SBA Size Protests and the Ostensible Subcontractor Rule: The Task Order Loophole

The tax code is famous (or infamous) for perceived loopholes, but the IRS isn’t the only regulatory agency with a loophole in its regulations.   The SBA’s affiliation rules contain—or at least used to contain (more on that later)—a gaping loophole when it comes to Multiple Award Task Order Contracts, or MATOCs, and the ostensible subcontractor rule.

The decision of the SBA Office of Hearings and Appeals in Size Appeal of Tyler Construction Group, Inc., SBA No. SIZ-5323 (2012) shows how the loophole works in real life.  But first, a little necessary background.  The SBA’s affiliation regulations state that, for a negotiated procurement, a size protest must be filed within five business days after the contracting officer has notified the protester of the identity of the prospective contract awardee.  If, on an “ordinary” contract, you believe a competitor has violated the ostensible subcontractor rule, you file your size protest within five business days and the SBA kicks off an investigation.

But what about a MATOC?  After all, on a MATOC, there are often two layers of competition—one for the underlying contract, and additional competitions among contract holders for task orders.  What if a competitor’s ostensible subcontractor violation occurs on one of those task order competitions?

Tough luck—at least in the Tyler size appeal.  In that case, the Army awarded a small business set-aside MATOC to a number of companies, including Polote Corporation, in September 2010.  In August 2011, the Army issued a task order solicitation among the MATOC awardees, but did not ask the awardees to recertify their small business status.  The Army awarded the task order to Polote in September 2011.

Within five business days, Tyler Construction Group, Inc., a MATOC holder, filed an SBA size protest, alleging that Polote had violated the ostensible subcontractor rule with respect to the task order.  The SBA Area Office dismissed the size protest as untimely, holding that it should have been filed within five business days after the 2010 award of the MATOC itself to Polote.

Now, let’s think logically for a second.  In 2010, how could Tyler have foreseen that Polote would propose to use a particular subcontractor on a task order competition more than a year later?  Was Tyler supposed to have special powers to predict the future?  If so, it might have wanted to get out of the government contracting business and into the stock market (and please, Tyler, tell me—will my Chicago Cubs ever win another World Series?)

But SBA OHA denied Tyler’s appeal.  It held that, under the SBA’s then-existing regulations, the only opportunity to file a size protest—even one related to the ostensible subcontractor rule—comes when the underlying contract is awarded.  It’s hard to knock SBA OHA for the decision.  SBA OHA doesn’t make the regulations; it only interprets them.  And the regulations did appear to provide a gaping loophole when it comes to size protests under MATOC task order competitions.

However, SBA OHA did offer some hope that such protests might be available in the future.  It discussed a regulation adopted in March 2011—too late to apply to this procurement, according to SBA OHA—stating that the ostensible subcontractor rule applies “during contract performance.”  The new rule does not say anything about the timeliness of size protests, but SBA OHA’s discussion suggested (though certainly did not hold), that a size protest of a MATOC task order might be timely if the new rule applied to the procurement.

Will SBA OHA interpret the new rule to close the ostensible subcontractor affiliation MATOC task order loophole?  Only time will tell.  Stay tuned.

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