“Similarly Situated Entities” Exempt From Ostensible Subcontractor Affiliation, SBA OHA Confirms

A “similarly situated entity” cannot be an ostensible subcontractor under the SBA’s affiliation rules.

In a recent size appeal decision, the SBA Office of Hearings and Appeals confirmed that changes made to the SBA’s size regulations in 2016 exempt similarly situated entities from ostensible subcontractor affiliation.

OHA’s decision in Size Appeal of The Frontline Group, SBA No. SIZ-5860 (2017) involved an Air Force solicitation for the alteration and fitting of uniforms.  The solicitation was issued as a small business set-aside under NAICS code 811490 (Other Personal and Household Goods Repair and Maintenance), with a corresponding $7.5 million size standard.

After evaluating proposals, the Air Force announced that DAK Resources, Inc. was the apparent successful offeror.  An unsuccessful competitor, The Frontline Group, then filed a size protest.  Frontline contended that DAK was affiliated with its subcontractor, Tech Systems Inc., under the SBA’s ostensible subcontractor affiliation rule.

The ostensible subcontractor affiliation rule provides that a prime contractor is affiliated with its subcontractor where the subcontractor is performing the “primary and vital” portions of the work, or where the prime is “unusually reliant” on the subcontractor.  However, in June 2016, the SBA amended the ostensible subcontractor regulation, 13 C.F.R. 121.103(h)(4), to specify that “[a]n ostensible subcontractor is a subcontractor that is not a similarly situated entity,” as that term is defined in 13 C.F.R. 125.1.

The SBA Area Office determined that the subcontractor, TSI, was a small business under NAICS code 811490.  Accordingly, the SBA Area Office found that TSI was a similarly situated entity, and exempt from being considered an ostensible subcontractor.  The SBA Area Office issued a size determination finding DAK to be an eligible small business.

Frontline filed a size appeal with OHA, challenging the SBA Area Office’s determination.

OHA noted that the SBA had amended the ostensible subcontractor affiliation rule in 2016 to exempt similarly situated entities.  OHA then wrote that “there is no dispute that DAK, the prime contractor, is small, and no dispute that the subject procurement was set aside for small businesses.”  Further, “DAK and TSI will perform the same type of work on this procurement, and no party contends that the subcontract would be governed by a different NAICS code or size standard than the prime contract.”

OHA determined that the SBA Area Office had correctly found TSI to be a similarly situated entity, exempt from consideration as an ostensible subcontractor.  OHA denied Frontline’s size appeal.

The Frontline Group confirms that the SBA’s regulatory exemption for similarly situated entities is now in effect.  When a subcontractor qualifies as a similarly situated entity, it is not an ostensible subcontractor.