Small Business Subcontracting Plans for Software Companies: How FAR 19.7 Works

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By — Founder of GovExpress; prior domain experience at Bloomberg Government and GovWin IQ.

Software companies meet federal subcontracting plans from two sides. A growing company that is no longer small will eventually be asked to write one for a larger contract. A small company will find that large primes look for it partly because their plans commit them to spending part of their subcontract dollars with small businesses.

This guide covers when a plan is required, what goes in it, the three kinds of plan, how performance is reported and enforced, and what all of it means for a software company on either side. The rules cited here are from FAR Subpart 19.7, The Small Business Subcontracting Program, and the related clauses in FAR Part 52.

When a subcontracting plan is required

FAR 19.702 requires a subcontracting plan from an offeror that is not a small business on a contract, or a contract modification, expected to exceed the dollar threshold stated in that section, when the work offers subcontracting possibilities. The threshold is adjusted periodically for inflation, and a higher threshold applies to construction.

The section also lists who does not need one:

  • Small business concerns, for any contract.
  • Personal services contracts.
  • Contracts performed entirely outside the United States and its outlying areas.
  • Modifications to contracts that did not originally carry the requirement, unless the modification itself brings the contract over the threshold and adds subcontracting possibilities.

How the plan arrives depends on the acquisition method. In a negotiated acquisition the plan is submitted with the offer, negotiated and approved before award, and FAR 19.702 makes an offeror that fails to negotiate an acceptable plan ineligible for the award. In sealed bidding the apparent low bidder submits the plan after bid opening. Either way, the approved plan is incorporated into the contract as a material part of it.

What goes in the plan

FAR 19.704(a) and the clause at FAR 52.219-9, Small Business Subcontracting Plan, set out what each plan must contain. The core is a set of separate percentage goals for subcontract awards to:

The goals are percentages of total planned subcontracting dollars, not of the contract’s value. A prime that plans to subcontract little has a small base, and the goals are measured against it.

Around the goals, the plan has to describe:

  • the total dollars planned to be subcontracted, and the dollars planned for each category;
  • the principal types of supplies and services to be subcontracted, and which categories of business are expected to provide them;
  • the method used to develop the goals and to identify potential sources, such as the SAM.gov entity records;
  • whether indirect costs are included in the goals;
  • the name of the employee who administers the program;
  • the steps the company will take to give small businesses an equitable opportunity to compete;
  • an assurance that the company will flow FAR 52.219-8, Utilization of Small Business Concerns, down to its subcontractors and require plans from its own large subcontractors where the threshold is met; and
  • a commitment to submit the required reports and keep the records that support them.

Individual, master and commercial plans

FAR 19.701 and 19.704 describe three forms a plan can take.

  • Individual plan. Covers one contract for its full term, with goals specific to that contract.
  • Master plan. Contains the required elements other than goals and is approved for a three-year period. Each contract then adds its own goals as an addendum, which saves renegotiating the boilerplate every time.
  • Commercial plan. Under FAR 19.704(d), a contractor selling commercial products or commercial services can use a plan that covers its fiscal year and its entire production of commercial items, with goals set on a company-wide basis. It is approved by the contracting officer of the first agency awarding the company a contract that requires a plan during that fiscal year, and it then applies to the company’s other federal contracts that year.

For a software company selling the same commercial licenses or subscriptions to many agencies, the commercial plan is usually the practical choice. It follows the FAR Part 12 commercial treatment the rest of those contracts already get. The Department of War (DoW) also runs a separate program for comprehensive subcontracting plans with certain large defense contractors, governed by its supplement to the FAR.

Reporting through eSRS

Subcontracting performance is reported in the Electronic Subcontracting Reporting System, eSRS, on the schedule set by FAR 52.219-9.

  • Individual Subcontract Reports cover performance against the goals of a single contract under an individual plan.
  • Summary Subcontract Reports roll up subcontracting across an agency’s contracts. A contractor operating under a commercial plan files a summary report annually rather than reporting contract by contract.

