Ostensible Subcontractor Rule

By: Theodore P. Watson.The Ostensible Subcontractor Rule creates a dangerous situation for small businesses when bidding on federal government contracts. It usually comes about when the competition files an Small Business Administration (SBA) size protest and claims that you, as the awardee and prime contractor, are unusually reliant on the proposed subcontractor or teaming partner.

Like most bid protests of this type, the rules are somewhat tricky.  The substance of challenging the SBA’s size determination on appeal usually rests on three things. First, what did the protestor allege. Second, how did the SBA investigate and come to its conclusion. Lastly, what does the size appeal to OHA allege? 

What is the Ostensible Subcontractor Rule?

What is the Standard of Review on Appeal?

As the party appealing the SBA Size determination, you have  the burden of proof ( by a preponderance of the evidence) all elements of the appeal. You, or your OHA appeals attorney must prove the SBA’s size determination is based upon a clear error of fact or law. See 13 CFR 134.314. 

OHA will only interfere or disturb an area office’s size determination if, after reviewing the record, the OHA judge has a definite and firm conviction that the area office erred in making its key findings of fact and law. Size Appeal of Taylor Consultants, Inc., SBA No. SIZ-4775, at 11 (2006). 

What does this mean?

When you appeal the SBA’s size determination based on the Ostensible Subcontractor Rule, you cannot simply conclude that the decision was unreasonable. Instead, you have to provide detail and legal analysis. You have to actually show what the SBA did wrong to a level that warrants a reversal or a remand (sending the case back) to ‘get it right.’

• The alleged error of fact or law must be more that an allegation.
• You have to convince the appeals court that the SBA really missed the boat.

Similarly Situated Entities and the Ostensible Subcontractor Rule

The “ostensible subcontractor” rule suggests that your subcontractor is not a similarly situated entity which performs the primary and vital requirements of a contract or is a subcontractor upon which you, the small business prime contractor, is unusually reliant. 13 CFR 121.103(h)(4).

Finding whether your subcontractor is a similarly situated entity can be somewhat tricky. Before submitting your proposal with a named subcontractor, it would beneficial to find out if you subcontractor is similarly situated in order to avoid affiliation. See also information about certificate of competency.

As the prime contractor, you and the alleged ostensible subcontractor are treated as joint venturers for size determinations if the SBA makes a finding of affiliation. Id. 

The reason for the Ostensible Subcontractor Rule is to “prevent other than small firms (large businesses) from forming relationships with small firms to simply  evade SBA’s size requirements.” Size Appeal of Fischer Business Solutions, LLC, SBA No. SIZ-5075, at 4 (2009).  

Limitations on Subcontracting and Ostensible Subcontractor Rule

The limitations on subcontracting rule has teeth when it comes to pass-through contracts or contract management matters. Prime contracts may want to stay away from the is argument during a size protest appeal.

OHA has often ruled that the limitations on subcontracting under FAR 52.219-14 are matter of contractor responsibility, and thus beyond OHA’s subject matter jurisdiction. See Size Appeal of Shoreline Services, Inc., SBA No. SIZ-5466, at 10 (2013); Size Appeal of Assessment & Training Solutions 

How Does Affiliation Apply to the Ostensible Contractor Rule 13 CFR 121.103?

SBA procurement regulations state that business entities are affiliates of each other when one has the power to control the other or a third party controls or has the power to control both. See 13 CFR 121.103. 

The SBA and OHA consider several factors when assessing affiliation and control. The factors include:

• Company ownership, 
• Management, 
• Previous relationships with or ties to another concern, and contractual relationships. 
• Affiliation can also occur among two or more individuals or entities which
• have “identical business or economic interests.” See 13 CFR 121.103(f). 
• Under the Identity of Interest analysis, there is a rebuttable presumption that
• firms share an identity of interest if the concern in question derived 70% or more of its receipts from another concern over the previous three fiscal years. 13 CFR 121.103(f)(2). 

Tip: When you are appealing the SBA’s size determination, you cannot speculate. Instead, the allegations must be supported by the record. 

Important Ostensible Subcontractor Analysis

What does the SBA have to do or how does OHA apply the legal analysis?

There are many facts that can support affiliation under the Ostensible Subcontractor Rule. One must first decide if the relationship between a prime contractor and a subcontractor / teaming partner rule.

