Economic Dependence Affiliation Can Be Created By Single Contract

Economic dependence affiliation under the SBA’s affiliation rules can be created by a single ongoing contract, according to the SBA Office of Hearings and Appeals.

In a recent size appeal decision, SBA OHA held that a single contract amounting to more than 90% of an 8(a) applicant’s revenues over two years resulted in economic dependence affiliation.

SBA OHA’s decision in Size Appeal of Ma-Chis Project Controls, Inc., SBA No. SIZ-5486 (2013) involved the 8(a) application of Ma-Chis Project Controls, Inc.  During its evaluation of Ma-Chis’ 8(a) application, the SBA’s 8(a) office (known as the Division of Program Certification and Eligibility) requested a formal size review to determine whether Ma-Chis qualified as a small business.

The SBA’s Area Office subsequently issued a size determination finding Ma-Chis to be an ineligible large business due to affiliation with Sauer, Inc.  The SBA Area Office explained that Ma-Chis was a party to a contract with Sauer, and that the contract represented 93.5% of Ma-Chis’ revenues in 2011 and 100% of Ma-Chis’ revenues in 2012.  The Sauer contract was ongoing as of April 2013, when Ma-Chis applied to the 8(a) program.  The Area Office concluded that the contract resulted in economic dependence affiliation.

Ma-Chis filed a size appeal with SBA OHA.  Ma-Chis argued that economic dependence affiliation should not be established on the basis of a single contract.  Ma-Chis also pointed out that by the time it filed its SBA OHA appeal, the Sauer contract was complete.

SBA OHA stated that if the contract had been complete as of the date of Ma-Chis’ 8(a) application, Ma-Chis might have been able to demonstrate that the economic dependence had ended.  However, because the “arrangement with Sauer was still ongoing as of April 22, 2013, the date for determining size,” the fact that the contract had ended by the time Ma-Chis filed its size appeal was irrelevant.

SBA OHA then wrote that “[t]he fact that [Ma-Chis] derived these revenues from a single contract does not alter this analysis . . ..”  SBA OHA continued, “[Ma-Chis’] contract with Sauer is a multi-million dollar arrangement over the course of several years, and the Area Office found that [Ma-Chis] would not be a viable business without the Sauer contract.”  SBA OHA denied the size appeal.

The Ma-Chis Project Controls SBA OHA decision demonstrates the breadth of the economic dependence affiliation rule.  Although SBA OHA has recognized an exception in the case of a newly-formed company with a single contract of “limited dollar value and extremely short duration,” a larger single contract of lengthier duration may result in affiliation.

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