SBA Office of Hearings and Appeals cases frequently involve contractors trying to argue that they are not affiliated with other entities.  But in Size Appeal of The Associated Construction Co., SBA No. SIZ-5314 (2011), the contractor at issue attempted to argue the opposite—that it was affiliated with another entity, namely, a division of itself.

This strange case came about because the contractor hoped to take advantage of the so-called “inter-affiliate transaction exception” under 13 C.F.R. § 121.104(a), which allows contractors to deduct “proceeds between a concern and its domestic or foreign affiliates” from its average annual receipts for size purposes.  Unfortunately for the contractor, SBA OHA held that a company cannot be affiliated with its own division—meaning that the exception did not apply.

The Associated Construction SBA size appeal involved any Army National Guard small business set-aside procurement for construction of an office/warehouse facility in Rhode Island.  After Associated won the contract, a competitor filed a SBA size protest, alleging that Associated exceeded the size standard.

During its size investigation, the SBA Area Office discovered that Associated had excluded certain “interdivisional labor charges” from its average annual receipts.  The SBA Area Office determined that these charges, which were transactions between Associated and its field labor division, could not be excluded under the inter-affiliate transaction exception, because the field labor division was not an “affiliate” of Associated.  Adding these receipts back into Associated’s total, the SBA Area Office held that Associated was not an eligible small business for the procurement.

SBA OHA agreed with the SBA Area Office, and denied Associated’s size appeal.  SBA OHA concluded that to qualify as an “affiliate” for purposes of the inter-affiliate transaction rule, an entity must be legally separate, such as a separate individual proprietorship, partnership, limited liability company, joint venture, association, trust or cooperative.  Associated’s field labor division, SBA OHA wrote, “is none of these things.”  SBA OHA continued that “the field labor division is simply part of [Associated] itself,” and that “a company cannot be affiliated with a division of itself.”

When applied correctly, the inter-affiliate transaction exception can help contractors stay beneath a size standard, but the Associated Construction SBA size appeal is a good reminder not to “get cute” when using the exception.  In order for it to apply, there must be a separate legal “affiliate,” not just a division of a company.