Ensuring Compliance with New SBA Requirement for Inclusion of Indirect Costs

By: Chase Kunk, Managing Partner and Will Jeffers, Senior Manager, Capital Edge Consulting

A revision to 13 CFR 125.3 recently went into effect impacting large businesses. This regulatory change now requires other than small businesses prime contractors to include indirect costs in their subcontracting goals. Although this mandate does add complexity to subcontracting goal development and reporting, it should generally increase the overall small business reportable dollars across industry.

In the past, large business prime contractors could use their discretion in determining whether to include indirect costs when developing individual small business subcontracting plans in accordance with FAR 52.219-9(d)(5). Most large businesses have opted to exclude indirect costs in their ISRs due to the complexity in accurately ascertaining these indirect costs throughout the year. As a result, small businesses that provide services generally considered to be indirect costs—such as legal services, accounting services, janitorial services, landscaping services, investment banking, etc.—are often overlooked by large contractors in their small business goal calculations and subcontract reporting.

However, effective May 30, 2023, 13 CFR 125.3 requires large business prime contractors must now include indirect costs in their individual small business subcontracting plan goals if the prime contract exceeds $7.5M. Furthermore, these indirect costs must now be included in the applicable semi-annual Individual Subcontracting Reports (ISRs) in www.esrs.gov submissions.

As mentioned in the Federal Register, dated 27 April 2023, the Small Business Administration has indicated that by requiring indirect costs to be included in their individual subcontracting plans, large businesses will have an incentive to award work to small businesses that provide those services.

This regulatory change does provide contractors with the latitude to use a pro-rata formula to allocate indirect costs to the covered contracts if indirect costs are not otherwise allocable to specific contracts. This will require additional support from contractors’ project control and finance functions to segregate and properly allocate indirect costs to covered contracts.

From a compliance and audit standpoint, we believe that the Defense Contract Management Agency Small Business Compliance Group will soon incorporate this new regulatory change into their evaluation of a contractors’ compliance with this new rule within their “640 Reviews.

Capital Edge’s Small Business Subject Matter Experts can help you address this new requirement and guide you in establishing the methodology and process to ensure indirect costs are allocated appropriately and reported correctly on your proposal submissions as well as within your ISRs and Summary Subcontracting Reports ensuring that your small business program remains in compliance with this new requirement.

Capital Edge Consulting is a professional services company comprised of adept problem solvers who deliver tangible results to address today’s most complex U.S. government contracting challenges. Capital Edge helps clients address the challenging regulatory, contractual, and compliance requirements of U.S. federal contracts and we have experience working with a wide variety of industries that provide goods or services to the federal government including industries such as biotech and healthcare, nuclear energy, education, information technology, non-profit, professional services, defense, and software.