The ostensible subcontractor rule says that, for a small business or socioeconomic set-aside such as 8(a), the small business prime contractor must perform the primary and vital parts of the contract and can’t be unduly reliant on a subcontractor. If the small business is found to violate the rule, the size of the small prime contractor and the large subcontractor are grouped for size purposes, which can result in loss of award. But the ostensible subcontractor rule is different from SBA’s joint venture rules, because SBA rules (and other federal law) distinguish between a prime-sub team and a joint venture. In a recent decision, OHA reversed a determination that a small business prime was affiliated with a subcontractor where the Area Office mixed up the analysis of the ostensible subcontractor rule and the joint venture rules.

In Leumas Residential, LLC, SBA No. SIZ-6091 (Mar. 16, 2021), the SBA Office of Hearings and Appeals (OHA) considered the proposal of Leumas to provide grounds maintenance services at a Navy facility. It had a $7 million size standard under NAICS code 561730 for Landscaping Services and was restricted to 8(a) participants.

Leumas proposed to subcontract work to ProDyn, LLC under the proposal, a teaming agreement, and a subcontract; the proposal stated that the two companies would be “working together under a teaming agreement and subcontractor agreement”. ProDyn was the incumbent contractor. The proposal stated that the “Leumas-ProDyn team proposed to hire two Project Managers from the incumbent contractor” and would rely on the past performance of ProDyn (through an affiliate) as well as a Leumas-ProDyn JV.

The protester argued that ProDyn, not Leumas, was performing the primary and vital requirements of the work. The SBA Area Office determined that, rather than Leumas, the actual prime offeror was the Leumas-ProDyn joint venture. For one thing, the proposal “identified the prime/sub team as ‘Leumas-ProDyn’ which is the same name as the formal joint venture” and “the entire proposal is written as if the joint venture is offering despite the proposal being submitted under Appellant’s name only.” Plus, the past performance has no examples from Leumas, apart from in its role as a member of the Leumas-ProDyn joint venture. SBA did not rule on the ostensible subcontractor issue, but found Leumas and ProDyn generally affiliated.

On appeal, Leumas argued that the Area Office erred by not reviewing the ostensible subcontractor basis for affiliation and looking only at joint venture issues. OHA agreed, stating that Leuemas’s proposal “presented itself as the prime contractor and ProDyn was its subcontractor.” There was a teaming agreement in place and the proposal stated that the prime contractor is “Leumas Residential, LLC.”

OHA agreed that the Area Office should have gone through the ostensible subcontractor analysis, but it failed to do so. The Area Office should have reviewed the principal purpose of the acquisition and then determined whether Leumas was performing it. The determination that the joint venture was the prime contractor under the proposal was incorrect. OHA noted that “the Area Office’s analysis contains not one reference to an OHA case in reaching its conclusion of affiliation. OHA’s case law has been issued with the objective of providing guidance, transparency, and predictability to small business concerns on how their size will be determined, should a dispute over their status arise.” It concluded that the case should be remanded to the Area Office to review the ostensible subcontractor issue.

This determination highlights the difference between affiliation in a joint venture context versus a prime-subcontractor team. Even the SBA Area Office gets confused, which means the concepts are not always easy to understand. Because SBA’s rules governing size in the context of a joint venture versus a prime-sub team can have different outcome, it’s important to be clear in the proposal, teaming agreement, and other documents which setup a contractor is using. The decision also reminds us that sometimes the Area Office gets these things wrong, and an appeal is necessary.

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