Ostensible Subcontractor Rule: Hiring Subcontractor’s Project Manager Didn’t Create Affiliation

Ostensible subcontractor affiliation was not created when the small prime contractor proposed to hire its subcontractor’s current employee to serve as the prime contractor’s project manager.

In a recent size appeal decision, the SBA Office of Hearings and Appeals held that, where the prime contractor would retain supervision and control of contract performance, the prime contractor was not dependent on its subcontractor for contract management.

OHA’s decision in Size Appeal of Glacare and Medtrust JV, LLC, SBA No. 5690 (2015) involved an Army solicitation for registered nursing services in the San Antonio Military Health System.  The solicitation was issued as a small business set-aside under NAICS code 621399 (Offices of All Other Miscellaneous Health Care Practitioners).

Global Dynamics, LLC submitted a proposal.  GDL proposed a prime/subcontractor teaming relationship with OMV Medical, Inc.  Under the teaming arrangement, GDL would perform 51% of the work and OMV would perform 49%.  GDL would hire a current OMV employee (whose name is redacted from OHA’s public decision) to serve as the Senior Project Manager.  The Senior Project Manager would be responsible for day-to-day contract management and communication with the Government.  The Senior Project Manager would report to GDL’s Chief Executive Officer, Ledell Weaver.

After evaluating competitive proposals, the Army announced that GDL was the apparent successful offeror.  Giacare and Medtrust JV, LLC, an unsuccessful competitor, filed a timely SBA size protest.  The protester alleged that GDL was affiliated with OMV under the ostensible subcontractor rule.

The SBA’s ostensible subcontractor rule provides that when a subcontractor is actually performing the primary and vital requirements of the contract, or when the prime contractor is unusually reliant upon the subcontractor, the two firms are affiliated for purposes of the contract at issue.  To evaluate whether an ostensible subcontractor relationship exists, the SBA Area Office is to examine “all aspects” of the relationship between the firms.  In its evaluation, the SBA Area Office is to consider the terms of the proposal, as well as the terms of any teaming agreement between the parties.

In this case, after evaluating the protester’s initial allegations, the SBA Area Office issued a size determination in GDL’s favor, holding that no ostensible subcontractor rule violation had occurred.  The protester then filed a size appeal with OHA.  In the course of the size appeal, the protester learned for the first time that the proposed Senior Project Manager was a current high-ranking employee of OMV.  The protester then supplemented its appeal, asking OHA to consider this relationship as new evidence of ostensible subcontractor affiliation.

OHA agreed to consider the new evidence, but held that the protester’s “contention that OMV will control management of the contract through [Senior Project Manager] amounts to no more than unsupported speculation.”  OHA explained that “when key personnel, even if hired from the subcontractor, remain under the supervision and control of the prime contractor, there is no violation of the ostensible subcontractor rule.”

Here, “although [Senior Project Manager] was employed by OMV at the time GDL submitted its proposal, she will be a GDL employee during contract performance, and will operate under GDL’s supervision and control.”  In that regard, “[a]ccording to the proposal, GDL’s CEO, Ms. Weaver, will oversee the program management office and supervise [Senior Project Manager] and other managers.”  The Senior Project Manager “thus will be subordinate to and report to Ms. Weaver, and ultimate control and decision-making rests with GDL.”  OHA concluded: “[b]ecause all contract performance will occur under Ms. Weaver’s supervision and direction, GDL is not dependent on OMV for contract management.”  OHA denied the protester’s size appeal.

Ostensible subcontractor rule analyses are intensely fact-specific, and the outcomes of these cases often turn on multiple factors.  For that reason, it may be a bridge too far to suggest that the ostensible subcontractor rule will never be violated by hiring a subcontractor’s current employee in the Project Manager role.  However, Glacare and Medtrust does indicate that such a hire is unlikely to lead to ostensible subcontractor affiliation so long as the proposal demonstrates that ultimate supervision and control rests with the small prime contractor, and so long as the other aspects of the parties’ relationship do not demonstrate the existence of affiliation.

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