan, including ensuring that contractors submit the required subcontracting
reports (see “Subcontracting Data Reporting”).51 Officers can either accept or reject a report,52
where a rejection requires a contractor to make report corrections.53 Officers use the Contractor
Performance Assessment Reporting System (CPARS), a tool for recording contractor
performance that includes information about subcontractor payment issues.54 Relatedly,
contracting officers can also require prime contractors to show their compliance with the
“limitations on subcontracting” (see “Subcontracting Regulations,” above), demonstrating that
they did not subcontract too large of a share of a contract award to entities that are not similarly
situated.55
Issues for Congress
Contractor Compliance
As part of its oversight functions, Congress may be interested in how well prime contractors
comply with existing subcontracting policy and how well agencies are implementing the
applicable acquisition and small business regulations. A study conducted by the Government
Accountability Office (GAO) in May 2020 found that “selected agencies did not consistently
follow all required procedures for oversight of small business subcontracting plans, both before
and after contracts were awarded.”56 Specifically, GAO found that “agency contracting officers
47 48 C.F.R. §19.705-4.
48 48 C.F.R. §19.705-4(d). Evaluation of plan acceptability includes ensuring subcontracting goals are attainable and
advising a contract offeror about potential small business subcontractors and information sources on “potential small
business, veteran-owned small business, service-disabled veteran-owned small business, HUBZone small business,
small disadvantaged business, and women-owned small business subcontractors.”
49 Source selection is the process through which contracting officials make decisions about which firms will receive a
contract. In a negotiated contracting process where a contract is not a set-aside for small businesses and that involves
consolidation or bundling of contract requirements, if there is a “significant opportunity” for subcontracting,
contracting officers must consider proposed subcontractor participation when evaluating a contract offer. 48 C.F.R.
§15.304(c)(4).
50 48 C.F.R. §19.705-3 and SBA, “Federal Contracting: Counseling and Help,” at https://www.sba.gov/federal-
contracting/counseling-help.
51 48 C.F.R. §19.705-6(f).
52 48 C.F.R. §19.705-6(f)(3).
53 48 C.F.R. §19.704(a)(10)(iv)(B).
54 CPARS is available at https://www.cpars.gov.
55 “Evidence of compliance includes, but is not limited to, invoices, copies of subcontracts, or a list of the value of tasks
performed.” 13 C.F.R. §125.6(e)(4).
56 U.S. Government Accountability Office, SMALL BUSINESS SUBCONTRACTING: Oversight of Contractor
Compliance with Subcontracting Plans Needs Improvement, GAO-20-464, May 28, 2020, p. Summary.
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did not ensure contractors met their reporting requirements” for “more than half” of 26 reviewed
contracts.57
While contracting officers at purchasing agencies have the most responsibilities58 for prime
contractor compliance, SBA personnel also play “a key role” in helping to oversee prime and
subcontracting with small businesses by conducting “regulatory compliance reviews.”59 Congress
may be interested to know that in recent fiscal years, the SBA has conducted “targeted” reviews
of “large” prime contractors for subcontracting regulation compliance,60 although the precise
number of reviews and their findings are not publicly available. In addition, the SBA’s
Commercial Market Representatives train federal agency personnel and contractors on
subcontracting plans and reporting requirements.61 Trainings cover such topics as the Contracting
Officer’s duty to coordinate with the SBA, subcontracting regulations and the elements of
subcontracting plans, and subcontracting goals for prime contractors.62
Subcontracting Data Reporting
Related to the issue of compliance is the availability of data on subcontract awards and
subcontractor firms. Although there are reporting requirements in place for contractors regarding
their subcontracting plans (if applicable), limited data on the destination of federal contract award
dollars could pose a barrier to understanding contractor compliance and accountability issues.
Subcontracting plans spur reporting requirements for contractors required to have such plans, but
these reports and the data contained in them is limited in scope and availability.
Prime contractors with subcontracting plans submit their regularly required reports through the
Electronic Subcontracting Reporting System (eSRS).63 While eSRS is a tool for the transmittal of
subcontract information between contractors and contracting officials, it is not a portal of
accessible data and can only be viewed by the contractor and contracting officer. Two types of
subcontracting reports are required: the Individual Subcontract Report (ISR) and the Summary
Subcontract Report (SSR); the ISR provides actual subcontract award dollars for the six-month
reporting period and the SSR provides the actual subcontract award dollars for the fiscal year.64
57 Ibid, p. 19.
58 According to SBA standard operating procedures (SOP 60 03 7), “it is the responsibility of the Federal Agency who
awarded the contract to monitor and enforce subcontract compliance throughout the life of the contract,” although
“SBA has oversight to monitor the compliance of both the Federal Government agency and contractors for contracts
governed by the Subcontracting Program regulations.” SBA’s evaluations of subcontracting plan performance are
completed as a supplement to a contracting agency’s review of a prime contractor’s subcontracting plan performance.
Small Business Administration, “Small Business Government Contracting and National Defense Authorization Act of
2013 Amendments,” 81 Federal Register 34243, May 31, 2016.
59 SBA, FY 2024 Congressional Budget Justification and FY 2022 Annual Performance Report, p. 70.
60 Ibid.
61 Ibid. The SBA reports that it provided “more than 500 individual training sessions, across 23 agencies, educating
more than 18,000 federal contracting and acquisition leaders.”
62 For example, one training on subcontracting plans offered detailed recommendations on how to determine “realistic”
subcontracting goals and advised against negotiating goals upward if higher goals would “significantly increase the
Government’s cost or seriously impeded the attainment of acquisition objectives.” Stephanie Lewis, Understanding
Small Business Subcontracting Plans, Office of Government Contracting, Small Business Administration, 2016.
63 48 C.F.R. §19.704(a)(10)(iv). eSRS is available at available at https://www.esrs.gov.
64 48 C.F.R. §19.704(a)(10)(iv). Regulations require the ISR to be submitted semi-annually and the SSR to be
submitted annually, by October 30 for the twelve-month period ending September 30. Both reports cover information
for a specific contract, with a specific federal agency, so if a contractor has more than one contract, it would file more
than one report.
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Similar to eSRS, CPARs, the existing web-based tool for recording contractor performance, is
designed for use by purchasing officials and the information it contains is not releasable.65
The SBA’s Procurement Scorecard data on subcontracts to small businesses, along with the GSA’s
Subcontracting Report by North American Industry Classification System, offer the most
comprehensive data on the flow of subcontract dollars. The SBA issues a Procurement Scorecard
for the 24 CFO Act66 agencies every fiscal year, including agency subcontracting “achievement
data,” aggregated by the type of small business awardee (e.g., Small Disadvantaged Business,
service-disabled veteran-owned small business).67 It excludes some contracts/subcontracts,
however, and cannot be disaggregated and analyzed at a level other than agency-wide (e.g., by
location of performance, contract type, or contract preference).68 This is in contrast to the data on
prime contract awards available through the SAM.gov data bank. The GSA report is a static
report provided each fiscal year that aggregates subcontract awards by industry NAICS code and
socioeconomic small business goal category (i.e., small business, veteran-owned small business,
service-disabled veteran-owned small business, HUBZone small business, small disadvantaged
business, and women-owned small business).69
Issues for Subcontractors
Legal and payment protections for federal subcontractors may interest Congress because they
may prevent potential subcontractors from entering the federal contracting market, or negatively
affect subcontractor performance on federal contracts. In the case of preventing entry into the
federal market, Congress might examine the diversity and robustness of the government’s
supplier base. Where subcontractor performance is impacted, Congress might look at the burdens
and costs to purchasing agencies.
