SBA OHA: Small Business Affiliated With Four Ostensible Subcontractors

Dividing key contract work among several subcontractors will not necessarily allow a small business to avoid affiliation under the SBA’s ostensible subcontractor rule, according to a recent decision issued by the SBA Office of Hearings and Appeals.  In that case, the prime contractor divided the primary and vital contract work among four subcontractors–and according to SBA OHA, was affiliated under the ostensible subcontractor rule with all four subs.

SBA OHA’s decision in Size Appeal of Competitive Innovations, LLC, SBA No. SIZ-5369 (2012) involved a Navy procurement seeking a contractor to design, develop and deliver educational seminars.  The solicitation was set-aside for competition among HUBZone firms.

After evaluating proposals, the Navy announced that Focus Group Corporation, or FGC, was the apparent successful offeror.  An unsuccessful competitor, Competitive Innovations, LLC, filed a SBA size protest, alleging that FGC and its subcontractors were affiliated under the SBA’s ostensible subcontractor rule.

The SBA Area Office determined that delivery of instruction was one of the primary and vital portions of the contract, and that FGC would not perform any instructional work.  However, the SBA Area Office noted that “this work is spread out over four different subcontractors.”  The SBA Area Office reasoned that “by dividing the instruction function among four subcontractors, FGC limited each subcontractor’s ability to control or influence FGC.”  The SBA Area Office issued a size determination finding FGC to be an eligible small business.

Competitive Innovations took the fight another round, filing a SBA OHA size appeal.  Citing prior SBA size appeal decisions, SBA OHA wrote that “OHA has held that the ostensible subcontractor rule is violated when a prime contractor will have no meaningful role in performing the contract’s primary and vital requirements.”  SBA OHA continued, “such is the case here, as FGC itself would conduct no actual instruction, the primary and vital requirement.”

Unlike the SBA Area Office, SBA OHA held that FGC could not escape affiliation under the ostensible subcontractor rule by dividing the primary and vital contract work among several subcontractors.  SBA OHA noted that when a prime contractor is performing a substantial portion of the primary and vital contract work, dividing the remainder of that work among multiple subcontractors may reduce the likelihood of ostensible subcontractor affiliation.  However, in this case, “the key issue is not that FGC would utilize multiple subcontractors, but that FGC itself will have no role in performing the contract’s primary and vital requirement.”  SBA OHA found FGC affiliated with all four of its subcontractors under the ostensible subcontractor rule.

The Competitive Innovations SBA size protest decision makes an important point: to avoid ostensible subcontractor affiliation, a small prime contractor must perform a significant portion of the contract’s primary and vital work.  If the prime contractor subcontracts all such work, dividing the work among multiple subcontractors will not save the prime from an adverse size determination under the ostensible subcontractor rule.

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