In a recent post, we looked at the implications of BA OHA’s reasoning in In & Out Valet Co., SBA No. VSBC033-P, 2024 (June 12, 2024) on the full-time devotion requirement. Today we look at the impact of that case on another of SBA’s rules that has implications for both small businesses and for companies in the 8(a) Program, Women-Owned Small Business Program (WOSB), and the Service-Disabled Veteran-Owned Small Business Program (SDVOSB)–the ostensible subcontractor rule. The rule requires contractors not to rely too heavily on a subcontractor in the performance of a contract set aside under an SBA socioeconomic program. In practice, this standard may be confusing to a lot of hopeful contractors. What, after all, constitutes “undue reliance?” How reliant is too reliant? OHA’s reasoning in this recent decision helps clarify their application of the regulations, with results that may have far-reaching implications.
The Ostensible Subcontractor Rule
In a nutshell, this rule requires that a small business awarded a set-aside contract actually perform the primary and vital work on a contract and not be overly reliant on a non-similarly situated subcontractor. 13 C.F.R. § 121.103(h)(3). Read more about the rule here. The limitations on subcontracting rule contains limits on what percentage of work can be paid to a non-similar subcontractor. 13 C.F.R. § 125.6. Here is our blog post on that rule. As you might guess, the rules have some overlap.
While subcontractors are an essential part of a prime contractor’s ability to perform a contract, SBA will not permit a small business prime contractor to be “unduly reliant” on a subcontractor that is not “similarly situated” (aka, another small business with the same program status, defined in 13 C.F.R. § 125.1). SBA will allow a contractor to “use the experience and past performance of a subcontractor to enhance or strengthen its offer” but if that subcontractor performs “primary and vital requirements” of the contract, or the prime is “unusually reliant” on the subcontractor, SBA will treat the contractor and its ostensible subcontractor as affiliated joint venturers for size determination purposes, and the prime will be ineligible for the award. 13 C.F.R. §§ 121.103(h)(3), 128.401(g) (the ostensible subcontractor rule for SDVOSBs, and there is a similar rule for other types of set-asides other than 8(a)).
A recent change to the rule stated that SBA will not find that the primary and vital requirements are being performed by the subcontractor, or that the prime contractor is unusually reliant on the subcontractor, if the prime contractor can “demonstrate that it, together with any subcontractors that qualify as small businesses, will meet the limitations on subcontracting” found in 13 C.F.R. § 125.6.
SBA permits protestors to challenge a prime contractor’s reliance on a non-SDVOSB subcontractor under the ostensible subcontractor rule at 13 C.F.R. § 128.401(g). That rule says:
In the case of a contract or order for services, specialty trade construction or supplies, 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, together with any subcontractors that are certified VOSBs or SDVOSBs, will meet the limitations on subcontracting provisions set forth in § 125.6 of this chapter.
The question remains, how will OHA apply this update to the rule? This case has the answer.
It’s All in the Proposal
In this case, the protester alleged the veteran owner had violated the limitations on subcontracting requirements and, thus, violated the ostensible subcontractor rule. Specifically, because awardee had no employees and was a single member LLC, the protester argued that the awardee would have to “subcontract the majority of the services to be performed under the contract,” meaning they would fail the “no more than 50% of services to entities that are not similarly situated” requirement of 13 C.F.R. § 125.6(a)(1).
OHA found this (seemingly reasonable) argument unpersuasive. They stated “[Awardee]’s proposal states that the subcontractor will only be responsible for providing 40% of the professional valet services. [Awardee] further confirmed in a Memorandum of Record to the CO that [Awardee] will fully comply with the Limitations on Subcontracting requirements at FAR 52.219-14 and will provide that at least 50% of the cost of contract performance incurred for personnel shall be expended for employees of [Awardee.]” OHA ended their inquiry into the matter there, essentially concluding that, because the prime contractor said it was going to follow the rules in its proposal, it was following the rules and compliant with the limitations on subcontracting requirements and did not violate the ostensible subcontractor rule.
Seemingly aware that this standard of review appears highly deferential, OHA asserted that it does not “have jurisdiction to adjudicate matters dealing with the conduct of the procurement.” Determining what capabilities are necessary to perform a contract and whether the awardee has them are matters for the contracting officer to decide, not OHA. What this seems to mean moving forward is that, while the ostensible subcontractor rule remains on the books, SBA will be satisfied so long as a proposal contains a provision addressing the rule and pledges compliance (other than for general construction, where SBA may look more closely at the facts of the situation). While the contracting officer could determine for themselves that a business is “unusually reliant” on a subcontractor, the fact that an SDVOSB with allegedly no employees failed to trigger this finding indicates this is an unlikely outcome. So long as proposals are worded adequately, this often-confusing rule may be easily met by prospective bidders.
Editor’s Note: Special thanks to our wonderful legal clerk Will Orlowski for putting together this blog post.
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