As mentioned, subcontractors working on federal construction contracts are protected through
certain required subcontract clauses as a result of the Miller Act and 1988 amendments to the
Prompt Payment Act. Other subcontractors, however, lack such beneficial protections.
65 48 C.F.R. §42.1503(d). According to acquisition regulations, “The completed evaluation [of a contractor] shall not be
released to other than Government personnel and the contractor whose performance is being evaluated during the
period the information may be used to provide source selection information. Disclosure of such information could
cause harm both to the commercial interest of the Government and to the competitive position of the contractor being
evaluated as well as impede the efficiency of Government operations.”
66 The Chief Financial Officers Act (1990) gave the Office of Management and Budget new authorities and
responsibilities to improve financial management across 24 federal agencies. The list of agencies is available at
https://www.cio.gov/handbook/it-laws/cfo-act/.
67 SBA, FY2021 Government-wide Small Business Procurement Scorecard, available at https://www.sba.gov/agency-
scorecards/scorecard.html?agency=GW&year=2021. GSA, FY2021 Subcontracting Report by North American
Industry Classification System, available at https://www.gsa.gov/policy-regulations/policy/acquisition-policy/reports-
required-by-the-small-business-act.
68 SBA excludes certain contracts when procurement data is unavailable or because the work cannot realistically be
performed by small businesses. According to the SBA’s FY2024 Goaling Guidelines, excluded contracts include
acquisitions on behalf of foreign governments; contracts awarded to mandatory sources (which include Federal Prison
Industries contracts that use penal labor from the Federal Bureau of Prisons and those with nonprofit agencies
employing persons who are blind or have other significant disabilities); contracts funded with non-appropriated,
agency-generated funds; Tricare health care program contracts; Department of Veterans Affairs Community Care
Network contracts. Purchases valued at less than $10,000 are also excluded because they are not tracked in the Federal
Procurement Data System. The value of contracts with these exclusions is referred to as the “small business eligible”
value.
69 GSA, FY2021 Subcontracting Report by North American Industry Classification System, available at
https://www.gsa.gov/policy-regulations/policy/acquisition-policy/reports-required-by-the-small-business-act. This
report is required by Section 15(h)(3)(A)(ii) of the Small Business Act.
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Subcontractors, particularly small businesses, may also not have access to contract financing, to
ensure adequate cash flow while they complete contract work.70
In April 2023, DOD published a study assessing the financing and payment policy impacts on
subcontractors because “ensuring the financial health” of the department’s supply base, including
subcontractors, it said, “is vital to accomplishment of the acquisition mission of DoD.”71 After
reviewing its policies, DOD found that “Defense subcontractors and suppliers generally do not
receive the favorable cash flow benefits to the same extent enjoyed by defense prime
contractors,” while it has been estimated that 60% to 70% of contracted defense work might be
completed by subcontractors.72 According to the study’s conclusions, “one of the major
advantages of doing business with DoD as a prime contractor is more robust cash flow in
comparison to what is common in the commercial marketplaces.” This may be because for prime
contractors, there is “the availability of contract financing, favorable payment terms, and the
Government’s commitment to pay its bills on time, or pay interest when missing a due date.”73
Where small business subcontractors are disadvantaged by the lack of payment protections and
other contract terms, agencies may be impacted by the reduction in potential suppliers able to
fulfill subcontracted work. Furthermore, where contract financing is unavailable or difficult to
obtain, agencies may face fewer suppliers and/or costs associated with the need for suppliers to
resort to debt financing.74 Section 862 of the National Defense Authorization Act for Fiscal Year
2024 (P.L. 118-31) includes provisions seeking to improve payment timeliness for subcontractors.
Specifically, it directs contractors to notify contracting officers when payment to a subcontractor
is more than 30 days past due, where this deadline was previously 90 days past due; it also
requires cooperation between a contractor, contracting officer, and agency Office of Small and
Disadvantaged Business Utilization (OSDBU),75 to correct or mitigate “unjustified failure to
make a full or timely payment to a subcontractor.”
Selected Legislative Proposals
Congressional interest in small business subcontracting has been reflected in a variety of bills
introduced in recent congresses. A selection of the bills includes the following:
• H.R. 7694, Strengthening Subcontracting for Small Business Act of 2022 (117th
Congress), was passed by the House, received in the Senate, and referred to the
Committee on Small Business and Entrepreneurship. The bill would have made
the extent to which a prime contract “offeror” proposes to use small businesses as
subcontractors a significant factor for the purposes of evaluating offers, for any
contract that requires a subcontracting plan.
• H.R. 7628, IMPROVE the SBA Act (117th Congress), was introduced and
referred to the Committee on Small Business. Section 403 of the bill would have
70 Department of Defense, Office of the Under Secretary of Defense for Acquisition and Sustainment Defense Pricing
and Contracting, Contract Finance Study Report, April 2023, p. 73, https://www.acq.osd.mil/asda/dpc/pcf/finance-
study.html.
71 Ibid, p. 53.
72 Ibid, pp. 5-6.
73 Ibid, p. 53.
74 Ibid, p. 72. According to the DOD study, “When small businesses are unable to obtain working capital to perform
their contracts and pay their bills through contract cash flow, the stakes can be so high that a small business may have
to resort to debt (vice equity) and leverage personal assets, such as a house or car.”
75 For additional information on the role and duties of agency OSDBUs in contracting, see CRS Report R47851, Offices
of Small and Disadvantaged Business Utilization: An Overview, by R. Corinne Blackford.
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An Overview of Small Business Subcontracting: In Brief
created questionnaires for first-tier subcontractors regarding prime contractor
engagement, usable as part of a prime contractor’s performance record. It also
would have included the timeliness of report submissions in the performance
evaluations of contractors by agencies.
• H.R. 6764, Put Our Neighbors to Work Act of 2020 (116th Congress), was
introduced and referred to the Small Business and Armed Services committees.
Among other provisions, it would have created a “local hire” preference for
contractors on military construction projects that hire employees (including a
subcontractor’s employees) from the same state or within 60 miles of the contract
work location.
• S. 2138, Small Business Subcontracting Transparency Act of 2015 (114th
Congress), was introduced, referred to the Committee on Small Business and
Entrepreneurship, and reported out of the committee with amendments. It would
have revised the SBA’s review and acceptance of subcontracting plans. Among
other provisions, it would have allowed an agency to delay the acceptance of a
subcontracting plan if it determined that the plan failed to provide the maximum
practicable opportunity for small businesses to participate in a contract.
Conclusion
To ensure a “fair proportion” of small business contracting and subcontracting as mandated in the
Small Business Act, federal agencies strive to reach four statutorily required subcontracting goals
for small disadvantaged businesses, women-owned small businesses, service-disabled veteran-
owned small businesses, and Historically Underutilized Business Zone (HUB Zone) small
businesses. Purchasing officials and prime contractors follow acquisition regulations designed to
support subcontracting to small businesses, which include subcontracting plans and reports, legal
protections for subcontractors, and limitations on subcontracting to non-small businesses. In some
instances, agencies may provide monetary incentives to prime contractors, to encourage
subcontracting to small firms.
