Back to Basics: Affiliation, An Overview

Affiliation is quite possibly one of the scariest words to small business government contractors. And it is easily one of the most misunderstood concepts in SBA’s small business regulations. Perhaps the widespread fear and misunderstanding are due to the fact that there are so many potential bases for affiliation listed in SBA’s rules–or the fact that you can be found affiliated with another company even if SBA finds that none of the listed bases for affiliation are met. Or maybe its the fact that, while affiliation isn’t always a bad thing, it can lead to severe consequences, like preventing an otherwise responsible and eligible business from competing under set-asides contracts.

Either way, this “Back to Basics” blog will be the first of two blogs that will “unpack” this concept for you, hopefully, removing some of the mystery. This first blog will provide a general overview of affiliation and what it means for government contractors, while the second blog will focus on the different types of affiliation.

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OHA Remands Size Determination Because Area Office Failed to Provide Due Process to Protested Concern

SBA’s Office of Hearing and Appeals (OHA) recently said that the SBA Area Office should have informed the protested concern of the issues its adverse size determination focused on before ruling against the concern’s size eligibility on that basis. In addition to its lesson on due process, OHA also took this opportunity to distinguish totality of the circumstances affiliation (the basis on which the Area Office found affiliation here) from ostensible subcontractor affiliation (the basis for affiliation alleged in the size protest). OHA vacated and remanded the Area Office’s decision.

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SBA’s Paycheck Protection Program: Affiliation Still Matters

The SBA’s Paycheck Protection Program went into effect March 27, 2020.  At that time many business owners faced confusion in trying to navigate the affiliation rules to determine their company’s eligibility for the program. Fast forward nearly two years and many businesses that received Paycheck Protection Loans have submitted applications for forgiveness of those loans. Some of those businesses are now having to consider potential affiliation issues that they may have initially overlooked in response to inquiries from SBA in its review of their loan forgiveness application.

We thought this would be a good time to revisit the basics of SBA’s affiliation rules for the Paycheck Protection Program.

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Five Things You Should Know: Common Misconceptions About SBA’s Affiliation Rules

Avoiding affiliation with other companies can be critical to qualifying as a small business under the SBA’s rules for government contractors. But not all SBA affiliation rules are intuitive, and in my career as a government contracts attorney I have seen the same misconceptions about the affiliation rules come up time and and time again.

So without further ado, here are five common misconceptions about the SBA’s affiliation rules.

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The “Three-in-Two” SBA Joint Venture Rule is Partly Gone–Now It’s Time to Get Rid of the Rest

Last year, SBA made joint venturing a little easier by relaxing the so-called “three-in-two” rule. But the “two-year” portion of the rule still exists–and in my view, the rule continues to unfairly elevate form over substance.

SBA, it’s time to take the plunge, and get rid of the rest of the three-in-two joint venture rule.

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OHA and the Ostensible Subcontractor Rule: A Two-Prong Test You Can’t Fix After the Fact

In a recent decision, OHA ruled that the ostensible subcontractor rule requires a two-prong evaluation before SBA can find affiliation. The SBA Area Office took a look at only one prong, which resulted in a remand from OHA. Ultimately, OHA found affiliation, reversed the SBA Area Office and found the concern ineligible. As OHA made clear, entities can’t fix deficiencies after the fact.

Think of the ostensible subcontractor rule like the preferred go-to move (other than line dancing) at a Country/Western Dance Hall, it is the ostensible subcontractor two-step. Follow along as I lead you through the dance you need to get right to avoid stepping on the toes of your proposal.

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New Avenue for SBA Protests: Ostensible Subcontractor Status Protests

SBA has issued a final rule, effective December 30, that will now provide an avenue to protest situations where the prime contractor on a SDVOSB, HUBZone, or WOSB set-aside contract is subcontracting most or all of the work to a non-similarly situated—but still small business—concern.

It will also allow SBA to review eligibility for 8(a) Program contracts on this ground as well.

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