Ostensible Contractor Rule

Avoid Mistakes in Bid Protests

Federal government contractors often have many questions about the Ostensible Contractor Rule and how it can impact the award of the contract. The bottom line is that if you are submitting government proposals as a small business, you want to stay away from the possibility of any alleged violations.

The below information shows how SBA Area Office analyzes affiliation decisions. The various levels of potential violations are confusing the say the least.  

What is an Ostensible Subcontractor?

 An Ostensible Subcontractor is a subcontractor upon which the small business prime has unusual reliance. What does this mean? This is where the SBA has significant power to subjectively make that decision. The bottom line is to make sure that you are not simply trying to pass through the contract to the subcontractor and simply claim that you are only managing the project. To be frank, it will cost you the contract.

The real fight when your competition alleges that you are affiliated under the Ostensible Contractor Rule is the dispute about what is the primary and vital parts of the contract?

Cases Explaining the Ostensible Subcontractor Rule & Evaluating the Meaning of Primary and Vital

In a recent case in October 2018, the Office of Hearing and Appeals (“OHA”) assessed a challenge of the SBA Area Office’s finding that a small business subcontractor violated the Ostensible Subcontractor Rule.  Size Appeal of Kûpono Government Services, LLC, SBA No. SIZ-5192 (2018). Relying on a prior case, OHA stated “[t”o ascertain whether the relationship between a prime contractor and a subcontractor violates the ostensible subcontractor rule, an area office must examine all aspects of the relationship, including the terms of the proposal and any agreements between the firms.” Size Appeal of C&C Int’l Computers and Consultants Inc., SBA No. SIZ-5082 (2009); Size Appeal of Microwave Monolithics, Inc., SBA No. SIZ-4820 (2006).

Furthermore, those ostensible subcontractor determinations are “intensely fact-specific given that they are based upon the specific solicitation and specific proposal at issue.” Size Appeals of CWU, Inc., et al., SBA No. SIZ-5118, at 12 (2010).   

It is important to bear in mind that a determination of the primary and vital aspects of a contract is not necessarily based on the percentage of work performed by the subcontractor. 

For example, in OHA’s decision in Size Appeal of Alutiiq Education & Training, LLC, SBA No. SIZ-5192 (2011), OHA found that the operation of a job corps center was the primary and vital contract requirement, notwithstanding that this task comprised only 23% of total contract value.

Affiliation Resulting from Violation of the Ostensible Subcontractor Rule Based on the Primary & Vital Aspects of a Contract

When an SBA Area Office finds that a contractor violated the ostensible subcontractor rule because of the subcontractor’s performance of the primary and vital components of a contract, this results in affiliation.

Again, having a professional opinion ahead of time can be beneficial. However, the above cases illustrate that point that a clear reading of the Statement of Work is where the legal analysis starts.

You can also be found affiliated when you could not have received the contract but for the subcontractor’s past performance. There is an argument to be made that the small business prime, without any previous past performance, should be allowed at least a neutral rating. Bring the teaming partner’s past performance to the table should only then increase your scores. This is obviously where your size protest lawyers come in.

Companies can work together to complete a particular contract. However, even an improperly drafted teaming agreement can cause the partners to be deemed affiliated. Thus, forfeiting the contract to a successful size protest. 

Control Required By The Prime under the Ostensible Contractor Rule

Under the ostensible subcontractor rule, complete control and daily management must be vested in the small business prime contractor (often a small business). This is just the first inquiry into affiliation and federal subcontracting rules.

As a matter of process, the Small Business Administration (SBA) is the final authority for affiliation and Ostensible Contractor Rule determinations.  In sum, the government may find parties of a teaming arrangement to be “affiliated” for purposes of small business size standards, where the proposed prime contractor is overly reliant on its teaming partners or where the tasks and areas of responsibility of the parties are not clearly delineated.

Be Aware of Teaming Agreement Terms When Subcontracting

When making a small business size determination as to whether the teaming partner will be considered an ostensible Contractor, the SBA  will also look to the language and contents of the teaming agreement or other subcontracting arrangements.

• Avoid common mistakes such as preparing the teaming agreement under the subcontractor’s letterhead.
• The agreement should also make it clear who will be performing the primary and vital parts of the contract.
• Never use general language. Instead, be very detailed.

Is the Teaming Partner Performing the Incumbent Contract?

This is a sensitive area where small businesses make frequent mistakes when subcontracting with other concerns. When choosing a subcontractor, be mindful that 13 C.F.R. § 121.103(h)(4) allows the SBA to consider whether the teaming partner is the incumbent contractor and that it may be ineligible to submit a bid. You want to avoid violating the Ostensible Subcontractor Rule by not paying attention ahead of time to how being the incumbent contractor can impact the SBA’s decision. “[E]ngaging the incumbent as a subcontractor leads to heightened scrutiny of the arrangement, but is not a per se violation.” Size Appeal of InGenesis, Inc., SBA No. SIZ-5436, 2013 SBA LEXIS 5, *41-42 (citing Size Appeal of HX5, LLC, SBA No. SIZ-5331, at 11).  The SBA Office of Hearings and Appeals has ruled that being an incumbent, plus other factors can lead to ostensible subcontractor affiliation.