The contracting officer reviews and accepts or rejects the reports. SBA’s procurement center representatives and commercial market representatives also review plans and compliance under FAR 19.705-4 and the SBA rules.

How plans are enforced

A plan is a contract term, and FAR treats it as one in three ways.

  • Liquidated damages. Under FAR 19.705-7 and the clause at FAR 52.219-16, if the contracting officer finds that the contractor did not make a good faith effort to comply with its plan, the contractor can be assessed liquidated damages equal to the dollar amount by which it failed to achieve each goal. The contractor gets an opportunity to show good faith before that decision is made.
  • Past performance. FAR 42.1502 directs agencies to assess subcontracting plan compliance in past performance evaluations, so shortfalls follow the company into its past performance record.
  • Source selection. In many larger unrestricted competitions, FAR 15.304(c) has the agency evaluate the extent of small business participation proposed by offerors. A credible plan can help a large offeror win, not only keep it compliant after award.

Plans also carry obligations toward the small subcontractors themselves. FAR 52.219-9 requires a prime to notify the contracting officer in writing when it pays a small business subcontractor a reduced price or is more than 90 days past due, with the reason.

What this means for a software company

  • If you are small, the plans are a demand signal. Every large prime on a big contract has goals to meet. Find the small business liaison officer at the primes you want to work with, register in their supplier portals, and keep your SAM.gov registration and socioeconomic certifications current, because the categories in the plan are the ones you are counted in. SBA’s SubNet lists subcontracting opportunities that primes post.
  • Lead with the category you count toward. A prime filling an SDVOSB, HUBZone or women-owned goal is looking for a specific kind of business. Say clearly which you are, and be ready to show it.
  • Know the difference from limitations on subcontracting. Subcontracting plans govern how much a large prime spends with small businesses. The limitations on subcontracting rule governs how much of a set-aside contract a small prime may pass to others. They answer different questions.
  • If you are growing past your size standard, prepare early. Once your company is other than small, unrestricted bids above the threshold will require a plan. A commercial plan built once for the fiscal year is easier than a plan written under proposal pressure.
  • Plan goals you can document. Goals are measured against your own planned subcontracting base, and reports are reviewed. Set goals from your actual supplier spend, and keep the records that support each report.
  • Read the current rule text. The FAR is being rewritten under the Revolutionary FAR Overhaul, and agencies have been adopting revised part text through class deviations. Confirm the section numbers and thresholds in the version your contracting officer applies.

Where this fits

Subcontracting plans are how the government turns large federal contracts into work for small businesses. For a large software company they are a contract term with reporting, damages and past performance attached. For a small one they are a reason the primes are looking for partners, and the way into much of the teaming and subcontracting work that leads to prime contracts later.

Score your company’s federal readiness to see how your registration and certification profile look next to the other categories federal buyers review.

Frequently Asked Questions

Does a small business need a subcontracting plan?

No. FAR 19.702(b) exempts small business concerns from the subcontracting plan requirement. The plan is required from other-than-small businesses on contracts and modifications expected to exceed the dollar threshold in FAR 19.702 that offer subcontracting possibilities. A small software company is far more likely to be counted toward a large prime's plan than to write one of its own.

What is a commercial subcontracting plan?

A commercial plan, described in FAR 19.704(d), covers a contractor's whole fiscal year and its entire production of commercial products or commercial services, rather than one contract. Once a contracting officer approves it, it applies to every federal contract the company performs that year. Software companies that sell commercial licenses or subscriptions across many agencies often use one.

What happens if a prime misses its subcontracting goals?

Missing a goal is not automatically a breach. The test in FAR 19.705-7 is whether the contractor made a good faith effort to comply with its plan. If the contracting officer finds it did not, the contractor can be assessed liquidated damages equal to the dollar amount by which it fell short of each goal, and its performance on the plan is considered in past performance evaluations.

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