A would-be SDVOSB’s relationships with a company controlled by the SDVOSB’s minority owner undermined the service-disabled veteran’s control–and cost the SDVOSB an Air Force contract.
In a recent decision, the SBA Office of Hearings and Appeals ruled that a SDVOSB did not adequately control his company where the company (and the veteran) appeared to be unduly dependent on an outside firm.
SBA OHA’s decision in Battalion, LLC, SBA No. VET-242 (2013) involved an Air Force solicitation seeking a contractor to repair exterior building walls. The Air Force set aside the procurement for SDVOSBs under NAICS code 238140 (Masonry Contractors).
After evaluating proposals, the Air Force awarded the contract to Battalion, LLC. An unsuccessful competitor filed a protest challenging Battalion’s eligibility as a SDVOSB. The SDVOSB protest alleged that Battalion’s service-disabled owner, Jason Harris, was a full-time employee of Sota Construction Services, Inc., a firm controlled by Battalion’s minority owner, Ernest Sota.
The SBA’s Director of Government Contracting, who decides SBA SDVOSB protests, determined that Mr. Harris was a former employee of SCS, but continued to serve as a SCS consultant. Mr. Harris earned no income from Battalion, and his recent W-2s were issued by SCS. Additionally, Mr. Sota and SCS had provided Battalion with financial support, including a bid bond for the Air Force procurement. An affiliate of SCS also provided Battalion with office space, apparently at no cost. Based on these relationships, the SBA D/GC determined that Mr. Sota “has the ability to significantly influence Battalion’s operations” in violation of the SBA SDVOSB program regulations.
Battalion filed an appeal with SBA OHA. Battalion argued, in part, that the regulations do not prohibit a service-disabled veteran from performing consulting work for another firm, nor do they prohibit a SDVOSB from accepting bonding assistance from another company.
After summarizing the relationships between Battalion and SCS, SBA OHA wrote:
Mr. Harris is subordinate to SCS officials through his consulting arrangement, and is dependent upon SCS for his personal income. Mr. Sota holds a 49% equity interest in Appellant, and Appellant receives significant financial assistance from SCS, including bonding assistance for the contract at issue. Appellant was unable to provide the D/GC with evidence of resources or income independent of SCS. As in [a prior SBA OHA decision], then, the record supports the D/GC’s determination that SCS and its officers either have control or the potential to control Appellant.
SBA OHA denied Battalion’s SDVOSB appeal.
The Battalion SBA OHA decision does not mean that a SDVOSB is prohibited from having non-SDV minority owners. But it does serve as a warning that when a SDVOSB relies on the resources and assistance of a minority owner (or a firm controlled by a minority owner), the SBA may deem the minority owner to possess too much influence over the company–resulting in SDVOSB ineligibility.