Under the government’s Ostensible Subcontractor Rule, subcontractor is defined as ostensible when it is actually performing the primary and vital requirements of the contract, or when the prime contractor is unusually reliant upon the subcontractor, the two firms are affiliated for purposes of the procurement at issue. 13 CFR121.103(h)(4).
Intent of Ostensible Subcontractor Rule: The rule is intended to prevent other than small firm (large businesses) from forming relationships with small firms to evade SBA’s size requirements. To oversee compliance with the rule, the SBA Area Office examines all aspects of the relationship, including the terms of the proposal and any agreements between the firms to see whether the relationship between a prime contractor and a subcontractor violates the ostensible subcontractor rule.
Companies bidding on government contracts should be fully aware that although an appeals court may look at the solicitation, teaming agreements and other obvious factors, there is always a possibility that you can violate the rule through the totality of the circumstances test.
Primary and Vital Contract Requirements
When submitting government proposal, keep in mind that the primary and vital contract requirements are those associated with the principal purpose of the acquisition. Applying the affiliation rule, you should always ask whether you can perform the work as a prime contractor without the help of the subcontractor. If the answer is no, then you may want to rearrange your plan of action.
Making the mistake of thinking that oversight and quality assurance is conclusive proof that you are performing the primary and vital requirements can be attacked in a small business size protest. Instead, you want to make sure that you are also performing the substantive requirements in the Performance Work Statement.
- To avoid potential violations of the rule, a good practice is to follow the requirements of the limitation on subcontracting rule.
Details and Facts are Important: The Ostensible Subcontractor Rule is a very tricky statute. Court rulings often catch small businesses and large contractors off guard because although there was no actual intent to violate the rule. The SBA size determination decisions still rule adversely.
- Ostensible subcontractor inquiries are very fact-specific given that they are based upon the specific solicitation and specific proposal at issue.
Hiring Incumbent Personnel Can Violate the Ostensible Subcontractor Rule: Although hiring former employees is not improper or indicative of unusual reliance, companies must still be aware of the specific laws and court rulings that address this overlooked matter. Executive Order 13495 “requires service providers that win follow-on contracts to offer jobs to non-managerial employees at the previous company.”
The appeals court has recognized that the hiring of incumbent personnel should no longer be considered strong evidence of reliance under the Ostensible Subcontractor Rule. This was in light of the Executive Order and widespread industry practice.
- Make sure that your teaming agreement is clear that these previous incumbent employees will report to the prime contractor’s program manager.
- This makes a better case that the prime is in control and not unduly relying on the subcontractor.
The appellate court has also found that the Executive Order “does not apply to managerial personnel, and does not mandate that a successor contractor will rely upon the incumbent for its entire workforce.” In the case of Wichita Tribal Enterprises, SBA No. SIZ-5390, at 3. SBA OHA, on appeal, agreed with the SBA the prime contractor was unusually reliant upon its subcontractor, based on four key factors:
- The proposed subcontractor was the incumbent contractor and was not itself eligible to compete for the procurement.
- The prime contractor planned to hire the large majority of its workforce from the subcontractor.
- The prime contractor’s proposed program manager previously served as program manager for the subcontractor on the incumbent contract.
- The prime contractor was a relatively new firm with modest revenues and scant experience.
OHA concluded that “when a prime contractor proposes the incumbent contractor as its subcontractor, relies heavily upon its subcontractor for both managerial and non-managerial personnel, and has little or no corporate experience, the prime contractor is at risk of violating the ostensible subcontractor rule.”
Prime Contractors Experience Under the Rule: Small business size determinations often prove fatal when there is little past performance. Although the FAR allows for a neutral rating for lack of experience, both the SBA and OHA have ruled that “it is appropriate to consider a prime contractor’s experience as part of an ‘ostensible subcontractor rule’ analysis, because such matters are relevant to whether the prime contractor can perform independently from the subcontractor.” See Size Appeal of Assessment &Training Solutions Consulting Corp., SBA No. SIZ-5228, at 7 (2011).
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