The SBA’s ostensible subcontractor rule can be a minefield for small prime contractors, who must be careful to avoid risk factors for affiliation with their large subcontractors.
But not every small prime need worry about ostensible subcontractor affiliation. As a recent SBA Office of Hearings and Appeals decision confirms, the ostensible subcontractor rule does not apply to procurements for manufactured products.
OHA’s decision in Size Appeal of Invisio Communications, Inc., SBA No. SIZ-6084 (2020) involved a Marine Corps RFP seeking proposals to provide Hearing Enhancement Devices. The RFP was issued as a small business set-aside under NAICS code 334220, which carries a 1,250-employee size standard.
After evaluating proposals, the Marine Corps notified offerors that Atlantic Signal, LLC was the apparent successful offeror. A competitor, Invisio Communications, Inc., subsequently filed a size protest.
Invisio argued, in part, that Atlantic Signal was affiliated with its subcontractor, 3M Peltor, under the ostensible subcontractor rule. Invisio claimed that 3M Peltor, not Atlantic Signal, would manufacture the headsets required by the contract. Invisio contended that the headsets constituted approximately 85% of the contract value, and thus were the “primary and vital” portion of the contract. Invisio also argued that Atlantic Signal would be unusually reliant upon 3M Peltor due to a teaming agreement between the companies.
The SBA Area Office issued a size determination finding Atlantic Signal to be an eligible small business. With respect to Invisio’s ostensible subcontractor allegations, the Area Office held that the ostensible subcontractor rule does not apply to procurements for manufactured products.
Invisio appealed this decision to OHA. Invisio argued that “[n]othing in the plain language of the regulation provides that it applies only to procurements that are classified as service procurements.” Invisio contended that by limiting the scope of the regulation, the Area Office had impermissibly “re-written” it.
OHA pointed out that a unique rule, the nonmanufacturer rule, applies to procurements for manufactured products. The nonmanufacturer rule allows a small business to provide products manufactured by another company, provided certain factors are met.
OHA explained that applying the ostensible subcontractor rule to procurements for manufactured products would be inconsistent with the approach allowed under the nonmanufacturer rule:
Appellant’s suggestion that both the ostensible subcontractor and nonmanufacturer rules may apply to the same procurement for manufactured goods . . . is problematic because, if the “primary and vital” contact requirements are defined as producing the manufactured products, it would become essentially impossible for a small business prime contractor to be eligible for award as a nonmanufacturer. Utilizing the ostensible subcontractor rule in situations ordinarily governed by the nonmanufacturer rule is thus logically untenable, as such an approach would eviscerate the nonmanufacturer rule.
In this case, OHA wrote, “the procurement plainly is for manufactured products, and the ostensible subcontractor rule is not applicable.” OHA denied Invisio’s appeal and upheld the size determination.
Invisio was correct in one respect: the text of the ostensible subcontractor rule does not specifically exempt procurements for manufactured products. But, as OHA held, applying the ostensible subcontractor rule to such procurements would completely undermine the nonmanufacturer rule, essentially making it impossible for a small business to provide products manufactured by another entity.
As a matter of clarity, SBA should consider amending the ostensible subcontractor rule to reflect its inherent limitations. But in the meantime, small businesses competing to sell products to the government should know that despite the absence of limiting language in the regulation, the ostensible subcontractor rule does not apply to procurements for manufactured products.
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