SBA OHA: Ostensible Subcontractor Rule Shouldn’t “Close the Door” to New Businesses

A small business’s relative inexperience should not be the primary basis for a determination that the small business is affiliated with its subcontractor under the “ostensible subcontractor” rule, according to the SBA’s Office of Hearings and Appeals.  SBA OHA’s decision in Size Appeal of Fischer Business Solutions, LLC, SBA No. SIZ-5075 (2009), held that the SBA’s Area Office improperly relied upon a small business’s lack of experience in a particular field to find it affiliated with its subcontractor.

In the Fischer SBA size appeal case, the small business awardee had been in existence for approximately a year at the time the solicitation was issued.  Although the company itself had little relevant experience, its principals had many years’ experience in the field.

After the small business was identified as the awardee, the SBA Area Office sustained a size protest, holding, in part, that the awardee’s lack of experience rendered it unduly reliant upon its subcontractor under the “ostensible subcontractor” doctrine.

On appeal, SBA OHA reversed.  It wrote that a small business’s “capacity to perform the contract [is] outside the purview of the size appeal process and [is] more properly the province” of the Contracting Officer.   To place “too much emphasis” on a small business’s prior experience in making an ostensible subcontractor determination “runs the risk of closing the door on new small firms.”

The SBA’s size appeal decision in Fischer is heartening for small businesses—especially new ones.  Nevertheless, the decision should be read in context with SBA OHA’s other case law on the topic.  In other cases, OHA has not been so charitable, sometimes holding that a prime contractor’s lack of relevant experience is one factor indicative of an ostensible subcontractor relationship.  See, e.g., Size Appeal of A1 Procurement, LLC, SBA No. SIZ-5121 (2010).

Despite its seemingly sweeping language on the proper “province” of the SBA, Fischer may be better seen as cautioning the SBA’s Area Offices not too rely too heavily on a small business’s lack of experience in making an ostensible subcontractor determination, rather than excluding experience entirely from the SBA’s consideration.

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