Affiliation under the SBA’s rules typically becomes a problem when a small business submits an offer on a set-aside procurement, and a competitor files an SBA size protest, challenging eligibility.  But the SBA will examine affiliation issues in other contexts, including when a small business submits an application for the SBA’s 8(a) Business Development Program.

As one unfortunate contractor recently learned, if you do not solve any affiliation problems before you submit your 8(a) application, the SBA may not only reject your 8(a) Program application, but deem you a large business, ineligible to obtain small business set-aside contracts in your primary NAICS code.

The size appeal decision of the SBA Office of Hearings and Appeals in Size Appeal of Grantco Pacific, Inc., SBA No. SIZ-5205 (2011), is an example of why small businesses need to get their SBA affiliation issues resolved before applying to the SBA’s 8(a)  Program.  The Grantco Pacific SBA size appeal involved a company wholly owned by Derik Takai.  Mr. Takai’s parents, Theodore and Ethel, owned Electricians Hawaii, Inc. (EHI).

Is your SBA affiliation “spidey sense” tingling yet?  It should be, because under the SBA affiliation rules, and SBA OHA’s interpretation of them, companies owned by close relatives—including parents and their children—are presumed affiliated, unless the relatives are estranged or the relatives have little or no involvement in one another’s business affairs.

In the Grantco Pacific size appeal, SBA OHA noted that EHI and Grantco were in the same line of work and shared the same physical address because Grantco leased space from EHI.  Mr. Takai was a former EHI employee, EHI had provided Grantco with significant loans and subcontracts, and Mr. Takai’s father and sister (who was also an EHI employee) were listed in the Central Contractor Registration system as points of contact for EHI.

Given these relationships between the companies, SBA OHA concluded that Grantco Pacific had not rebutted the presumption of affiliation arising out of the family relationship, and was affiliated with EHI.  As a result of the affiliation, Grantco not only was denied admission to the SBA’s 8(a) Program, but was found to be a large business within its primary NAICS code, causing it to be ineligible for small business set-aside contracts in that NAICS code.

The Grantco Pacific SBA size appeal illustrates just how important it is for a small government contractor to conduct a thorough audit of its size and affiliation compliance—and resolve any problems—before submitting an application for admission to the SBA 8(a) Program.  Submitting an application without addressing these problems could not only lead to an 8(a) Program denial, but eliminate the company’s ability to compete for small business set-aside contracts.