Proposed Rule on Constitutionality of Federal Contracting Programs for Minority-Owned and Other Small Businesses

September 9, 2011

DoD, GSA, and NASA are proposing to amend the Federal Acquisition Regulation (FAR) to address the impact of the decision in Rothe Development Corporation vs. the DoD and the U.S. Department of the Air Force (USAF) on small disadvantaged business concerns and certain institutions of higher education. Reference Federal Register Volume 76, Number 175 (Friday, September 9, 2011).

In November 1998, Rothe Development Corporation (RDC) filed suit against DoD and the USAF (Rothe), in the U.S. District Court for the Western District of Texas. In its complaint, RDC challenged the constitutionality of section 1207 of the National Defense Authorization Act of 1987, Public Law 99-661 (10 U.S.C. 2323), alleging that it violated the right to equal protection under the Due Process Clause of the Fifth Amendment to the United States Constitution. RDC's initial complaint against the DoD/USAF focused on the reauthorization of section 1207 in 1992. On September 25, 2007, the U.S. District Court for the Western District of Texas entered a judgment in favor of DoD. However, RDC appealed the court's ruling and on November 4, 2008, the U.S. Court of Appeals for the Federal Circuit decided in its favor (Rothe Dev. Corp. v. DoD, 545 F.3d 1023 (Fed. Cir. November 4, 2008)). The U.S. Court of Appeals for the Federal Circuit found 10 U.S.C. 2323 unconstitutional. A District court decision mandated by the U.S. Court of Appeals was issued on February 27, 2009, enjoining all application of 10 U.S.C. 2323 (Rothe Dev. Corp. v. DoD, 606 F. Supp. 2d 648 (W.D. Tex. 2009)).

Section 1207 of the National Defense Authorization Act of 1987, Public Law 99-661, codified at 10 U.S.C. 2323, established the DoD, NASA, and the U.S. Coast Guard (USCG), Small Disadvantaged Business (SDB) Participation Program. The purpose of the program was to ensure that SDBs could fully participate in the Federal contracting process. Section 1207 provided the authority for DoD, NASA, and USCG contracting officers to apply a price adjustment of up to 10 percent to afford SDBs a competitive price advantage when competing in a full and open competition and assist in achieving a 5 percent SDB goal. Section 1207 serves as the statutory underpinning for FAR subpart 19.11, Price Evaluation Adjustment for Small Disadvantaged Business Concerns, as well as some of FAR subpart 19.12, Small Disadvantaged Business Participation Program, and certain associated FAR clauses.

FAR Revisions
DOD, GSA, and NASA are proposing to amend the FAR to remove coverage at FAR subpart 19.11, FAR subpart 19.12, corresponding clauses at FAR 52.219-22, Small Disadvantaged Business Status, FAR 52.219-23, Notice of Price Evaluation Adjustment for Small Disadvantaged Business Concerns, FAR 52.219-24, Small Disadvantaged Business Participation Program--Targets, FAR 52.219-25, Small Disadvantaged Business Participation Program--Disadvantaged Status and Reporting, and FAR 52.219-26, Small Disadvantaged Business Participation Program--Incentive Subcontracting, and to remove references to FAR subpart 19.11, 19.12, and corresponding clauses in FAR parts 1, 2, 4, 12, 14, 15, 19, 22, 26, 52, and 53.

Certain authorities in FAR subpart 19.12 and supporting clauses addressing the award of subcontracts to SDBs that are rooted in the Small Business Act, rather than in section 1207, were not at issue in the Rothe decision, and therefore retain their legal status. These include the authority to (1) provide monetary incentives to prime contractors to encourage subcontracting opportunities to SDBs and (2) use an evaluation factor or subfactor to evaluate the participation of small businesses as subcontractors. Because these authorities are not affected by the Rothe decision, the coverage in FAR subpart 19.12 addressing subcontracting (with the exception of the coverage at FAR 19.1202 on the use of factors or subfactors to evaluate SDB subcontract participation) has been retained but moved to FAR subpart 19.7, which already addresses subcontracting issues generally, including the use of
monetary incentives to encourage subcontracting opportunities. As a result, this realignment consolidates coverage on subcontracting with small business programs in one place.

With respect to FAR 19.1202, Evaluation factor or subfactor, FAR subpart 19.7 is currently silent on its use. Nothing in this rulemaking precludes an agency from using evaluation factors and subfactors for subcontracting during source selections. The Small Business Administration's (SBA) regulations (13 CFR 125.3(g)) allow the application of evaluation factors and subfactors to subcontracting with any of the small business programs, including, but not limited to, SDBs. The Federal Acquisition Regulatory Council will confer with SBA to evaluate the need for guidance in the FAR on the use of evaluation factors and subfactors for subcontracting.

Standard Form (SF) 294, Subcontracting Report for Individual Contracts
DOD, GSA, and NASA are proposing to revise the SF 294, Subcontracting Report for Individual Contracts to remove references to DOD and the USCG collecting subcontract award data for Historically Black Colleges and Universities (HBCUs) and Minority Instructions (MIs). In addition, conforming changes are made to reflect that the threshold for contractors to submit small business subcontracting plans was increased from $550,000 to $650,000 (from $1.0 million to $1.5 million for construction).

Interested parties should submit written comments to the Regulatory Secretariat at one of the addresses shown below on or before November 8, 2011 to be considered in the formation of the final rule. Submit comments in response to FAR Case 2009-016 by any of the following methods: Submit comments via the Federal eRulemaking portal by inputting ''FAR Case 2009-016'' under the heading ''Enter Keyword or ID'' and selecting ''Search.'' Select the link ''Submit a Comment'' that corresponds with ''FAR Case 2009-016.'' Follow the instructions provided at the ''Submit a Comment'' screen. Please include your name, company name (if any), and ''FAR Case 2009-016'' on your attached document.

Fax: (202) 501-4067.

Mail: General Services Administration, Regulatory Secretariat (MVCB), Attn: Hada Flowers, 1275 First Street, NE., 7th Floor, Washington, DC 20417.

Instructions: Please submit comments only and cite FAR Case 2009-016, in all correspondence related to this case. All comments received will be posted without change to, including any personal and/or business confidential information provided.

FOR FURTHER INFORMATION CONTACT: Mr. Karlos Morgan, Procurement Analyst, at (202) 501-2364, for clarification of content. For information pertaining to status or publication schedules, contact the Regulatory Secretariat at (202) 501-4755. Please cite FAR Case 2009-016. 

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