The SBA is a small business size protest case must must examine all aspects of the relationship, including the terms of the proposal and any agreements between the firms. The analysis must also include whether the subcontractor is the incumbent contractor and is ineligible to submit a proposal because it exceeds the applicable size standard for that solicitation. 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). 

• Many size determinations by the SBA miss this important aspect. Arguably, it would make the concluding that a company is other than small an incomplete decision.
• Ostensible subcontractor size protests 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). 
• The real question on appeal is how did the SBA apply the facts?

Is Your Company Unusually Reliant on the Ostensible Contractor?

This question is somewhat a tricky one. The SBA area office can certainly find affiliation when your company is unusually reliant on the subcontractor to either get the contractor or to perform the contract. See Size Appeal of Dover Staffing, Inc., SBA No. SIZ-5300 (2011). In the Dover Staffing SBA OHA introduced the legal test for determining whether a prime contractor is unusually reliant upon its subcontractor: 

1. The subcontractor (or proposed subcontractor) is the incumbent on the contract and is ineligible to compete for the instant procurement; 
2. The prime contractor plans to hire the large majority of its workforce from the subcontractor; 
3. The prime contractor’s proposed management served with the subcontractor on the incumbent contract; and 
4. The prime contractor lacks relevant experience and as a result must rely on the more experienced subcontractor to win the contract. 

See Size Appeal of Automation Precision Tech., LLC SBA No. SIZ-5850 (2017); Size Appeal of Charitar Realty, SBA No. SIZ-5806 (2017); Size Appeal of Modus Operandi, Inc., SBA No. SIZ-5548 (2016). SBA OHA has all ruled that  “engaging the incumbent as a subcontractor leads to heightened scrutiny of the arrangement but is not a per se violation” of the ostensible subcontractor rule. Size Appeal of InGenesis, Inc., SBA No. SIZ-5436, at 16 (2013). 

Does Hiring Incumbent Employees Violate the Ostensible Subcontractor Rule?

As a general rule, you want to first use your own staff or seek possibilities of hiring other employees apart from the incumbent’s employees. Just the mere fact that a small business awardee hires the incumbent’s employees does not conclusively amount to a violation of the Ostensible Subcontractor Rule.

Tip: OHA has held that hiring the incumbent workforce alone is not problematic so long as the personnel to be hired from incumbent are reviewed individually rather than a unilateral transfer of employees or hiring en masse. Size Appeal of Elevator Service, Inc., SBA No. SIZ- 5949, at 9-10 (2018); Size Appeal of National Sourcing, Inc., SBA No. SIZ-5305, at 12 (2011). 

Tip: OBA OHA has also ruled that a wholesale hiring of incumbent employees from a subcontractor is justified when the pool of eligible employees is small or limited. Elevator Service, at 10 (2018). 

Tip: You want to at least show that you have been unsuccessful in finding other employees. OHA has decided that a prime contractor’s ability to find other personnel in place of the incumbent’s employees as originally anticipated by the proposal lessens its reliance on the subcontractor. Size Appeal of Spiral Solutions & Technologies, SBA No. SIZ-5279 (2011).

Ostensible Subcontractor Rule – Application of Primary and Vital Requirements of the Contract

One of the critical aspects of submitting a proposal to the federal government, and using a subcontractor or teaming partner, is to determination whether your company as the prime is performing the primary and vital parts of the project.

The primary and vital requirements of the contractare those generally those associated with the principal purpose of the acquisition. Size Appeal of Santa Fe Protective Services, Inc., SBA No. SIZ-5312, at 10 (2012). 

• This is a fact based analysis and sometimes very tricky for many lawyers to determine.

Tip: If all else fails, one can potentially look at a performance based contract and see if the QASP articulates what the government believes to be important. The contents of the Statement of Work is equally as important. 

Defending or filing a bid protest alleging a violation of the Ostensible Subcontractor Rule can be tricky. If you are unfamiliar with the nuances of the rule, you can find yourself losing out on the contract award or getting your appeal denied.

 For immediate help filing an SBA Size protest or filing a Size Appeal at SBA OHA, Call Our Government Contract Attorneys at 1-866-601-5518.

Contact a government contracts attorney.