The Ostensible Subcontractor Rule and Key Personnel

According to Executive Order 13,495, follow-on contractors must offer a “right of first refusal” to certain incumbent personnel.  Based on the Executive Order, the SBA Office of Hearings and Appeals has previously held that hiring non-management personnel from a subcontractor is no longer evidence of unusual reliance under the ostensible subcontractor rule.

I emphasize “non-management” for a reason: the Executive Order does not apply to non-management personnel.  According to SBA OHA, hiring a subcontractor’s management team—particularly when the subcontractor is an ineligible incumbent—continues to be strong evidence of a violation of the ostensible subcontractor rule.

SBA OHA addressed this issue in Size Appeal of Doverstaffing, Inc., SBA No. SIZ-5300 (2011).  In that case, the small business identified as the apparent successful awardee did not propose its own personnel for the project, but instead intended to hire 100% of existing personnel–including the entire incumbent management team.  At the same time, the incumbent contractor—which was no longer eligible for the contract in its own right—would serve as a subcontractor, and perform approximately 40% of the work.

The SBA Area Office held that this arrangement violated the ostensible subcontractor rule, and SBA OHA agreed.  It held that because “the Executive Order specifically excluded managerial and supervisory employees from its coverage,” hiring such individuals can be evidence of ostensible subcontractor affiliation.  In addition, because the prime contractor did not offer any of its own personnel to perform the contract—key or otherwise—SBA OHA wrote that the situation was analogous to that of an earlier ostensible subcontractor rule case, Size Appeal of Four Winds Services, Inc., SBA No. SIZ-5260 (2011) in which “the prime was bringing nothing to the contract but its small business status.”

In the Doverstaffing size appeal, the transfer of key personnel (and the fact that the small prime was not proposing any of its own personnel) was strong evidence of a violation of the ostensible subcontractor rule, despite the Executive Order.  Small businesses should keep Doverstaffing in mind when it comes to hiring a subcontractor’s personnel.

Finally, the protester raised an interesting argument—namely, that Executive Order 13,495 is not self-effecting, and final regulations implementing the Executive Order have not yet been issued.  In other words, the protester argued, even though the Executive Order is on the books, it is not effective, and should not serve to mitigate the affiliation effects of hiring any of an ineligible subcontractor’s employees, regardless of whether they are managerial or supervisory employees.

SBA OHA did not address the argument—perhaps because it was unnecessary to do so given its finding that the arrangement had violated the ostensible subcontractor affiliation rule even assuming the Executive Order applied.

Still, I think the argument makes a lot of sense.  Last I checked, Executive Order 13,495 was not in effect and contractors were not seeing “right of first refusal” clauses in their contracts on the basis of the order.  It’s hard to see why an ineffective Executive Order should have any bearing on an ostensible subcontractor affiliation analysis.  Perhaps OHA will look at this issue again in a future case (or perhaps Executive Order 13,495 will be repealed before it ever takes effect, depending on the outcome of next November’s election).

Leave a Reply

Your email address will not be published. Required fields are marked *