Issues of congressional concern might include agency implementation and prime contractor
compliance with subcontracting policies as well as subcontract reporting data accessibility. Some
subcontracting data is available in select formats, including through the annual SBA Procurement
Scorecard and GSA Subcontracting Report by NAICS code. However, this static data is
aggregated at certain levels and cannot be analyzed the same ways that prime contract award data
can be analyzed. Additionally, payment and financing issues for small business subcontractors
may interest Congress, as they can create barriers to entering the federal contracting market or
impact subcontractor cash flows. The effects could reduce the number of suppliers and might also
increase business costs that are passed on to prime contractors and borne by the government.
Additional, related information on federal contracting policy is available in the following
products: CRS Report RS22536, Overview of the Federal Procurement Process and Resources,
by Dominick A. Fiorentino; CRS Report R45576, An Overview of Small Business Contracting, by
R. Corinne Blackford; and CRS Insight IN12018, Federal Small Business Contracting Goals, by
R. Corinne Blackford.
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Author Information
R. Corinne Blackford
Analyst in Small Business and Economic
Development Policy
Disclaimer
This document was prepared by the Congressional Research Service (CRS). CRS serves as nonpartisan
shared staff to congressional committees and Members of Congress. It operates solely at the behest of and
under the direction of Congress. Information in a CRS Report should not be relied upon for purposes other
than public understanding of information that has been provided by CRS to Members of Congress in
connection with CRS’s institutional role. CRS Reports, as a work of the United States Government, are not
subject to copyright protection in the United States. Any CRS Report may be reproduced and distributed in
its entirety without permission from CRS. However, as a CRS Report may include copyrighted images or
material from a third party, you may need to obtain the permission of the copyright holder if you wish to
copy or otherwise use copyrighted material.
Congressional Research Service
R47585 · VERSION 3 · UPDATED
14
In Brief
R. Corinne Blackford
For small businesses, participating in federal contracts as subcontractors can offer an important
Analyst in Small Business
pathway to government contracting work and is one of the ways that the federal government can
and Economic
help maintain a diversity of suppliers. Congress may be interested in the policies and regulations
Development Policy
surrounding small business subcontracting because the Small Business Act requires certain
contractors to provide subcontracting opportunities for small businesses and because subcontracts
are an access point for small firms seeking to provide goods and services to the government.
The federal government maintains a policy of “maximum practicable” subcontracting opportunities for small businesses via
prime contracts above $250,000, a value known as the simplified acquisition threshold. Regulations outline the details of
agency and contractor obligations when subcontracts are awarded, and are implemented by agency purchasing officials
across the government such as contracting officers, as well as SBA personnel that specialize in contracting support for small
businesses.
Other federal policies that foster small business subcontracting include monetary incentives to encourage prime contractors to
subcontract with small businesses; legal protections for subcontractors such as assurances of timely payments; and
“limitations on subcontracting” to prevent contracts intended for small businesses from being subcontracted to larger firms.
This report discusses major components of small business subcontracting policy and select issues of congressional concern:
contractor compliance with subcontracting regulations, and subcontracting reporting and data availability. It also provides
recent legislative proposals that would affect subcontracting policy.
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Contents
Introduction ..................................................................................................................................... 1
Subcontracting Opportunities for Small Businesses ....................................................................... 1
Directories and Databases ......................................................................................................... 2
Assistance for Subcontractors ................................................................................................... 3
Federal Subcontracting Policy ......................................................................................................... 4
Government-wide Subcontracting Goals .................................................................................. 4
Subcontracting Regulations ...................................................................................................... 5
Subcontracting Plans ........................................................................................................... 7
Issues for Congress .......................................................................................................................... 9
Contractor Compliance ............................................................................................................. 9
Subcontracting Data Reporting ............................................................................................... 10
Issues for Subcontractors ......................................................................................................... 11
Selected Legislative Proposals ................................................................................................ 12
Conclusion ..................................................................................................................................... 13
Figures
Figure 1. Prime and Subcontractor Relationships ........................................................................... 2
Tables
Table 1. Statutory Contracting Goals .............................................................................................. 5
Contacts
Author Information ........................................................................................................................ 14
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An Overview of Small Business Subcontracting: In Brief
Introduction
For small businesses, participating in federal contracts as subcontractors can offer an important
pathway to government contracting work. Subcontracting also helps the federal government
maintain a diversity of suppliers. Congress may be interested in the policies and regulations
surrounding small business subcontracting because the Small Business Act requires certain
contractors to provide subcontracting opportunities for small businesses.
Agency purchasing officials, including contracting officers, implement federal subcontracting
policy across the government, and Small Business Administration (SBA) personnel specialize in
contracting support for small businesses. While there is not a statutorily required subcontracting
goal for small businesses, the Small Business Act requires that 5% of federal subcontract award
dollars each fiscal year go to small disadvantaged businesses and 5% go to women-owned small
businesses; 3% of federal subcontract award dollars each fiscal year must go to service-disabled
veteran-owned small businesses and 3% must go to Historically Underutilized Business Zone
(HUB Zone) small businesses.1
In addition to regulations designed to enable subcontracting with small businesses, federal
policies supporting small business subcontracting include monetary incentives for prime
contractors to subcontract with small businesses; legal protections for subcontractors; and
“limitations on subcontracting” that prevent contracts intended for small businesses from being
subcontracted to larger firms. This report discusses major components of small business
subcontracting policy and select topics of congressional concern: contractor compliance with
subcontracting regulations, subcontracting data availability, and issues facing small business
subcontractors. It also provides recent legislative proposals that would affect subcontracting
policy.
Subcontracting Opportunities for Small Businesses
Small businesses may have the opportunity to sell goods and services to the federal government
through “prime” contracting as well as through subcontracting. While prime contractors contract
directly with agencies that procure goods and services, subcontractors may work for other
government contractors and further subcontract with other businesses.2 For small firms, working
directly with the federal government as a prime contractor can require prohibitive amounts of
staff, capital, and in-depth technical knowledge of contracting policies and regulations.
Preparation of an offer in response to a prime contract solicitation can be a complex and lengthy
process, making it costly and time-intensive for a firm, regardless of the potential contract
award’s value. For a small business, the payoff from a prime contract award might not justify the
level of investment required to secure the contract. Prime contract solicitations may also weight
the importance of a firm’s experience and performance record as a contractor, which might
present a particular challenge for a small business, especially a start-up business.
By participating in the federal marketplace as subcontractors, small businesses can benefit from
federal procurement, and potentially expand and position themselves to become prime
contractors. Subcontracts can offer less burdensome opportunities to sell to the government. They
1 15 U.S.C. §644(g)(1).
2 It is also possible for a firm to perform as a prime contractor on one federal contract and as a subcontractor on
another.
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also offer exposure to federal agency requirements and give firms a chance to establish their
qualifications, necessary to prepare for future prime contract proposals.
Figure 1. Prime and Subcontractor Relationships
Source: Developed by Jamie Hutchinson, Visual Information Specialist, CRS.
To help foster small business subcontracting, agencies directly support prospective and current
subcontractors, and indirectly support them through regulations affecting procurement personnel
and prime contractors (see the section “Subcontracting Regulations”). Direct subcontractor
assistance includes directories and databases of subcontracting opportunities (as described
below), as well as technical assistance provided by the Small Business Administration (SBA) and
Department of Defense (DOD).
