Compliance with the ostensible subcontractor rule is essential for companies seeking small business and socioeconomic set-asides. Yet many contractors learn the hard way that there is a difference between simply claiming compliance and proving it.
Earlier this year, we blogged on an SBA Office of Hearings and Appeals (OHA) decision (here) that examined whether a subcontractor was an ostensible subcontractor or not. Ultimately, the awardee failed to sufficiently demonstrate that its subcontractor was not performing the primary and vital parts of the contract.
In a recent OHA decision, the same parties went head-to-head again for round two, on a different procurement with a different proposal. But this time, one party brought the receipts. In reviewing the proposal, SBA found that the prime contractor had properly outlined its tasks and work in alignment with the solicitation and showed its compliance with the limitations on subcontracting. These two cases work in tandem to help show federal contractors how to demonstrate compliance with the ostensible subcontractor rule.
There are several blogs where we dive deeper into the ostensible subcontractor rule, which you can read about here. For a brief overview, an ostensible subcontractor is a subcontractor that is not a similarly situated entity and performs the “primary and vital” parts of the contract or an order, or is a subcontractor that the prime contractor is unusually reliant upon. 13 C.F.R. 121.103(h)(3)(i). If the prime contractor is found to have an ostensible subcontractor, then the prime and subcontractor will be deemed affiliated.
SBA will find that a small business prime contractor on a set-aside contract (other than for general construction) is not violating the rule when it can demonstrate that it and any of its similarly situated subcontractors will meet the limitations on subcontracting found in 13 C.F.R. 125.6. The limitations on subcontracting rule limits the percentage of work a non-similarly situated subcontractor is permitted to perform (read more about it here).
In Winergy LLC, SBA No. VSBC-445-P, 2025 WL 2752647 (Sept. 22, 2025), the solicitation was issued by the U.S. Department of Veterans Affairs (VA) as a set aside for Service-Disabled Veteran-Owned Small Businesses (SDVOSB), seeking a contractor to perform hood certification and repairs.
Atlantic First Industries Corporation (AFIC) was awarded the contract. As a result, Winergy, LLC (the Protester) protested AFIC’s SDVOSB status. The Protester alleged AFIC was unduly reliant upon its non-SDVOSB subcontractor, thus in violation of the ostensible subcontractor rule.
The Protester primarily relied on OHA’s prior decision as evidence that AFIC was violating the limitations on subcontracting requirements for this procurement as well.
In response, AFIC argued that under 13 C.F.R. § 125.6(a)(1), AFIC only needed to demonstrate that it would not pay more than 50% of the amount paid by the government to its non-similarly situated subcontractor. For SDVOSB, the regulations state,
In the case of a contract or order for services … SBA will find that a prime VOSB or SDVOSB contractor is performing the primary and vital requirements of the contract or order, and is not unduly reliant on one or more subcontractors that are not certified VOSBs or SDVOSBs, where the prime contractor can demonstrate that it … will meet the limitations on subcontracting provisions set forth in § 125.6 of this chapter.
AFIC made this exact same legal argument (and lost) in the prior status protest under a different solicitation. But this protest was under a new solicitation and a new proposal. In the current protest, AFIC supported its position with documentation demonstrating its compliance with the limitations on subcontracting.
AFIC noted that its proposal sufficiently explained the subcontract relationship and detailed how the relationship adhered to the limitations on subcontracting. Additionally, AFIC provided a declaration stating the tasks AFIC would be responsible for related to contract administration, compliance, and project management. AFIC argued the company had demonstrated by a preponderance of the evidence its compliance with the limitations on subcontracting requirements. Thus, the subcontractor was not an ostensible subcontractor.
Regarding the Protester’s reference to the previous OHA decision, AFIC noted that its failure to demonstrate compliance with the limitations on subcontracting in that decision was not sufficient evidence to show the subcontractor as an ostensible subcontractor to AFIC “for the purposes of this procurement.”
In the prior status protest, OHA found that AFIC had failed to demonstrate that it would comply with the limitations on subcontracting. AFIC did not identify the tasks AFIC would be performing, nor did AFIC identify any of its own employees that would be involved in contract performance. While AFIC claimed that it intended to pay the subcontractor less than 50% of the contract price, AFIC provided no sworn statements, subcontracts, or other information to support this claim.
For this protest, AFIC provided OHA with its proposal, a copy of the subcontract, and a declaration supporting the calculation of its compliance with the limitations on subcontracting.
And ultimately, OHA found AFIC’s evidence sufficient:
AFIC submitted its Proposal, a copy of its subcontract with [Subcontractor], and a sworn Declaration that clearly demonstrates its compliance with the limitations on subcontracting. These documents provide the concrete evidence that was lacking in the previous Winergy case and which Protestor has failed to provide here. By supplying this detailed and corroborated information, AFIC has shown that its division of labor and financial arrangement with its subcontractor adheres to the relevant regulations. . . .
Viewing the subject procurement in the aggregate, it is clear that the prime contractor, AFIC, will have substantial responsibilities throughout the entire period of performance, as the tasks outlined in both the Proposal itself and subsequent Declaration detail. Furthermore, both documents closely align with the requirements contained within the Solicitation itself, and the tasks contained therein constitute a majority of the total work required for the subject procurement.
After being unsuccessful in the first protest, AFIC took the loss as a lesson and prepared a proposal for this procurement that sufficiently demonstrated its compliance in preparation of any future challenges to the company’s status.
AFIC’s comeback story emphasizes the value of ensuring your company can demonstrate its compliance with the regulations well before a protest is filed that alleges otherwise.
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