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.
Tag Archives: ostensible subcontractor affiliation
The Ostensible Subcontractor Rule and Key Personnel
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.
Subcontractor’s Provision of Bonds OK with GAO—But Watch Out for Affiliation
Small prime contractors often have difficulty securing necessary bid, performance and payment bonds for federal government contracts–especially in the construction industry, where payment and performance bonds are typically required. Not surprisingly, small primes often turn to their larger subs to secure the necessary bonding.
A small prime’s reliance on its subcontractor for bonding was recently put to the test in a GAO bid protest. Fortunately for small primes everywhere, in Shaka, Inc., B-405552 (Nov. 14, 2011), the GAO held that the subcontractor’s role in the bond process did not render the bond defective. But small primes and their large subcontractors shouldn’t pop the champagne for a celebration, because subcontractor bonding assistance can still increase the risk of ostensible subcontractor affiliation.
SBA OHA OK’s “Mystery Subcontractor” SBA Size Protests
Can a contractor file an SBA size protest alleging so-called “ostensible subcontractor” affiliation, without knowing the identity of the subcontractor in question? Yes. According to the SBA Office of Hearings and Appeals, a size protest should not be dismissed as “non-specific” just because it alleges ostensible with an unknown subcontractor–or a “mystery subcontractor,” if one is inclined to be a bit more dramatic.
Contradictory, Post Hoc Statements Don’t “Fix” Ostensible Subcontractor Rule Problem
When a small government contractor gets its hand caught in the “affiliation” cookie jar, the natural reaction is to scramble to fix the problem, even if it means contradicting the contractor’s own proposal. But don’t expect post hoc efforts at fixing a problem with the SBA affiliation rules to pan out. The SBA’s Office of Hearings and Appeals has held that where a contractor’s after-the-fact statements regarding affiliation contradict its proposal, the language of the proposal governs.
SBA OHA: Ostensible Subcontractor Rule Shouldn’t “Close the Door” to New Businesses
A small business’s relative inexperience should not be the primary basis for a determination that the small business is affiliated with its subcontractor under the “ostensible subcontractor” rule, according to the SBA’s Office of Hearings and Appeals. SBA OHA’s decision in Size Appeal of Fischer Business Solutions, LLC, SBA No. SIZ-5075 (2009), held that the SBA’s Area Office improperly relied upon a small business’s lack of experience in a particular field to find it affiliated with its subcontractor.