SBA OHA: Contractor Successfully Fractured Economic Dependence Affiliation

A contractor is not economically dependent upon another firm where it receives only a small proportion of its revenues from the other firm as of the self-certification date for a set-aside contract–even if the contractor previously received more than 70% of its annual revenues from the other firm.

This was the commonsense decision of the SBA Office of Hearings and Appeals in a recent size appeal case, in which SBA OHA held that a contractor’s prior economic dependence on another company does not necessarily mean that the companies are still affiliated under the SBA’s affiliation rules.

SBA OHA’s decision in Size Appeal of OBXTech, Inc., SBA No. SIZ-5451 (2013) involved a State Department SDVOSB set-aside for professional, management and administrative employee support services.  On February 1, 2012, OBXTech, Inc. submitted its initial offer and self-certified as an eligible SDVOSB for the procurement.

On November 5, 2012, the Contracting Officer notified offerors that OBXTech was the apparent successful offeror.  Two unsuccessful competitors subsequently filed SBA size protests challenging the award.  The protesters alleged, among other things, that OBXTech was economically dependent on MicroTechnologies, LLC.

The SBA Area Office found that OBXTech had received more than 70% of its revenues from MircoTech between 2009 and 2011.  For this reason, the Area Office determined that OBXTech was economically dependent upon MicroTech, causing the two firms to be affiliated under the SBA’s affiliation rules.

OBXTech filed a size appeal with SBA OHA.  OBXTech conceded that it had previously received the majority of its revenues from contracts with MicroTech, but argued that this was no longer the case by the February 1, 2012 self-certification date.  Rather, as of that date, OBXTech had 13 active contracts–12 with federal agencies, and one with MicroTech.  On the self-certification date, the MicroTech subcontract represented just 18.16% of OBXTech’s revenues.

SBA OHA wrote that when the SBA is considering whether two firms are affiliated under the economic dependence rule, the SBA may assess the totality of the firm’s receipts over the prior three years.  However, the SBA should also “examine the nature of the business relationship between the two firms as of the date for determining size, to determine whether the same business relationship has continued and whether the challenged firm may have developed contracts with firms other than the alleged affiliate.  The challenged firm may no longer be economically dependent by the date for determining size, even if it was so earlier.”

In this case, SBA OHA held, “the assessment of whether [OBXTech] was economically dependent upon MicroTech should have been conducted as of the self-certification date of February 1, 2012, and taken into account the relationship between [OBXTech] and MicroTech as of that date.”  SBA OHA continued, “it does not follow that MicroTech could control [OBXTech] as of the date of self-certification, just because MicroTech had that power at an earlier time.”  SBA OHA granted OBXTech’s appeal and reversed the SBA Area Office’s size determination.

The OBXTech case represents a fair and commonsense approach to the question of economic dependence.  Had SBA OHA ruled otherwise, it could have forced firms to wait as long as three years after becoming economically independent to self-certify as small.  Such an approach would be inequitable, because the underlying foundation of affiliation–shared control–would no longer exist.  Fortunately, SBA OHA got it right.

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