Ostensible Subcontractor Rule: Management Ain’t Enough to Comply

When it comes to the SBA’s ostensible subcontractor rule, managing a contract, by itself, is not enough to avoid affiliation.

As demonstrated in a recent decision of the SBA Office of Hearings and Appeals, a small business and its subcontractor violate the ostensible subcontractor rule whenever the subcontractor will perform the primary and vital work required under the prime contract–even if the small business will perform the management function.

SBA OHA’s decision in Size Appeal of Bell Pottinger Communications USA, LLC, SBA No. SIZ-5495 (2013) involved a Department of Defense solicitation for trade show support services.  The solicitation was set-aside for small businesses.

Bell Pottinger Communications USA, LLC submitted a proposal.  Bell Pottinger’s proposal stated that it would be the lead contractor and Pelham Bell Pottinger would be a major subcontractor.  The proposal described Pelham as the “operational lead on this project” and stated that Pelham would “undertake full logistics organization for the trade show program . . ..”   According to the pricing proposal, Pelham would perform 90% of the contract.  Additionally, seven of ten proposed key personnel were Pelham employees.

After the DoD made award to Bell Pottinger, a competitor filed a size protest.  The SBA Area Office determined that the protest was untimely.  However, the SBA Area Director “adopted” the untimely protest, initiating its own size challenge.

The SBA Area Office subsequently issued a size determination finding Bell Pottinger affiliated with Pelham under the ostensible subcontractor rule.  The SBA Area Office held that Bell Pottinger was not an eligible small business as a result of the ostensible subcontractor affiliation.

Bell Pottinger filed a size appeal with SBA OHA.  Bell Pottinger argued that the size determination was erroneous because the SBA Area Office “failed to consider a major factor–whether the prime or the subcontractor will manage contract performance.”  Bell Pottinger argued that it would manage “the majority of contract performance,” and interface with the Contracting Officer.

SBA OHA wrote that “[t]his appeal reflects a fundamental misunderstanding of the ostensible subcontractor rule.”  SBA OHA explained that “[t]he ostensible subcontractor rule provides that when a subcontractor is actually performing the primary and vital requirements of the prime contract, or the prime contractor is unusually reliant upon the subcontractor, the two firms are affiliated for purposes of the procurement at issue.”

In this case, SBA OHA noted, Bell Pottinger “does not argue that it will perform the contract’s primary and vital requirements, or that it does not unduly rely on Pelham to perform the contract.”  SBA OHA held that regardless of whether Bell Pottinger was actually managing the contract (an assertion SBA OHA appeared to view with some skepticism), “because [Bell Pottinger] is not performing the contract’s primary and vital requirements, the proposal violates the ostensible subcontractor rule.”  SBA OHA denied Bell Pottinger’s size appeal.

The Bell Pottinger Communications USA case demonstrates that managing a contract, alone, does not mean that a small business does not violate the SBA’s ostensible subcontractor rule.  If a subcontractor will perform the primary and vital portions of the contract, the SBA is likely to find that the arrangement results in affiliation–regardless of which party is managing the contract.

One final note: if Bell Pottinger’s price proposal did, in fact, indicate that Pelham would perform 90% of the contract, the DoD should have rejected the proposal for failing to comply with the FAR’s limitations on subcontracting clause.  The DoD’s failure to reject the proposal proved unimportant, because the successful size protest removed Bell Pottinger from the competition.  Nevertheless, the DoD’s failure to identify this defect is, in itself, a little troubling.

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