SBA OHA: Prime Contractor Not Economically Dependent On Subcontractor

A prime contractor was not economically dependent on its subcontractor for purposes of the SBA affiliation rules because a prime contractor “has the power to choose whatever subcontractor it desires.”

In a recent size appeal decision, the SBA Office of Hearings and Appeals stopped short of holding that a prime contractor could never be economically dependent on a subcontractor, but SBA OHA’s decision indicates that if such dependence ever existed, it would be in an unusual case.

SBA OHA’s decision in Size Appeal of Dorado Services, Inc., SBA No. SIZ-5515 (2013) involved a NAVFAC procurement for solid integrated waste management services.  The contract was a small business set-aside under NAICS code 562111 (Solid Waste Collection).

After evaluating competitive proposals, NAVFAC announced that Mark Dunning Industries, Inc. was the apparent successful offeror.  Dorado Services, Inc., an unsuccessful competitor, subsequently filed a size protest.  Dorado claimed that MDI was affiliated with various entities.  Among the alleged affiliates was Zero Waste Solutions.  Dorado argued that MDI and Zero were mutually economically dependent upon one another due to several contractual relationships.

The SBA Area Office determined that Zero had issued three subcontracts to MDI over the past four years, and that the companies had entered into two teaming agreements.  MDI’s revenues from its subcontracts with Zero represented an insignificant portion of MDI’s overall revenues.  The SBA Area Office held that MDI was not economically dependent on Zero.

Dorado filed a size appeal with SBA OHA.  Dorado argued, in part, that it was improper for the Area Office to merely consider whether MDI was economically dependent on Zero.  Instead, Dorado urged, the Area Office should also have considered whether Zero was economically dependent on MDI.

SBA OHA disagreed.  It noted that Zero’s revenues from contracts involving MDI represented less than half of Zero’s total revenues.  It then wrote, “[Dorado’s] argument is also unconvincing because [Dorado] has failed to explain how Zero, the prime contractor, can be economically dependent on MDI, its subcontractor, when Zero has the power to choose whatever subcontractor it desires.”  SBA OHA denied the size appeal.

The Dorado Services case demonstrates that, at least in the ordinary case, economic dependence affiliation is a one-way street.  Although a subcontractor may be economically dependent on a prime contractor, the opposite is not the case.  Because a prime contractor has the power to select among a number of subcontractors, it will be difficult for a protester to demonstrate that the prime contractor is economically dependent on its subcontractor.

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