Who Prepared the Proposal?

Among the many factors that the SBA may consider in making an Ostensible Subcontractor determination is the actual participants in the proposal writing and preparation. Be mindful and be able to prove that the prime contractor controlled the process and participated in the major components such as pre-bid walk-thru“. Why is this important? Because it leads to another factor of reliance on the subcontractor. See also Size Appeal of ePerience, Inc., SBA No. SIZ-4668, 2004 SBA LEXIS 83, *13 (2004) (collaboration in drafting the proposal, and prime contractor’s reliance on subcontractor’s in-depth knowledge of the solicitation was “another strong indicia” of affiliation).

Using Past Performance of a Teaming Partner or Subcontractor? 

Contractors can use teaming partners for purposes of past performance evaluations. However, if the government will not consider such past performance, the solicitation must expressly say so.

• As a prime contractor, you need to be careful of the Performance Work Statement items passed on to your subcontractor/teaming partner.
• You must also understand the allowances to hire incumbent employees.

How Does the SBA Determine if you are Affiliated Under the Ostensible Contractor Rule?

Generally, the SBA uses a “Seven Factor” ostensible contractor rule test to determine the size status of the prime/sub relationship and analyze the legal affiliation meaning. However, these seven factors are not conclusive. In a size standard protest or affiliation analysis, the totality of the circumstances is the catch-all test over and beyond the seven-factor test. 

• Understand that the SBA does not have to prove all of the seven factors.

The “Seven Factor” Test?

Although not mandatory, the SBA uses the following to international support its totality of the circumstances test under the Ostensible Subcontractor Rule:

• Which party will be managing the contract?
• Which party possesses the necessary background and expertise to carry out the contract?
• Which party pursued the contract award?
• What degree of collaboration was there in the proposal effort?
• Were the tasks allocated to be performed by each party or is there commingling of staff and material?
• What is the amount of work to be performed by each party?
• Which party will perform the more complex and costly contract functions?

The above factors are not conclusive. The SBA tends to use the “totality of the circumstances” test more often when trying to meet the ostensible definition. The key to avoiding the pitfalls of affiliation is to have an experienced government contracts lawyer to give you concrete advice based on your specific situation.

Affiliation means the actual or ability to control the business: Concerns and entities are affiliates of each other when one controls or has the power to control the other, or a third party or parties controls or has the ability to control both. SBA considers factors such as ownership, management, previous relationships with or ties to another concern, and contractual relationships in determining whether affiliation exists.

Determination of your small business size: In determining the concern’s size, SBA area office will count the receipts, employees, or other measures of the size of the concern whose size is at issue and that of all of its domestic and foreign affiliates, regardless of whether the affiliates are organized for profit.

• For more information on how SBA determines affiliation, see 13 CFR 121.103.
• If you are a small business bidder, you are generally considered an interested party in the procurement.

Challenging the Awardee’s Size Standard: Once the apparently successful offeror has been identified on a Request for Proposals or at a bid opening, you may challenge your competitor’s small business self-certification. Notify the contracting officer of the matter according to the rules in 13 CFR 121.1001-1010.

• Your challenge must be prompt and set forth specifically alleged grounds.
• The contracting officer is required to send the challenge to SBA for a size determination.

What Happens if Affiliation Exists?  

The SBA will consider the revenue of both firms in determining whether they meet the size standard for the specific NAICS code assigned to the project. If the combined revenue of the two companies exceeds the size standard, then the company (prime) would be considered a large business for the purpose of the current procurement. Hence, forfeiting the contract.

Key Points: Teaming agreements should specifically identify the roles of the prime contractor and subcontractor. Have an attorney give you advice about the pitfalls in the Ostensible Subcontractor Rule analysis. Small businesses, in particular, should be careful when entering into government teaming contracts or Joint Venture agreement with large businesses. This is the typical arrangement that falls prey to a violation of affiliation rules.

What are the Requirements to File an SBA Size Protest?

To file a size protest, you must:

• Be an eligible unsuccessful bidder for the procurement awarded to the small business;
• File your protest within 5 days after notice of award with the federal agency and contracting officer;
• State the specific grounds upon which the firm awarded the deal was not eligible; and
• Offer information in support of your small business size protest. For more information on the Ostensible Contractor Rule, see 13 CFR 121.1001-1010. 

In sum, always be aware that a well-drafted teaming agreement does not in itself save you from forfeiting your contract under the SBA affiliation law or the Ostensible Subcontractor Rule.

Call an SBA size protest lawyer at  1-866-601-5518 for immediate help.