A supplier diversity manager and a federal subcontracting administrator can sit in the same meeting, say "Tier 2 spend," and mean two different things. One is thinking about a corporate program. The other is thinking about a clause. Mixing them up produces reports that do not reconcile and suppliers who are asked for data they do not have.
This article separates the terms. It covers what counts toward a federal prime's goals under the small business subcontracting plan clause, what happens to spend below the first tier, how commercial corporate programs use Tier 2 reporting, and what data a supplier should be ready to give. We write from the supplier side. We are a small, minority-owned, SAM-registered supplier and reseller, and we get these data requests regularly.
The short version
| Term | Plain meaning | Federal credit toward the prime's goals |
|---|---|---|
| Direct spend | Dollars the prime pays to a supplier for something that goes into the contract deliverable | Yes, when the supplier qualifies and it is an award to an immediate next-tier subcontractor |
| Indirect spend | Dollars spent on things the company needs to operate, normally allocated as overhead (for example office supplies, facilities, travel) | Only through a proportionate share the plan chooses to include, and the plan must say how it was figured |
| Tier 2 spend | Dollars a first-tier supplier pays to its own suppliers | Generally not credited to the prime. Credit cannot be taken for awards to lower-tier subcontractors, with a narrow exception |
The sections below take each in turn and cite the clause text.
What counts under FAR 52.219-9
FAR 52.219-9, Small Business Subcontracting Plan (Jan 2025 on acquisition.gov), is the clause that requires a large prime to commit to goals. The categories are small business, veteran-owned small business, service-disabled veteran-owned small business, HUBZone small business, small disadvantaged business and women-owned small business. Goals are stated in total dollars and as a percentage of planned subcontracting dollars.
Two facts from the clause drive everything else.
First, the clause defines a subcontract broadly: any agreement, other than one involving an employer-employee relationship, for supplies or services needed to perform the contract or a subcontract. It is not limited to items that physically end up in the deliverable.
Second, paragraph (l) limits reporting to the next tier. The text says subcontract award data reported by the contractor and subcontractors "shall be limited to awards made to their immediate next-tier subcontractors." It also says credit cannot be taken for awards made to lower-tier subcontractors. So the unit of credit is the prime's own award to a first-tier supplier.
Direct spend
Direct spend is what the prime pays a first-tier supplier for work or products tied to the contract. When a prime buys supplies from a small business to fill a government order, that award is a first-tier subcontract, and the dollars are reported against the category that supplier holds. The status a prime can rely on comes from FAR 19.703, covered below.
Indirect spend
Paragraph (d)(1) of the clause says the offeror may include a proportionate share of products and services that are normally allocated as indirect costs. Paragraph (d)(6) then requires the plan to state whether indirect costs were included in the goals and to describe the method used to figure each category's share. FAR 19.704 repeats the requirement.
Two details matter here. The inclusion is a choice made in the plan, not an automatic rule for individual contract plans. And if indirect costs were left out of the goals, the clause's reporting language still has the summary report include them on a prorated basis. If you are a supplier selling office, facilities or other overhead goods to a prime, ask whether your dollars are being counted as indirect, and how. The answer depends on the prime's plan.
Commercial plans work differently. FAR 52.219-9 and 19.704 describe a commercial plan as the preferred type for contractors furnishing commercial products and services. It covers the offeror's fiscal year across commercial and government business, and its goals include indirect costs except for listed exclusions such as salaries, depreciation and taxes. One annual summary report covers all contracts under the plan, due within 30 days after the government's fiscal year ends.
What happens below the first tier
This is where "Tier 2" gets confusing, so here is what the clause actually says.
What the clause says: reporting is limited to immediate next-tier awards, and credit cannot be taken for awards to lower-tier subcontractors. The clause has four alternates. They change when the plan is requested, whether the SF 294 is used, and how modifications are treated. None of them adds a general Tier 2 credit rule. FAR 19.704 does not add one either.
The one exception in the clause text: where an Alaska Native Corporation or Indian tribe is designated to receive credit, a contractor in the chain can take it, under paragraph (d)(1)(ii). That is narrow and specific to those entities.
What the clause does require of the chain below the prime: FAR 19.704(a)(9) says the prime must include the small business subcontracting clause in subcontracts that offer further subcontracting opportunities, and a subcontractor receiving a large subcontract must adopt its own plan. The threshold is $900,000, or $2 million for construction, and small businesses are generally exempt. A first-tier subcontractor with its own plan reports its own awards to its immediate next tier. That is how lower-tier activity enters the system. It is reported by the firm that made the award, not credited to the prime.
