A contractor’s economic dependence on another company can cause affiliation under the SBA affiliation rules, but economic dependence can also be a major problem when a company applies for 8(a) program certification.
As demonstrated in a recent decision of the SBA Office of Hearings and Appeals, if an 8(a) program applicant has received most of its revenues from another company, the SBA may find that the applicant is economically dependent on the other company–and therefore, ineligible for admission to the 8(a) program.
SBA OHA’s decision in Harris Grant, LLC, SBA No. BDPE-478 (2013) involved the 8(a) program application of Harris Grant, LLC. Harris Grant initially submitted its 8(a) application in July 2011 (and the fact that I am only now writing about Harris Grant’s case tells you how long the 8(a) application process can take).
The SBA issued an initial denial letter in April 2012. The initial denial letter stated that Harris Grant could not exercise independent business judgment without great economic risk. The letter explained that Harris Grant had earned all of its revenues from Innovative Solutions Group since at least 2009, and that Harris Grant’s economic dependence on ISG meant that ISG effectively had the power to control Harris Grant.
Harris Grant filed a request for reconsideration. In its request for reconsideration, it sought a formal SBA size determination. The SBA’s 8(a) office then referred the matter to the SBA Area Office, which performs size determinations.
The SBA Area Office determined that Harris Grant was a small business. However, the SBA Area Office wrote that although Harris Grant was small, “economic dependency on ISG is considered very high and rises to such a level that it would [give] ISG the power to control” Harris Grant. In other words, the SBA Area Office apparently determined that Harris Grant was affiliated with ISG, but that the affiliation did not result in Harris Grant’s exceeding the applicable size standard (presumably, the size standard related to its primary NAICS code).
The SBA 8(a) office subsequently issued a decision denying Harris Grant’s admission to the 8(a) program. The SBA noted that Harris Grant had introduced some evidence showing that it had diversified its revenue sources, but that as of the date of the request for reconsideration, 65% of revenues were still generated from ISG.
Harris Grant filed an appeal with SBA OHA, challenging the SBA’s decision to deny its 8(a) program application. Harris Grant argued, in part, that it had made efforts to obtain revenues from other sources since 2009 and had received no revenues from ISG since June 2012.
SBA OHA denied Harris Grant’s appeal. It wrote, “Harris Grant derived essentially all revenue from ISG until 2012; Harris Grant’s financial stability was thus wholly reliant on ISG. As such, based on the Administrative Record, it was not unreasonable for SBA to conclude that [Harris Grant’s] economic success was inextricably linked with ISG, and thus its independent business judgment compromised.”
SBA OHA held that Harris Grant had not effectively supported its allegation that it received revenues from other sources in 2012, writing “the amount and source of revenue is unclear.” SBA OHA denied Harris Grant’s appeal.
The Harris Grant 8(a) appeal decision illustrates how the SBA uses economic dependence in the context of an 8(a) program application. Here, even though the economic dependence did not result in Harris Grant exceeding the size standard for small business purposes, it prevented Harris Grant from gaining admission to the 8(a) program.