Back to Basics: SBA’s OHA Reminds Area Offices How to Apply the Ostensible Subcontractor Rule

We’ve discussed the “ostensible subcontractor rule” quite a few times on the blog (including most recently here and here) because it is one of the most frequent grounds for size protests. It’s also frequently misunderstood. A recent SBA Office of Hearings and Appeals decision, Contego Environmental, LLC, SBA No. SIZ-6054 (May 19, 2020), demonstrates how even SBA Area Offices can misapply the rule and provides useful reminders to contractor looking to avoid violating it.

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Too Late for Take-Backs: Ostensible Subcontractor Analysis Won’t Consider Post-Proposal Changes

In Warrior Service Company, LLC, SBA No. SIZ-6046 (Jan. 24, 2020), the SBA reminded small business contractors that it determines whether a contractor has violated the ostensible subcontractor rule as of the date of bid submission; SBA won’t consider any changes that come later.

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“Similarly Situated Entities” Exempt From Ostensible Subcontractor Affiliation, SBA OHA Confirms

A “similarly situated entity” cannot be an ostensible subcontractor under the SBA’s affiliation rules.

In a recent size appeal decision, the SBA Office of Hearings and Appeals confirmed that changes made to the SBA’s size regulations in 2016 exempt similarly situated entities from ostensible subcontractor affiliation.

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Ostensible Subcontractor Affiliation: Who Manages The Work Matters

So you’ve teamed with an ineligible incumbent contractor to bid on some government work and, to try and maintain continuity, the incumbent would like to retain project management functions. “No big deal,” you think, “I’ll just create a management position to oversee the project manager.”

Actually, it could be a big deal if you’re trying to avoid ostensible subcontractor affiliation. Among the four key factors for determining ostensible subcontractor affiliation is whether the management previously served with the subcontractor under the incumbent contract. And according to a recent SBA Office of Hearings and Appeals decision, creating a figurehead management position to oversee the project manager won’t negate this indicia of ostensible subcontractor affiliation.

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Reminder: No Ostensible Subcontractor Protests At GAO

The GAO lacks jurisdiction to consider a challenge to a contract awardee’s size status, including questions of whether the awardee is affiliated with its subcontractor under the ostensible subcontractor rule.

In a recent bid protest decision, the GAO confirmed that it will not adjudicate an allegation of ostensible subcontractor affiliation.

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Ostensible Subcontractor Affiliation: Hiring Third-Party Employees OK

Under the SBA’s ostensible subcontractor affiliation rule, hiring incumbent employees can be evidence of affiliation, but the importance of that staffing plan in an affiliation analysis depends on what role the incumbent contractor will play in the awardee’s performance of the contract.

In a recent size appeal decision, the awardee proposed to hire 85% of its personnel from the incumbent contractor, but the incumbent wasn’t proposed as a subcontractor–in fact, the incumbent was the company protesting the awardee’s small business size.  Under these circumstances, the SBA Office of Hearings and Appeals held, the awardee’s hiring of incumbent employees did not establish ostensible subcontractor affiliation.

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Ostensible Subcontractor Rule: SBA OHA Confirms “Four Key Factors” To Avoid

In determining whether a prime contractor and subcontractor are affiliated under the ostensible subcontractor rule, the SBA is supposed to consider the totality of the relationship between the parties.  But when it comes to determining whether the ostensible subcontractor rule has been violated, not all components of the prime/subcontractor relationship are created equal.

In a recent decision, the SBA Office of Hearings and Appeals confirmed that there are “four key factors” that are strongly suggestive of ostensible subcontractor affiliation–especially if the subcontractor will perform a large percentage of the overall contract work.

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