Since FY2017, government-wide subcontracting to small businesses has remained near 30% of
subcontract award dollars, which in FY2021 approximated $72 billion (prime contract award
dollars to small businesses was $154 billion, roughly 27% of prime award dollars).3
Directories and Databases
For prospective subcontractors, the SBA and many other agencies provide databases and
directories of subcontracting work. The SBA hosts an online Subcontracting Network website,
“SubNet,” where prime contractors post subcontracting opportunities, by geographic location,
and list their contact information and industry.4 In addition, SBA offers its Directory of Federal
Government Prime Contractors with a Subcontracting Plan,5 which lists federal prime contractors
required to develop a subcontracting plan for small business participation (see the section
“Federal Subcontracting Policy” for information about subcontracting plan requirements).
3 SBA, FY2021 Small Business Procurement Scorecard, at https://www.sba.gov/agency-scorecards/scorecard.html?
agency=GW&year=2021. This is the most recent scorecard currently available.
4 SubNet is available at https://subnet.sba.gov/client/dsp_Landing.cfm.
5 This directory is available at https://www.sba.gov/document/support-directory-federal-government-prime-contractors-
subcontracting-plans.
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Although many agencies offer prime contractor directories for prospective small business
subcontractors, those provided by the General Services Administration (GSA), Department of
Transportation (DOT), and Department of Defense (DOD) are extensive:
• GSA offers a Subcontracting Directory using information from its Federal
Procurement Data System, which small businesses can search by state and North
American Industry Classification System (NAICS) code.6
• DOT updates its Subcontracting Directory each fiscal year and includes “major
DOT prime contractors” that have approved subcontracting plans along with their
address, a company subcontracting liaison, and descriptions of the work or
products needed.7
• DOD’s Prime Contractor Directory lists the department’s prime contractors
required to have subcontracting plans and goals, including phone numbers and
emails for company points of contact as well as industry NAICS codes.8
Assistance for Subcontractors
The SBA and DOD have programs dedicated to individually assisting federal contractors; these
services may serve prospective subcontractors as well. SBA advertises online courses as well as a
Subcontracting Assistance Program that are available by contacting the SBA directly.9 SBA’s
offerings also include its standard suite of “technical assistance,” which can assist small
businesses with federal contracting as well as other kinds of counseling and training. Small
Business Development Centers, dispersed across the country and U.S. territories, are the SBA’s
flagship technical assistance resource for small businesses. In addition, the SBA’s Procurement
Center Representatives “conduct market research, assist small businesses with payment issues,
provide counseling on the contracting process, and more.”10
DOD’s Under Secretary of Defense for Acquisition and Sustainment oversees the APEX
Accelerators program for contractors. Formerly known as Procurement Technical Assistance
Centers, APEX Accelerators help small businesses “determine whether they are ready for
government opportunities,” complete necessary registration processes, network with procurement
staff and other contractors, “navigate solicitations,” and even “resolve [contract] performance
issues.”11 The program “focuses on building a [sic] strong, sustainable, and resilient U.S. supply
chains by assisting a wide range of businesses that pursue and perform under contracts with the
DoD, other federal agencies, state and local governments and with government prime
contractors.”12
6 This directory is available at https://www.gsa.gov/small-business/register-your-business/subcontracting-and-other-
partnerships.
7 This directory is available at https://www.transportation.gov/osdbu/procurement-assistance/dot-subcontracting-
directory.
8 This directory is available at https://business.defense.gov/Acquisition/Subcontracting/Subcontracting-For-Small-
Business/.
9 Ibid.
10 SBA, “Counseling and Help,” https://www.sba.gov/federal-contracting/counseling-help.
11 APEX Accelerators, “What We Do,” https://www.apexaccelerators.us/#/about-us.
12 Ibid.
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Federal Subcontracting Policy
The federal government implements subcontracting policies through agency regulations. These
policies are executed through acquisition regulations, directed towards procurement officials as
well as prime contractors. Described below, such regulations aim to create opportunities for small
businesses to participate in procurement and support them once employed by prime contractors
(see “Subcontracting Regulations”). They are also designed to help agencies reach subcontracting
goals, including those established by legislation (see “Government-wide Subcontracting Goals”).
When the Small Business Act of 1953 authorized the SBA, Congress declared its policy to
promote the interests of small businesses, in order to “preserve free competitive enterprise.”
Congress specified that one of the ways to do this was to ensure that small businesses received a
“fair proportion” of federal contracts and subcontracts.13 The Small Business Act currently
requires contractors with contracts greater than $250,000 (the “simplified acquisition
threshold”)14 to provide the “maximum practicable opportunity” for small businesses to
participate in contracts as subcontractors.15
Furthermore, all non-small contractors and subcontractors16 performing contracts with a value of
more than $750,000—or $1.5 million for construction contracts—must submit what is known as a
small business subcontracting plan.17 Further discussion of the regulations surrounding
subcontracting plans can be found under “Subcontracting Plans.”
Those implementing federal subcontracting policy include agency purchasing officials across the
government such as contracting officers, as well as SBA personnel that specialize in contracting
support for small businesses.
In addition to government-wide subcontracting policy, there is a unique Department of Defense
(DOD) subcontracting policy, the Indian Incentive Program. Under that program, DOD
“encourages prime contractors with a subcontract worth at least $500,000 to subcontract with
qualified Indian tribes, Native American-owned and -controlled businesses, and Native Hawaiian
small businesses by providing a 5% rebate on the amount subcontracted to these businesses.”18
Government-wide Subcontracting Goals
The statutory small business procurement goals reflect a government-wide commitment to
helping small firms compete as both prime contractors and subcontractors, shown in Table 1.
13 Ibid.
14 48 C.F.R. §2.101, “Simplified Acquisition Threshold.”
15 “Any contractor receiving a contract with a value greater than the simplified acquisition threshold must agree in the
contract that small business, veteran-owned small business, service-disabled veteran-owned small business, HUBZone
small business, small disadvantaged business, and women-owned small business concerns will have the maximum
practicable opportunity to participate in contract performance consistent with its efficient performance. It is further the
policy of the United States that its prime contractors establish procedures to ensure the timely payment of amounts due
pursuant to the terms of their subcontracts with small business, veteran-owned small business, service-disabled veteran-
owned small business, HUBZone small business, small disadvantaged business, and women-owned small business
concerns.” 48 C.F.R. §19.702.
16 Non-small entities would be those that do not meet the SBA size standards for small businesses.
17 48 C.F.R. §19.702(a)(1).
18 Defense Federal Acquisition Regulation Supplement (DFARS) Subpart 252.226-700. Information from DOD on this
program is available at https://business.defense.gov/Programs/Indian-Incentive-Program.
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Various pieces of legislation established these goals, the earliest of which were created in 1988.19
Although prime contracting goals receive the majority of the attention in small business policy
discussions, subcontracting goals direct agency buyers to consider the indirect participation of
small businesses in prime contracts as well.
There is no statutorily required subcontracting goal for small businesses generally, as there is for
“socioeconomic” small businesses, such as small disadvantaged businesses, women-owned small
businesses, service-disabled veteran-owned small businesses, and Historically Underutilized
Business Zone (HUB Zone) small businesses. Table 1, below, shows the statutorily required
small business prime contracting and subcontracting goals.
