Tag Archives: ostensible subcontractor affiliation

Small Business Violates Ostensible Subcontractor Rule, Wins Contract Anyway

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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.

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Subcontractors And Past Performance: What Are The Risks?

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Inexperienced small government contractors sometimes rely primarily (or completely) on larger subcontractors to boost their past performance scores.  Although this practice sometimes results in better past performance scores, there are two risks small government contractors should be aware of when it comes to relying on a subcontractor’s past performance: poor evaluations and ostensible subcontractor affiliation.

A recent GAO bid protest decision, coupled with a decision of the SBA Office of Hearings and Appeals, demonstrates how each risk may affect a small government contractor.

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Ostensible Subcontractor Rule: More Than Subcontract Value

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I travel with some frequency, but will readily admit that I hate flying (I trace it largely to an unpleasant incident several years ago involving a rapid cabin depressurization and emergency landing).  I’ve been known to pay a few dollars more to take a direct flight rather than a less expensive option involving a connection.  For me, while price is an important factor, other factors, like convenience–and fewer takeoffs and landings–matter, too.

A recent size appeal decision issued by the SBA Office of Hearings and Appeals demonstrates that, like my flying arrangements, price is not the only factor when it comes to determining whether a prime/subcontractor team has violated the ostensible subcontractor rule.  As this size appeal decision shows, in some cases, there may be no ostensible subcontractor affiliation even if the subcontractor will perform the bulk of the overall contract value.

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Ostensible Subcontractor Rule: Hiring Incumbent Employees “En Masse” Causes Affiliation

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In the syndicated television show Crossing Over, psychic John Edward (not to be confused with former presidential candidate and tabloid mainstay John Edwards), claimed to carry on conversations with deceased relatives of audience members.  Perhaps not surprisingly, some critics have been skeptical of Mr. Edward’s supposed paranormal abilities, accusing him, according to Wikipedia, of using “prior knowledge or a wide array of quick and sometimes general guesses to create the impression of psychic ability.”  In other words, according to the critics, Crossing Over was one big sham.

Crossing Over–and the significant questions surrounding its legitimacy–is an apt metaphor for a question I commonly get from small companies planning a subcontracting relationship with an ineligible incumbent.  “Can we just hire all the prime’s employees?” they ask.  While this type of “crossing over” of employees, from ineligible incumbent subcontractor to eligible small business prime contractor, is not always impermissible, hiring too many of an ineligible incumbent’s employees–particularly managerial employees–can be seen as a sham of sorts by the SBA, as seen in one recent decision of the SBA Office of Hearings and Appeals.

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Teaming Agreements and the Ostensible Subcontractor Rule: SBA OHA Decision Provides Some Guidance

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Teaming agreements for small business set-aside contracts can be tricky.  On the one hand, unlike 8(a) and SDVOSB joint venture agreements, there are no mandatory provisions.  On the other, if a competitor files an SBA size protest challenging the award, the teaming agreement may be “Exhibit A” in the SBA’s evaluation of whether the team violated the ostensible subcontractor rule.  In other words, mess up the teaming agreement, and you could have a big problem on your hands.

The SBA has never published a road map to a perfect teaming agreement, but a recent SBA OHA decision–which found no ostensible subcontractor rule violation–highlights a few provisions that prime contractors and their subcontractors would be wise to consider including.

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

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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.

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The Ostensible Subcontractor Rule and Key Personnel

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According to Executive Order 13,495, follow-on contractors must offer a “right of first refusal” to certain incumbent personnel.  Based on the Executive Order, the SBA Office of Hearings and Appeals has previously held that hiring non-management personnel from a subcontractor is no longer evidence of unusual reliance under the ostensible subcontractor rule.

I emphasize “non-management” for a reason: the Executive Order does not apply to non-management personnel.  According to SBA OHA, hiring a subcontractor’s management team—particularly when the subcontractor is an ineligible incumbent—continues to be strong evidence of a violation of the ostensible subcontractor rule.

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