SBA OHA: Northrop Grumman Entity Was An Ostensible Subcontractor

You would think a company as large as Northrop Grumman would know how to avoid ostensible subcontractor affiliation with a small prime, wouldn’t you?

You’d be wrong.  In a recent SBA Office of Hearings and Appeals decision, a Northrop Grumman entity entered into a teaming arrangement with a small prime, in which all three key employees identified in the proposal were employed by the large subcontractor.  The result: ostensible subcontractor affiliation.

SBA OHA’s decision in Size Appeal of Rylex Consulting, LLC, SBA No. SIZ-5401 (2012) involved an Air Force small business set-aside for engineering and logistics support.  Northrop Grumman Technical Services. Inc., or NGTS, was the incumbent contractor (presumably, the incumbent contract had not been a small business set-aside).  NGTS is a part Northrop Grumman.

NGTS entered into a teaming agreement with a small business, Rylex Consulting LLC.  In the team’s proposal, all three of the key employees offered to the Air Force were employed by NGTS.  Nowhere did the proposal refer to any of Rylex’s employees.

After the Air Force identified Rylex as the apparent successful offeror, the Contracting Officer himself filed a SBA size protest.  The CO questioned whether NGTS was acting as Rylex’s ostensible subcontractor.

Responding to the SBA size protest, Rylex argued that NGTS was not its ostensible subcontractor. Rylex admitted that the three key personnel identified in the proposal were NGTS employees.  However, Rylex stated that a fourth position key referred to in the solicitation, Contract Manager, would be filled by a Rylex employee.  Although the Contract Manager had not been mentioned in the proposal, Rylex submitted the Contract Manager’s resume to the SBA Area Office.

The SBA Area Office “determined NGTS will manage the contract and have all key employees.”The SBA Area Office disagreed with Rylex’s position and found Rylex affiliated with NGTS under the ostensible subcontractor rule.

Rylex filed a size appeal with SBA OHA.  Rylex contended that the SBA Area Office had erred by not considering the Contract Manager as a key employee for the contract.  Rylex also argued that Executive Order 13,495 (Nondisplacement of Qualified Workers Under Service Contracts) permitted Rylex to rely on NGTS’s incumbent employees.

SBA OHA held that the SBA Area Office had properly disregarded the Contract Manager.  SBA OHA noted that “size status for the purpose of compliance with the ostensible subcontractor rule is determined as of the date of the final proposal revision.”

In this case, Rylex’s final proposal “contains no mention of a Contract Manager . . . [b]ecause the ‘Contract Manager position and information are completely absent from the Proposal, the Area Office was corrected in finding them irrelevant to its ostensible subcontractor analysis.”  SBA OHA concluded, “Appellant’s proposal, as submitted to the Air Force, is fatally flawed in that all three of the proposed managerial/key personnel are, and will remain, employees of NGTS.”

Finally, SBA OHA rejected Rylex’s argument regarding Executive Order 13,495.  SBA OHA wrote that Executive Order 13,495 does not apply to managerial employees.  Thus, SBA OHA held, “because the three NGTS employees here are all incumbent management personnel, I conclude that Executive Order 13,495 does not shield Appellant from the application of the ostensible subcontractor rule.”  (Although SBA OHA did not mention it, Executive Order 13,495 also might not have applied because Rylex did not propose to hire NGTS’s incumbent employees; the proposal was for those employees to remain employed by NGTS).

SBA OHA denied Rylex’s size appeal, affirming the SBA Area Office’s decision that Rylex and NGTS were affiliated under the ostensible subcontractor rule.

Many times, a small government contractors has told me that it is comfortable with a teaming arrangement proposed by a large subcontractor, because the large business “must know what it is doing,” and would never propose or agree to an arrangement that would violate the ostensible subcontractor rule.  For any small contractor relying on its large subcontractor to create a compliant teaming relationship, the Rylex size appeal decision should be a wake-up call.

I don’t know whether Rylex or Northrop Grumman proposed the specific teaming arrangement in this case.  Regardless, if a company as large as Northrop Grumman can agree to an an arrangement involving ostensible subcontractor red flags, other large companies can do the same.  Small government contractors owe it to themselves to do their due diligence and propose changes to questionable teaming practices suggested by large subcontractors–before it is too late.

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