Table 1. Statutory Contracting Goals
Type of Firm
Goal
Measure of Contract Awards
Small Businesses
23% Dol ar value of prime contract awards
Small Disadvantaged Businesses
5% Dol ar value of prime and subcontract awards
Women-Owned Small Businesses
5% Dol ar value of prime and subcontract awards
Service-Disabled Veteran-Owned Small Businesses
5% Dol ar value of prime and subcontract awards
HUB (Historically Underutilized Business) Zone
3% Dol ar value of prime and subcontract awards
Small Businesses
Source: 15 U.S.C. §644(g)(1)(A); P.L. 118-31.
Notes: For reporting purposes, the “amount” annually contracted to businesses is measured by the dol ars
obligated in a fiscal year, although contracts may span multiple years.
The SBA oversees small business procurement goal-making for individual federal agencies,
consulting with agencies to establish annual goals for small business participation in contracting
that collectively add up to the statutory, government-wide goals shown above,20 as required by
Section 15(g)(2) of the Small Business Act.
While the SBA sets agency-level prime contracting goals for HUBZone businesses, women-
owned small businesses, and service-disabled veteran-owned small businesses at the statutory
level, it bases agency subcontracting goals on an agency’s recent small business subcontracting
achievements. As seen in the table above, regardless of agency-specific goals, the total value of
annual subcontract dollars going to socioeconomic small businesses through contracts across the
government must collectively add up to either 5% or 3% for the socioeconomic categories. There
are no punitive consequences for failure to meet goals but agencies that fail to meet them must
submit a “corrective action report” to the SBA and propose a “corrective action plan.”21
Subcontracting Regulations
The origins of regulations surrounding small business subcontracting can be found in a 1978 law
amending the Small Business Act and the Small Business Investment Act of 1958, P.L. 95-507.
That legislation directed the SBA to encourage major businesses to subcontract with specified
19 P.L. 100-656, the Business Opportunity Development Reform Act of 1988. The government-wide minimum
participation goal for small businesses was increased from 20% to 23% by P.L. 105-135, the Small Business
Reauthorization Act of 1997.
20 Small Business Administration Office of Policy, Planning and Liaison, FY2024 Goaling Guidelines, p. 5,
https://www.sba.gov/document/report-sba-goaling-guidelines.
21 Ibid. Additional information on small business contracting goals is available in CRS Insight IN12018, Federal Small
Business Contracting Goals, by R. Corinne Blackford.
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categories of small businesses, required some contractors to submit a “subcontracting plan” along
with their offers, and required certain information to be included in these subcontracting plans.
The law also authorized agencies to provide incentives to encourage subcontracting opportunities
for small businesses owned or controlled by disadvantaged individuals.22
Today, the federal government maintains a policy of “maximum practicable” subcontracting
opportunities for small businesses and socioeconomic small businesses via prime contracts above
$250,000, the simplified acquisition threshold.23 For contracts of this size, prime contractors must
agree to maximize participation by small businesses, veteran-owned small businesses, service-
disabled veteran-owned small businesses, HUBZone small businesses, small disadvantaged
businesses, and women-owned small businesses, “consistent with its [the contract’s] efficient
performance.”24 Acquisition regulations outline the details of agency and contractor obligations
when subcontracts are awarded, including those surrounding the “subcontracting plans”
submitted by prime contractors (see “Subcontracting Plans”).
In order to incentivize the creation of small business subcontracting opportunities, regulations
also permit contracting officers to encourage prime contractors financially. Monetary incentives
may include “payments based on the actual subcontracting achievement” where a contractor
exceeds their subcontracting plan goals, as long as the goals are “realistic” and the “rewards for
exceeding the goals are commensurate with the efforts the contractor would not have otherwise
expended.”25 Incentives are “negotiated after [a contracting officer has] reach[ed] final agreement
with the contractor on the subcontracting plan.”26
Federal subcontracting policy also aims to provide some legal protections to subcontractors, as
well as to prevent large firms from effectively performing contracts intended for small businesses.
Because subcontractors do not have a direct contractual relationship with federal purchasing
agencies the way that prime contractors do, they lack some of the legal protections that benefit
prime contractors. For example, prime contractors benefit from payment terms related to payment
timeliness and interest on late payments. To provide some protections to subcontractors, Congress
enacted laws such as the Miller Act and the 1988 amendments to Prompt Payment Act of 1982.27
The Miller Act helps ensure payment to subcontractors working on federal construction contracts,
while the 1988 amendments to Prompt Payment Act extended certain timely payment
requirements to subcontractors on federal construction contracts.28 Because construction projects
typically involve subcontracting, Congress recognized that “Subcontractors play a very
substantial role in the accomplishment of federal construction projects,” and believed that certain
22 P.L. 95-507.
23 48 C.F.R. §2.101. The simplified acquisition threshold means $250,000.
24 48 C.F.R. §19.702.
25 48 C.F.R. §19.705-1(a).
26 Ibid.
27 CRS Report R41230, Legal Protections for Subcontractors on Federal Prime Contracts: In Brief, by Kate M.
Manuel. This report is nondistributable but available to congressional clients upon request.
28 The 1988 amendments “require that every construction contract awarded by a federal agency contain clauses
obligating the prime contractor to (1) pay the subcontractor for ‘satisfactory performance’ under the subcontract within
seven days of receiving payment from the agency and (2) pay interest on any amounts that are not paid within the
proper time frame. The contract must also obligate the prime contractor to include similar payment and interest penalty
terms in its subcontracts, as well as require its subcontractors to impose these terms on their subcontractors.” CRS
Report R41230, Legal Protections for Subcontractors on Federal Prime Contracts: In Brief, by Kate M. Manuel.
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An Overview of Small Business Subcontracting: In Brief
guarantees for these subcontractors would benefit the government by controlling project costs and
avoiding project delays.29
To limit the amount of small business contracting dollars flowing through small firms to larger
ones, prime contractors that receive a small business preference30 typically may not pay more
than 50%31 of the federal dollars they receive to firms that are “not similarly situated,” i.e., firms
that are not a small business or the specific type of small business that received the contract.32 A
small business that receives a contracting preference and subcontracts some of the work out to a
“similarly situated” firm however, does not need to count that work as subcontracted so long as
the subcontractor is using its own employees.33 These regulations, known as the “limitations on
subcontracting,” seek to maintain the integrity of contracting preferences intended for small and
socioeconomic small businesses, including contract set-asides and sole-source awards.34 They do
not apply to contracts that are set-aside for small businesses and fall between the micro-purchase
($10,000) and simplified acquisition ($250,000) thresholds.35 They also do not apply to
subcontractors, unless a prime contractor is “relying on a similarly situated entity” to adhere to
the limitations.36
Subcontracting Plans
Certain prime contractors must submit a subcontracting plan to their purchasing agency, in which
they describe their subcontracts and subcontractors. In general, offerors must submit
subcontracting plans to an agency when a contract value is greater than $750,000 (or $1.5 million
for construction contracts) and subcontracting possibilities exist.37 Per acquisition regulations,
these subcontracting plans must include the following:
29 A Senate report during deliberations over the amendments to the Prompt Payment Act included the following
statement from the testimony of a representative of the American Subcontractors Association: “[construction]
Contractors, of necessity, must recoup a portion of the negative cash flow created by late payments by increasing their
prices to the government.” U.S. Congress, Senate Committee on Governmental Affairs, Prompt Payment Act
Amendments of 1987, To Amend Chapter 39 of Title 31, United States Code, To Clarify and Strengthen the Prompt
Payment Act of 1982, 100th Cong., 2nd sess., June 19, 1987, pp. 21-23.
