Ostensible Subcontractor Affiliation: Who Manages The Work Matters

So you’ve teamed with an ineligible incumbent contractor to bid on some government work and, to try and maintain continuity, the incumbent would like to retain project management functions. “No big deal,” you think, “I’ll just create a management position to oversee the project manager.”

Actually, it could be a big deal if you’re trying to avoid ostensible subcontractor affiliation. Among the four key factors for determining ostensible subcontractor affiliation is whether the management previously served with the subcontractor under the incumbent contract. And according to a recent SBA Office of Hearings and Appeals decision, creating a figurehead management position to oversee the project manager won’t negate this indicia of ostensible subcontractor affiliation.

By way of background, ostensible subcontractor affiliation exists when a prime contractor relies on a subcontractor to perform the contract’s primary and vital requirements or if the prime contractor is otherwise “unusually reliant upon” its subcontractor. Though it’s a fact-specific inquiry, OHA has identified four key factors for determining unusual reliance:

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 upon its more experienced subcontractor to win the contract.

An important consideration, then, is contract management—if the subcontractor is providing project management, or if the managers previously served on the subcontractor’s incumbent contract, OHA is more likely to find ostensible subcontractor affiliation.

That brings us to Automation Precision Technology, LLC, SBA No. SIZ-5850 (Sept. 6, 2017). In that case, Automation Precision Technology (“ATS”) teamed with Serco, Inc. (the incumbent contractor, and a multi-billion dollar company) to bid on undersea surveillance systems support services solicited by the Department of Navy’s Space and Naval Warfare Systems Command. The work was solicited under NAICS code 541614 (Process, Physical Distribution, and Logistics Consulting Services), which carries a $15 million size standard.

Though ATS’s revenues alone fell under the size standard, the SBA Area Office found that ATS’s relationship with Serco violated the ostensible subcontractor rule based on the four key factors. As part of the determination, the Area Office noted that nearly all of the contract employees were former Serco employees that would transition over to ATS, including the key personnel and management employees (like the Program Manager). Serco’s size was aggregated with ATS’s and, as a result, ATS was found to be ineligible for the SPAWAR contract.

ATS appealed the determination to OHA, saying, in part, that the Area Office erred by finding ATS unusually reliant on Serco for project management. According to ATS, its proposal included a Contract Manager who would serve as “the absolute lead for the Contract team” and would ensure that ATS firmly manages the contract. Thus, ATS said the Area Office erred by finding ATS reliant on Serco for project management.

OHA rejected ATS’s arguments, noting that the solicitation identified the Program Manager as the contract’s top management official and charged her “with the responsibility of accomplishing the overall efforts of the contract.” The Contract Manager position created by ATS was not required under the solicitation. And though ATS said its Contract Manager would oversee the entirety of the contract, its proposal indicated otherwise: under ATS’s proposal, the Program Manager was “responsible for day-to-day contract management with the authority to obligate Team [ATS] within contract terms,” while the Contract Manager “provides leadership, guidance, and resources to support the Project Manager in management and execution of the contract.”

According to OHA, “the Contract Manager appears to be more of a liaison and an advisor than a manager . . . [who] does not work directly on and has no major role in performing the contract.” OHA found ATS’s Contract Manager did not exercise sufficient management over the Program Manager, thus supporting a finding of ATS’s unusual reliance on Serco.

OHA denied ATS’s appeal.

Automation Precision Technology confirms that, when evaluating ostensible subcontractor affiliation, project management matters. A company cannot avoid the sting of affiliation simply by creating a figurehead manager that lacks firm authority.