The clause text does not spell out how agencies or primes roll subcontractor-level reports into a prime's overall numbers. If your reporting depends on that, ask your contracting officer or the prime's small business liaison.
The practical point for a supplier is this. If a prime asks you for "Tier 2 data" on a federal contract, the prime is usually asking about your own subcontracting, because you may have a plan of your own or because the prime wants visibility into its supply chain. It is not asking because your lower-tier purchases earn it credit.
How commercial corporate supplier-diversity programs use Tier 2
Outside federal contracting, many large companies run supplier-diversity programs with their own rules. These are voluntary corporate programs, not the FAR. In general they work like this:
- The company sets internal targets for spend with diverse suppliers, defined by the company's own criteria.
- Direct (Tier 1) spend is what the company pays suppliers itself.
- Tier 2 spend is what those first-tier suppliers pay to diverse suppliers for work on the company's account. Companies ask their larger suppliers to report it, often quarterly, and some count it toward their own diversity numbers or use it in supplier scorecards.
- What counts as a diverse supplier is set by the company. Programs often accept private certifications, which the next article covers.
Because these programs are voluntary and company-specific, the definitions, report formats and allocation rules vary. A corporate Tier 2 report and a federal subcontracting report can cover the same supplier and the same dollars and still not match, because the rules for what counts are different. If you are a supplier answering both kinds of requests, label which program each number is for. Read the request, not just the template.
What data a supplier provides
Whichever program is asking, the request tends to come back to the same short list. A supplier should be able to hand over, without being chased:
- Legal name, UEI and CAGE code, matching what is in SAM, so the prime's records and the government's records line up.
- Size and socioeconomic status for the relevant NAICS code, as represented in SAM. FAR 19.703 lets the prime accept a written representation that the supplier's size and status are current, accurate and complete, or accept the supplier's SAM representation if it is registered and says those are current, accurate and complete.
- The contract or purchase order the spend relates to, and the amounts invoiced or paid in the reporting period. Primes with subcontractors that have plans must require the prime contract number to be provided, per FAR 19.704.
- Your own lower-tier spend on that account, if the prime asks for it under a corporate program or because you have a plan: the supplier names, their status, and the dollars.
- A named contact for follow-up questions.
Notice what is not on the list: a certificate. A document tells a prime what was true on one date. The SAM record is what the government sees. We cover what a minority-owned supplier should and should not hand over in minority-owned supplier documentation for primes.
If a prime's request seems to assume spend counts that the clause does not credit, say so politely and ask what the report is for. It is a fast way to avoid a misreport.
How Lunula Supply handles it
We are a small, minority-owned, SAM-registered supplier in Chicago (CAGE 9GWP3), primary NAICS 423990. We source commercial products from manufacturers and distributors and drop-ship to the agency, and we also subcontract services. When a prime or a supplier-diversity team asks for our data:
- We keep our SAM registration current and send our representations with the quote or order.
- We confirm each order line by line in writing, so the dollars you report match the order.
- We keep a running order report for each award, so invoiced and delivered amounts are easy to pull.
- We answer status and identifier requests quickly, because reporting deadlines are real.
- One contact stays with you from acknowledgment through warranty.
If you are building a supplier base or reconciling a report, contact us or see what we supply. For the file a prime should require of any small supplier, start with what a prime should require of a small supplier. For the plan numbers themselves, see small business subcontracting plans from the supplier's side, and for how reports are filed now, see eSRS is retired, and reports live in SAM.gov. The clause text is on acquisition.gov.
Frequently asked questions
Does a prime get federal credit for Tier 2 spend?
Generally no. FAR 52.219-9 limits reported award data to immediate next-tier subcontractors and says credit cannot be taken for awards to lower-tier subcontractors. The clause text we read makes a narrow exception for designated Alaska Native Corporations and Indian tribes.
Can indirect spend count toward a prime's goals?
It can if the prime's plan includes a proportionate share of indirect costs and describes the method used. The plan must say whether indirect costs were included. Commercial plans include indirect costs by design, with listed exclusions.
Are corporate Tier 2 reports the same as federal subcontracting reports?
No. Corporate supplier-diversity programs are voluntary and set their own definitions of a diverse supplier and of what counts. A federal report follows the FAR. The same dollars can appear in both and still be counted differently.
What should a small supplier send when asked for Tier 2 data?
Send legal name, UEI and CAGE, status as represented in SAM, the related contract and invoiced amounts, and your own lower-tier spend if the request covers it. Ask what program the report is for, because the answer decides what counts.
General information, not legal advice. Clause references were checked against FAR 52.219-9, 19.703 and 19.704 on acquisition.gov (FAC 2026-01) on the publish date. Your prime contract and subcontracting plan control.