30 48 C.F.R. §52.219-14. This preference refers to partial or full contract set-asides and sole-source contract awards, as
well as to orders under multiple-award contracts that are set aside or issued directly to small businesses.
31 Per 13 C.F.R. §125.6(a)(3), this percentage rises to 85% in the case of construction contracts. Per 13 C.F.R.
125.6(a)(4), this percentage is 75% for special trade contractors.
32 13 C.F.R. §125.6 and 13 C.F.R. §125.1. Similarly situated “means a subcontractor that has the same small business
program status as the prime contractor. This means that: For a HUBZone contract, a subcontractor that is a certified
HUBZone small business concern; for a small business set-aside, partial set-aside, or reserve, a subcontractor that is a
small business concern; for a SDVOSB contract, a subcontractor that is a certified SDVOSB; for a VOSB contract, a
subcontractor that is a certified VOSB; for an 8(a) contract, a subcontractor that is a certified 8(a) BD Program
Participant; for a WOSB or EDWOSB contract, a subcontractor that is a certified WOSB or EDWOSB. In addition to
sharing the same small business program status as the prime contractor, a similarly situated entity must also be small
for the NAICS code that the prime contractor assigned to the subcontract the subcontractor will perform.”
33 13 C.F.R. §125.6(c).
34 Set-aside is a commonly used term to refer to a contract competition in which only small businesses, or specific types
of small businesses, may compete. Set-asides can be total or partial, depending on whether the entire procurement, or
just a segment of it, is restricted. Sole source awards are noncompetitive procurements made after soliciting and
negotiating with one source.
35 13 C.F.R. §125.6(e)(1).
36 13 C.F.R. §125.6(e)(2).
37 48 C.F.R. §19.704. Per 48 C.F.R. §19.702(b), prime contractors exempt from the requirement to submit a
subcontracting plan include small business concerns, personal service contractors, contractors performing work entirely
(continued...)
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An Overview of Small Business Subcontracting: In Brief
• small business subcontracting goals, expressed as a percentage of subcontracted
award dollars;38
• the total number of dollars to be subcontracted;
• the number of dollars to be subcontracted to small businesses, as well as to each
type of socioeconomic small business;39
• descriptions of methods used to develop subcontracting goals; and
• a description of methods used to identify possible subcontractors.40
There are two types of subcontracting plans: “individual” and “commercial.” Individual
subcontracting plans apply to a specific contract whereas a commercial subcontracting plan
applies “to the entire production” of products or services sold by a firm.41 The type of plan used
depends on the particular contractor and its contracts; if a contractor sells commercial products
and services,42 commercial subcontracting plans are preferred.43 In general, commercial products
and services are those customarily used by the general public for non-governmental purposes.
DOD contracts may use a third type of subcontracting plan, known as a “comprehensive small
business subcontracting plan,” under what is referred to as the “Test Program for Negotiation of
Comprehensive Small Business Subcontracting Plans.”44 This test program is intended to “reduce
administrative burdens while enhancing subcontracting opportunities for small and small
disadvantaged business concerns,” by allowing plans to be submitted “on a corporate, division, or
plant-wide basis.”45
Contracting officers have a few obligations regarding subcontracting plans. They determine
whether a contract requires a subcontracting plan, depending on the contract value thresholds
mentioned above and analysis of the possibilities for subcontracts.46 In addition, they review
outside of the United States or its outlying areas. Per 48 C.F.R. §19.705 2(b), contracting officers determine whether
subcontracting possibilities exist by “considering relevant factors,” such as “whether firms engaged in the business of
furnishing the types of items to be acquired customarily contract for performance of part of the work or maintain
sufficient in-house capability to perform the work; whether there are likely to be product prequalification requirements;
and whether the firm can acquire any portion of the work with minimal or no disruption to performance.”
38 48 C.F.R. §19.704(a). In some cases, a contracting officer may require goals to be expressed as a percentage of total
contract dollars (in addition to as a percentage of subcontract dollars). Per 48 C.F.R. §19.705-2(e), although a contract
does not have more than one subcontracting plan, “a contracting officer may establish separate subcontracting goals for
each order under an indefinite-delivery, indefinite-quantity contract.”
39 48 C.F.R. §19.704(a)(2).
40 48 C.F.R. §19.704(a)(4-5).
41 48 C.F.R. §19.701.
42 Generally speaking, commercial products are those that are “customarily used by the general public or by
nongovernmental entities for purposes other than governmental purposes.” Commercial services are those procured to
support commercial products. 48 C.F.R. §2.101, “Commercial product,” and 48 C.F.R. §2.101, “Commercial service.”
43 Commercial subcontracting plans can cover multiple contracts. 48 C.F.R. §19.704(d)).
44 DFARS Subpart 219.702-70. Eligibility requirements apply for firms wishing to participate in the test program. An
eligible firm must have “furnished supplies or services (including construction) under at least three DoD contracts
during the preceding fiscal year, having an aggregate value of at least $100 million.”
45 Ibid.
46 48 C.F.R. §19.705-2. Per 48 C.F.R. §19.705-2(b), contracting officers determine whether subcontracting possibilities
exist by “considering relevant factors,” such as “whether firms engaged in the business of furnishing the types of items
to be acquired customarily contract for performance of part of the work or maintain sufficient in-house capability to
perform the work; whether there are likely to be product prequalification requirements; and whether the firm can
acquire any portion of the work with minimal or no disruption to performance.” Contracting officers also may
determine that subcontracting possibilities do not exist, in which case a “detailed rationale” is required and must be
approved “at a level above the contracting officer” (48 C.F.R. §19.705-2(c)).
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subcontracting plans during the pre-award process,47 determine whether a subcontracting plan is
“acceptable,”48 and may assess small business subcontracting plans as one evaluation factor when
choosing a contractor during the “source selection” process.49 Finally, contracting officers provide
SBA Procurement Center Representatives (PCRs) an opportunity to review a contract solicitation
that will require a subcontracting plan. According to the SBA, PCRs “view many federal
acquisition and procurement strategies before they’re announced.” This enables the PCRs to
“influence opportunities that should be set aside for small businesses.”50
Following an award, contracting officers must monitor a prime contractor’s compliance with its
subcontracting plan, including ensuring that contractors submit the required subcontracting
reports (see “Subcontracting Data Reporting”).51 Officers can either accept or reject a report,52
where a rejection requires a contractor to make report corrections.53 Officers use the Contractor
Performance Assessment Reporting System (CPARS), a tool for recording contractor
performance that includes information about subcontractor payment issues.54 Relatedly,
contracting officers can also require prime contractors to show their compliance with the
“limitations on subcontracting” (see “Subcontracting Regulations,” above), demonstrating that
they did not subcontract too large of a share of a contract award to entities that are not similarly
situated.55
Issues for Congress
Contractor Compliance
As part of its oversight functions, Congress may be interested in how well prime contractors
comply with existing subcontracting policy and how well agencies are implementing the
applicable acquisition and small business regulations. A study conducted by the Government
Accountability Office (GAO) in May 2020 found that “selected agencies did not consistently
follow all required procedures for oversight of small business subcontracting plans, both before
and after contracts were awarded.”56 Specifically, GAO found that “agency contracting officers
47 48 C.F.R. §19.705-4.
