Ostensible Subcontractor Rule: Management Alone Wasn’t Enough

The prime contractor’s management of a contract wasn’t enough to avoid ostensible subcontractor affiliation where the subcontractor would provide the labor, equipment, and facilities for performing the work.

In a recent size appeal decision, the SBA Office of Hearings and Appeals confirmed that, where the subcontractor will provide the goods or services that the agency “actually seeks to acquire,” the subcontractor may be deemed an ostensible subcontractor under the SBA’s affiliation rules.

OHA’s decision in Size Appeal of Hamilton Alliance, Inc., SBA No. 5698 (2015) involved a NAVFAC solicitation seeking a contractor to provide refuse collection and processing, as well as the collection, processing and sale of recyclable waste.  Under the solicitation’s Performance Work Statement, the contractor was to be responsible for providing all labor, supplies, materials, equipment, transportation, facilities, supervision and management necessary to collect and process refuse and recyclable waste.  The solicitation was a SDVOSB set-aside under NAICS code 562119 (Other Waste Collection), with a corresponding $38.5 million size standard.

After evaluating competitive proposals, NAVFAC announced that Hamilton Alliance, Inc. was the apparent successful offeror.  An unsuccessful competitor then filed a size protest, alleging that Hamilton Alliance was unusually reliant on its two subcontractors, both of which were large businesses.

The SBA Area Office found that the primary purpose of the solicitation was refuse collection, and the Hamilton Alliance would not be performing any of the refuse collection itself.  Instead, a subcontractor would provide the trucks and drivers to service the waste.  Additionally, Hamilton Alliance would lease the necessary refuse containers and equipment from its subcontractors.  Although Hamilton Alliance would provide most of the project management, the SBA Are Office concluded that management was not the primary purpose of the solicitation.

Because the subcontractors would perform all of the primary and vital work under the solicitation (the refuse collection), the SBA Area Office determined that Hamilton Alliance was affiliated with its subcontractors under the ostensible subcontractor rule.  The SBA Area Office issued a size determination finding Hamilton Alliance to be ineligible for the NAVFAC contract.

Hamilton Alliance filed a size appeal with OHA.  Hamilton Alliance argued, in essence, that its management of the contract was sufficient to avoid ostensible subcontractor affiliation.  The Contracting Officer also submitted a response, agreeing with Hamilton Alliance.  The Contracting Officer stated that NAVFAC sought a contractor that would “manage the refuse stream,” and pointed out that subcontracting was not prohibited under the solicitation.

OHA wrote that, under the SBA’s ostensible subcontractor rule, a prime contractor is affiliated with its subcontractor where “a subcontractor is actually performing the primary and vital requirements of the contract, or the prime contractor is unusually reliant upon the subcontractor.”  In this case, the PWS “clearly states” that the intent of the solicitation is to provide refuse and recycling services.”  The SBA Area Office “thus properly found that the contract’s primary and vital requirements are the collection and processing of refuse and recyclable waste.”  This “is the principal purpose of the solicitation and the crux of any ostensible subcontractor analysis.”

OHA wrote that “the record is clear that the subcontractor is providing the trucks, drivers, containers, and facilities for the performance of the contract, while [Hamilton Alliance] provides the management.”  However, “it is the goods or services which the procuring agency actually seeks to acquire, and not those goods or services which the contractor must perform or provide in order to deliver those goods or services, which determine what the primary and vital tasks of the contract are.”  OHA continued:

The CO and [Hamilton Alliance’s] attempts to paint this solicitation as one for management are not substantiated by the record.  Of course the contractor must manage this contract, as all contracts require management.  But here the solicitation requires the contractor to provide the personnel and equipment to perform the refuse and recycling collection and processing.  [NAVFAC] seeks the refuse and recycling services for the identified installations, not an overall plan for refuse collection and processing.  It is without question that the primary and vital requirements are not to provide management of refuse collection and process.  The management duties that the CO and [Hamilton Alliance] highlight, evidenced by the Management Approach evaluation factor, while important, are simply those that must be performed for all contracts.

OHA concluded that “allowing a prime contractor to merely supervise its subcontractor’s performance–while performing no part itself–of the contract’s primary and vital requirements is a violation of the ostensible subcontractor rule.”  OHA denied Hamilton Alliance’s size appeal, and upheld the SBA Area Office’s size determination.

I’ve had discussions with many small contractors who seem to believe that they will always avoid ostensible subcontractor affiliation so long as they manage and supervise the contract.  Not so.  As Hamilton Alliance demonstrates, it is important for the small prime contractor to manage the contract–but in many cases, management alone won’t be enough.

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