Small Business Violates Ostensible Subcontractor Rule, Wins Contract Anyway

The SBA’s ostensible subcontractor rule has tripped up many small businesses over the years.  The rule states that a small prime contractor is affiliated with its subcontractor when the prime is unusually reliant upon the subcontractor and/or the subcontractor will perform the primary and vital portions of the contract work.

It is worth remembering, however, that the ostensible subcontractor rule only matters if affiliation between the prime contractor and subcontractor would cause a size standard problem.  If the sizes of the prime contractor and its ostensible subcontractor, added together, do not exceed the size standard, a violation of the ostensible subcontractor rule doesn’t matter.

That is what happened in one recent decision of the SBA Office of  Hearings and Appeals, in which a small prime contractor had an ostensible subcontractor–but was declared an eligible small business anyway.

SBA OHA’s decision in Size Appeal of Ipkeys Technologies, LLC, SBA No. SIZ-5353 (2012), involved an Army solicitation seeking to procure services for the Home Station Instrumentation Training System.  The solicitation was designated with NAICS code 333319 (Other Commercial and Service Industry Machinery Manufacturing), with a corresponding size standard of 500 employees.

The Army identified EHS Technologies Corporation, a small business under the 500 employee size standard, as the apparent successful offeror.  EHS had three subcontractors: Riptide Software, Inc., Engineering & Computer Simulations (or ECS), and Camber Corporation. Ipkeys Technologies, an unsuccessful offeror, filed a SBA size protest, alleging that the three subcontractors were EHS”s ostensible subcontractors.

The SBA Area Office found that Riptide would perform primary and vital contract functions, amounting to 51% of the total contract value.  Based on this finding, the SBA Area Office agreed with Ipkeys that Riptide was an ostensible subcontractor, but held that ECS and Camber were not ostensible subcontractors.  The SBA Area Office added Riptide’s size to EHS’s, but the result was still beneath the 500-employee size standard.  Accordingly, the SBA Area Office found EHS to be an eligible small business.

Ipkeys filed a size appeal with SBA OHA.  Ipkeys primarily argued that Camber was also an ostensible subcontractor.  Notably, Camber was a large business, so had it been affiliated with EHS, there would have been a size problem.

However, SBA OHA agreed with the SBA Area Office that  Camber was not an ostensible subcontractor.  SBA OHA noted that Camber would perform only 10.9% of overall labor on the contract, and would lead only one of fifteen elements to be provided under the contract.  SBA OHA held that the SBA Area Office had not erred by finding EHS to be an eligible small business, despite its ostensible subcontractor affiliation with Riptide.

The Ipkeys Technologies SBA size appeal decision is a good reminder that ostensible subcontractor affiliation is only a concern, from a practical perspective, when the affiliation would cause the prime contractor to exceed the size standard.  Particularly in a case like Ipkeys Technologies, in which the solicitation carried a high size standard, it may be possible for a small business to have an ostensible subcontractor, but be eligible for the contract anyway.

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