48 48 C.F.R. §19.705-4(d). Evaluation of plan acceptability includes ensuring subcontracting goals are attainable and
advising a contract offeror about potential small business subcontractors and information sources on “potential small
business, veteran-owned small business, service-disabled veteran-owned small business, HUBZone small business,
small disadvantaged business, and women-owned small business subcontractors.”
49 Source selection is the process through which contracting officials make decisions about which firms will receive a
contract. In a negotiated contracting process where a contract is not a set-aside for small businesses and that involves
consolidation or bundling of contract requirements, if there is a “significant opportunity” for subcontracting,
contracting officers must consider proposed subcontractor participation when evaluating a contract offer. 48 C.F.R.
§15.304(c)(4).
50 48 C.F.R. §19.705-3 and SBA, “Federal Contracting: Counseling and Help,” at https://www.sba.gov/federal-
contracting/counseling-help.
51 48 C.F.R. §19.705-6(f).
52 48 C.F.R. §19.705-6(f)(3).
53 48 C.F.R. §19.704(a)(10)(iv)(B).
54 CPARS is available at https://www.cpars.gov.
55 “Evidence of compliance includes, but is not limited to, invoices, copies of subcontracts, or a list of the value of tasks
performed.” 13 C.F.R. §125.6(e)(4).
56 U.S. Government Accountability Office, SMALL BUSINESS SUBCONTRACTING: Oversight of Contractor
Compliance with Subcontracting Plans Needs Improvement, GAO-20-464, May 28, 2020, p. Summary.
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An Overview of Small Business Subcontracting: In Brief
did not ensure contractors met their reporting requirements” for “more than half” of 26 reviewed
contracts.57
While contracting officers at purchasing agencies have the most responsibilities58 for prime
contractor compliance, SBA personnel also play “a key role” in helping to oversee prime and
subcontracting with small businesses by conducting “regulatory compliance reviews.”59 Congress
may be interested to know that in recent fiscal years, the SBA has conducted “targeted” reviews
of “large” prime contractors for subcontracting regulation compliance,60 although the precise
number of reviews and their findings are not publicly available. In addition, the SBA’s
Commercial Market Representatives train federal agency personnel and contractors on
subcontracting plans and reporting requirements.61 Trainings cover such topics as the Contracting
Officer’s duty to coordinate with the SBA, subcontracting regulations and the elements of
subcontracting plans, and subcontracting goals for prime contractors.62
Subcontracting Data Reporting
Related to the issue of compliance is the availability of data on subcontract awards and
subcontractor firms. Although there are reporting requirements in place for contractors regarding
their subcontracting plans (if applicable), limited data on the destination of federal contract award
dollars could pose a barrier to understanding contractor compliance and accountability issues.
Subcontracting plans spur reporting requirements for contractors required to have such plans, but
these reports and the data contained in them is limited in scope and availability.
Prime contractors with subcontracting plans submit their regularly required reports through the
Electronic Subcontracting Reporting System (eSRS).63 While eSRS is a tool for the transmittal of
subcontract information between contractors and contracting officials, it is not a portal of
accessible data and can only be viewed by the contractor and contracting officer. Two types of
subcontracting reports are required: the Individual Subcontract Report (ISR) and the Summary
Subcontract Report (SSR); the ISR provides actual subcontract award dollars for the six-month
reporting period and the SSR provides the actual subcontract award dollars for the fiscal year.64
57 Ibid, p. 19.
58 According to SBA standard operating procedures (SOP 60 03 7), “it is the responsibility of the Federal Agency who
awarded the contract to monitor and enforce subcontract compliance throughout the life of the contract,” although
“SBA has oversight to monitor the compliance of both the Federal Government agency and contractors for contracts
governed by the Subcontracting Program regulations.” SBA’s evaluations of subcontracting plan performance are
completed as a supplement to a contracting agency’s review of a prime contractor’s subcontracting plan performance.
Small Business Administration, “Small Business Government Contracting and National Defense Authorization Act of
2013 Amendments,” 81 Federal Register 34243, May 31, 2016.
59 SBA, FY 2024 Congressional Budget Justification and FY 2022 Annual Performance Report, p. 70.
60 Ibid.
61 Ibid. The SBA reports that it provided “more than 500 individual training sessions, across 23 agencies, educating
more than 18,000 federal contracting and acquisition leaders.”
62 For example, one training on subcontracting plans offered detailed recommendations on how to determine “realistic”
subcontracting goals and advised against negotiating goals upward if higher goals would “significantly increase the
Government’s cost or seriously impeded the attainment of acquisition objectives.” Stephanie Lewis, Understanding
Small Business Subcontracting Plans, Office of Government Contracting, Small Business Administration, 2016.
63 48 C.F.R. §19.704(a)(10)(iv). eSRS is available at available at https://www.esrs.gov.
64 48 C.F.R. §19.704(a)(10)(iv). Regulations require the ISR to be submitted semi-annually and the SSR to be
submitted annually, by October 30 for the twelve-month period ending September 30. Both reports cover information
for a specific contract, with a specific federal agency, so if a contractor has more than one contract, it would file more
than one report.
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Similar to eSRS, CPARs, the existing web-based tool for recording contractor performance, is
designed for use by purchasing officials and the information it contains is not releasable.65
The SBA’s Procurement Scorecard data on subcontracts to small businesses, along with the GSA’s
Subcontracting Report by North American Industry Classification System, offer the most
comprehensive data on the flow of subcontract dollars. The SBA issues a Procurement Scorecard
for the 24 CFO Act66 agencies every fiscal year, including agency subcontracting “achievement
data,” aggregated by the type of small business awardee (e.g., Small Disadvantaged Business,
service-disabled veteran-owned small business).67 It excludes some contracts/subcontracts,
however, and cannot be disaggregated and analyzed at a level other than agency-wide (e.g., by
location of performance, contract type, or contract preference).68 This is in contrast to the data on
prime contract awards available through the SAM.gov data bank. The GSA report is a static
report provided each fiscal year that aggregates subcontract awards by industry NAICS code and
socioeconomic small business goal category (i.e., small business, veteran-owned small business,
service-disabled veteran-owned small business, HUBZone small business, small disadvantaged
business, and women-owned small business).69
Issues for Subcontractors
Legal and payment protections for federal subcontractors may interest Congress because they
may prevent potential subcontractors from entering the federal contracting market, or negatively
affect subcontractor performance on federal contracts. In the case of preventing entry into the
federal market, Congress might examine the diversity and robustness of the government’s
supplier base. Where subcontractor performance is impacted, Congress might look at the burdens
and costs to purchasing agencies.
As mentioned, subcontractors working on federal construction contracts are protected through
certain required subcontract clauses as a result of the Miller Act and 1988 amendments to the
Prompt Payment Act. Other subcontractors, however, lack such beneficial protections.
65 48 C.F.R. §42.1503(d). According to acquisition regulations, “The completed evaluation [of a contractor] shall not be
released to other than Government personnel and the contractor whose performance is being evaluated during the
period the information may be used to provide source selection information. Disclosure of such information could
cause harm both to the commercial interest of the Government and to the competitive position of the contractor being
evaluated as well as impede the efficiency of Government operations.”
66 The Chief Financial Officers Act (1990) gave the Office of Management and Budget new authorities and
responsibilities to improve financial management across 24 federal agencies. The list of agencies is available at
https://www.cio.gov/handbook/it-laws/cfo-act/.
