Ostensible Subcontractor Affiliation: Beware These “Four Key Factors,” Says SBA OHA

Ostensible subcontractor affiliation can arise for many reasons–but a small business may be in grave danger of affiliation with its subcontractor when four specific factors are present.

In a recent size appeal decision, the SBA Office of Hearings and Appeals held that a small prime contractor was unusually reliant on its large subcontractor where “four key factors” indicated that the small prime contractor was bringing little to the table but its small business status.

OHA’s decision in Size Appeal of Modus Operandi, Inc., SBA No. SIZ-5716 (2016) involved an Air Force solicitation for research, studies, engineering, and related services.  The solicitation was issued as a small business set-aside under NAICS code 541690 (Other Scientific and Technical Consulting Services), with a corresponding $15 million size standard.

The solicitation was a follow-on to a procurement for similar services, known as the Sustainment Systems Engineering & Acquisition Management Services contract.  BAE Systems Technology Solutions & Services, Inc., a large business, was the incumbent under the SSEAMS contract.

After reviewing competitive proposals, the Air Force awarded the contract to Modus Operandi, Inc.  An unsuccessful competitor subsequently filed an SBA size protest.  The competitor alleged that Modus Operandi had proposed to use BAE as its subcontractor, and that Modus Operandi was affiliated with BAE under the ostensible subcontractor rule.

The SBA Area Office reviewed Modus Operandi’s proposal.  The proposal indicated that Modus Operandi would perform 51.1% of the contract services and BAE the remaining 48.9%.  Of a total workforce of 20 personnel, 10 would be Modus Operandi employees and 10 would be BAE employees.  All 20 employees were incumbent SSEAMS employees, and the 18 non-managerial personnel would perform the same role on the new contract as on SSEAMS.

As its Program Manager, Modus Operandi offered the incumbent SSEAMS Deputy Project Manager, a BAE employee who would move to Modus Operandi’s payroll.  In the past performance portion of the proposal, Modus Operandi identified two prior contracts for itself and two for BAE–one of which was the incumbent SSEAMS contract.  The proposal identified the SSEAMS contract as the only one involving geophysical research support, an important component of the Air Force solicitation.

The SBA Area Office issued a size determination finding Modus Operandi to be affiliated with BAE under the ostensible subcontractor affiliation rule.  The SBA Area Office found that Modus Operandi was hiring BAE’s incumbent personnel “en masse,” and concluded that Modus Operandi would contribute nothing more than its small business status to the procurement.

Modus Operandi filed a size appeal with OHA.  Modus Operandi argued that the SBA Area Office had erred by finding ostensible subcontractor affiliation.

OHA wrote that a recent line of size appeal decisions have “identified ‘four key factors’ that have contributed to the findings of unusual reliance.”  OHA explained:

First, the proposed subcontractor was the incumbent contractor, and was not itself eligible to compete for the procurement.  Second, the prime contractor planned to hire the large majority of its workforce from the subcontractor.  Third, the prime contractor’s proposed management previously served with the subcontractor on the incumbent contract.  And fourth, the prime contractor lacked relevant experience, and was obliged to rely on its more experienced subcontractor to manage the contract.

Modus Operandi’s case, OHA wrote “fits squarely within [this] fact pattern.”  Here, BAE was the ineligible incumbent contractor.  Modus Operandi “proposed to staff [its] portion of the project almost entirely with personnel hired from BAE, and all non-managerial personnel would continue in the ‘same role’ that they performed on SSEAMS.”  To manage the contract, Modus Operandi “proposed to retain BAE’s incumbent Deputy Project Manager . . . to serve as” the new Program Manager.  And finally, “according to [Modus Operandi’s] own proposal, BAE is the only member of [Modus Operandi’s] team with experience in the ‘Geophysics and Research’ technical discipline, and the Contracting Officer likewise acknowledged that Modus Operandi ‘does not have Geophysical Research Support experience.'”

OHA affirmed the SBA Area Office’s decision, and denied Modus Operandi’s size appeal.

Because ostensible subcontractor affiliation cases are very fact-specific, it can be frustrating for potential prime contractors and subcontractors to determine when their relationship might cross the line.  The Modus Operandi size appeal decision offers some helpful guidance.  Although the “four key factors” identified in Modus Operandi are neither conclusive nor exhaustive, they are a good starting point–and if all four factors are met, there may be grave danger of ostensible subcontractor affiliation.

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