We recently blogged about a decision that focused on the ostensible subcontractor rule and how the SBA’s Office of Hearings and Appeals (OHA) determines whether a subcontractor is an ostensible subcontractor or not. This and other similar cases have raised the question–how has SBA’s regulatory update affected the analysis of the ostensible subcontractor rule, and what remains of that rule. Below we will give a quick review of the decision from that case and look at a couple more principles of the ostensible subcontractor rule.
For starters, here is a quick overview of what it means to be or have an ostensible subcontractor. Read more about the rule here.
An ostensible subcontractor is a subcontractor that is not a similarly situated entity (meaning not an SDVOSB on an SDVOSB set aside contract, not an 8(a) on an 8(a) set aside contract, etc.) that performs the “primary and vital” parts of the contract or order or is a subcontractor that the prime contractor is unusually reliant upon. 13 C.F.R. § 121.103(h)(3). If a small business prime contractor is found to have an ostensible subcontractor, the prime and subcontractor are found to be affiliated, and their sizes will be combined, but only for the contract at issue. This affiliation could lead to the small business exceeding the size standard for the particular procurement.
But size is not the only thing that can be called into question. Status, such as SDVOSB, 8(a), WOSB, or HUBZone, can also be challenged. This was the case in Winergy, LLC, SBA No. VSBC-424-P, 2025 (Feb. 11, 2025), where the awardee was found to not be an SDVOSB because the subcontractor that was performing the primary and vital parts of the contract, and that held a license that was required, was not an SDVOSB.
So, we know that the prime contractor (or a similarly situated subcontractor) must perform the primary and vital parts of the contract, and we know that the prime contractor cannot be unduly reliant on the subcontractor. So how is a prime contractor supposed to demonstrate this?
Primary and Vital
For contracts for services, specialty trade construction, or supplies, SBA will find that a prime contractor on a set-aside contract is performing the primary and vital work of the contract, when it can demonstrate that it and any of its similarly situated subcontractors, will meet the limitations on subcontracting found at 13 C.F.R. 125.6. 13 C.F.R. § 121.103(h)(3)(iii). Compliance with the limitations on subcontracting is determined by looking at the contracting dollars received by the prime contractor from the government as compared to the dollars paid to non-similarly situated entities.
While contracts for service, specialty trade construction, or supplies take all of the “work” into consideration, contracts for general construction are a bit different. The primary and vital parts of a general construction contract are specific as to the type of work being performed. Per 13 C.F.R. § 121.103(h)(3)(iv), the prime contractor must perform the “management, supervision, and oversight of the project, including coordinating the work of various subcontractors, not the actual construction work performed.”
Unduly Reliant
As mentioned, a prime contractor will be found to have an ostensible subcontractor if they are unduly reliant on a subcontractor. OHA has determined that there are four factors to look at when assessing whether a prime contractor is unduly reliant on one of its subcontractors. Those factors are as follows:
(1) The proposed subcontractor is the incumbent that is ineligible to compete for the procurement;
(2) The prime contractor intends to hire the large majority of its workforce from the subcontractor;
(3) The prime contractor’s proposed management previously served with the subcontractor on the incumbent contract; and
(4) The prime contractor lacks relevant experience and must rely on its subcontractor to win the contract.
There does not need to be a finding of all four factors. Any one of these factors can be enough to determine that the prime contractor is unduly reliant on one of its subcontractors. Junius J. Dion D/B/A/ Risen Video Production, SBA No. SIZ-6306 (Aug. 12, 2024). In that case, though, the proposal showed that the subcontractor would employ many of the employees.
Joint Ventures
We would be remiss not to mention a clarification to how the ostensible subcontractor and joint venture rules interact. In January, SBA clarified some previously ambiguous language that applied to joint ventures between a protégé and its SBA approved mentor as part of the SBA’s Small Business Mentor Protégé Program.
A joint venture offeror is ineligible as a small business concern, an 8(a) small business concern, a certified HUBZone small business concern, a WOSB/EDWOSB concern, or a VO/SDVO small business concern where SBA determines that the managing joint venture partner will not perform 40% of the work to be performed by the joint venture.
13 C.F.R. § 121.103(h)(3)(v). If that number looks familiar, 40% is the amount that a small business managing venturer must perform on any small business contract awarded to a small business joint venture per 13 C.F.R. § 125.8. And, of course, the joint venture still must have a joint venture agreement that complies with the appropriate joint venture regulations.
When should the prime contractor demonstrate compliance? Compliance with the ostensible subcontractor rule is assessed at the time the proposal is submitted. It is common in federal government contracting to enhance a proposal by using the experience and past performance of a subcontractor to enhance the proposal, so it would only make sense to demonstrate that the prime contractor meets the primary and vital requirements, and is not unduly reliant on the subcontractor, in its proposal.
So, the proposal must be clear that the contractor will meet the limitations on subcontracting, and SBA’s inquiry may stop there, as noted in this case. It’s doubly important that the proposal and any delineations of workshare by a subcontractor are crystal clear that the limitations on subcontracting will be followed.
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Don’t get caught red handed with an ostensible subcontractor. Make sure that proposals clearly demonstrate which party will be performing what work. And ensure that the prime contractor meets the requirements for licenses, capabilities, experience, etc.
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