67 SBA, FY2021 Government-wide Small Business Procurement Scorecard, available at https://www.sba.gov/agency-
scorecards/scorecard.html?agency=GW&year=2021. GSA, FY2021 Subcontracting Report by North American
Industry Classification System, available at https://www.gsa.gov/policy-regulations/policy/acquisition-policy/reports-
required-by-the-small-business-act.
68 SBA excludes certain contracts when procurement data is unavailable or because the work cannot realistically be
performed by small businesses. According to the SBA’s FY2024 Goaling Guidelines, excluded contracts include
acquisitions on behalf of foreign governments; contracts awarded to mandatory sources (which include Federal Prison
Industries contracts that use penal labor from the Federal Bureau of Prisons and those with nonprofit agencies
employing persons who are blind or have other significant disabilities); contracts funded with non-appropriated,
agency-generated funds; Tricare health care program contracts; Department of Veterans Affairs Community Care
Network contracts. Purchases valued at less than $10,000 are also excluded because they are not tracked in the Federal
Procurement Data System. The value of contracts with these exclusions is referred to as the “small business eligible”
value.
69 GSA, FY2021 Subcontracting Report by North American Industry Classification System, available at
https://www.gsa.gov/policy-regulations/policy/acquisition-policy/reports-required-by-the-small-business-act. This
report is required by Section 15(h)(3)(A)(ii) of the Small Business Act.
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Subcontractors, particularly small businesses, may also not have access to contract financing, to
ensure adequate cash flow while they complete contract work.70
In April 2023, DOD published a study assessing the financing and payment policy impacts on
subcontractors because “ensuring the financial health” of the department’s supply base, including
subcontractors, it said, “is vital to accomplishment of the acquisition mission of DoD.”71 After
reviewing its policies, DOD found that “Defense subcontractors and suppliers generally do not
receive the favorable cash flow benefits to the same extent enjoyed by defense prime
contractors,” while it has been estimated that 60% to 70% of contracted defense work might be
completed by subcontractors.72 According to the study’s conclusions, “one of the major
advantages of doing business with DoD as a prime contractor is more robust cash flow in
comparison to what is common in the commercial marketplaces.” This may be because for prime
contractors, there is “the availability of contract financing, favorable payment terms, and the
Government’s commitment to pay its bills on time, or pay interest when missing a due date.”73
Where small business subcontractors are disadvantaged by the lack of payment protections and
other contract terms, agencies may be impacted by the reduction in potential suppliers able to
fulfill subcontracted work. Furthermore, where contract financing is unavailable or difficult to
obtain, agencies may face fewer suppliers and/or costs associated with the need for suppliers to
resort to debt financing.74 Section 862 of the National Defense Authorization Act for Fiscal Year
2024 (P.L. 118-31) includes provisions seeking to improve payment timeliness for subcontractors.
Specifically, it directs contractors to notify contracting officers when payment to a subcontractor
is more than 30 days past due, where this deadline was previously 90 days past due; it also
requires cooperation between a contractor, contracting officer, and agency Office of Small and
Disadvantaged Business Utilization (OSDBU),75 to correct or mitigate “unjustified failure to
make a full or timely payment to a subcontractor.”
Selected Legislative Proposals
Congressional interest in small business subcontracting has been reflected in a variety of bills
introduced in recent congresses. A selection of the bills includes the following:
• H.R. 7694, Strengthening Subcontracting for Small Business Act of 2022 (117th
Congress), was passed by the House, received in the Senate, and referred to the
Committee on Small Business and Entrepreneurship. The bill would have made
the extent to which a prime contract “offeror” proposes to use small businesses as
subcontractors a significant factor for the purposes of evaluating offers, for any
contract that requires a subcontracting plan.
• H.R. 7628, IMPROVE the SBA Act (117th Congress), was introduced and
referred to the Committee on Small Business. Section 403 of the bill would have
70 Department of Defense, Office of the Under Secretary of Defense for Acquisition and Sustainment Defense Pricing
and Contracting, Contract Finance Study Report, April 2023, p. 73, https://www.acq.osd.mil/asda/dpc/pcf/finance-
study.html.
71 Ibid, p. 53.
72 Ibid, pp. 5-6.
73 Ibid, p. 53.
74 Ibid, p. 72. According to the DOD study, “When small businesses are unable to obtain working capital to perform
their contracts and pay their bills through contract cash flow, the stakes can be so high that a small business may have
to resort to debt (vice equity) and leverage personal assets, such as a house or car.”
75 For additional information on the role and duties of agency OSDBUs in contracting, see CRS Report R47851, Offices
of Small and Disadvantaged Business Utilization: An Overview, by R. Corinne Blackford.
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created questionnaires for first-tier subcontractors regarding prime contractor
engagement, usable as part of a prime contractor’s performance record. It also
would have included the timeliness of report submissions in the performance
evaluations of contractors by agencies.
• H.R. 6764, Put Our Neighbors to Work Act of 2020 (116th Congress), was
introduced and referred to the Small Business and Armed Services committees.
Among other provisions, it would have created a “local hire” preference for
contractors on military construction projects that hire employees (including a
subcontractor’s employees) from the same state or within 60 miles of the contract
work location.
• S. 2138, Small Business Subcontracting Transparency Act of 2015 (114th
Congress), was introduced, referred to the Committee on Small Business and
Entrepreneurship, and reported out of the committee with amendments. It would
have revised the SBA’s review and acceptance of subcontracting plans. Among
other provisions, it would have allowed an agency to delay the acceptance of a
subcontracting plan if it determined that the plan failed to provide the maximum
practicable opportunity for small businesses to participate in a contract.
Conclusion
To ensure a “fair proportion” of small business contracting and subcontracting as mandated in the
Small Business Act, federal agencies strive to reach four statutorily required subcontracting goals
for small disadvantaged businesses, women-owned small businesses, service-disabled veteran-
owned small businesses, and Historically Underutilized Business Zone (HUB Zone) small
businesses. Purchasing officials and prime contractors follow acquisition regulations designed to
support subcontracting to small businesses, which include subcontracting plans and reports, legal
protections for subcontractors, and limitations on subcontracting to non-small businesses. In some
instances, agencies may provide monetary incentives to prime contractors, to encourage
subcontracting to small firms.
Issues of congressional concern might include agency implementation and prime contractor
compliance with subcontracting policies as well as subcontract reporting data accessibility. Some
subcontracting data is available in select formats, including through the annual SBA Procurement
Scorecard and GSA Subcontracting Report by NAICS code. However, this static data is
aggregated at certain levels and cannot be analyzed the same ways that prime contract award data
can be analyzed. Additionally, payment and financing issues for small business subcontractors
may interest Congress, as they can create barriers to entering the federal contracting market or
impact subcontractor cash flows. The effects could reduce the number of suppliers and might also
increase business costs that are passed on to prime contractors and borne by the government.
Additional, related information on federal contracting policy is available in the following
products: CRS Report RS22536, Overview of the Federal Procurement Process and Resources,
by Dominick A. Fiorentino; CRS Report R45576, An Overview of Small Business Contracting, by
R. Corinne Blackford; and CRS Insight IN12018, Federal Small Business Contracting Goals, by
R. Corinne Blackford.
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Author Information
R. Corinne Blackford
Analyst in Small Business and Economic
Development Policy
Disclaimer
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Congressional Research Service
R47585 · VERSION 3 · UPDATED
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