Avoid Losing Government Contracts in SBA Size Protests, Or Criminal Liability for Violating SBA Affiliation & PPP Loan Rules.

SBA affiliation rules and Ostensible Subcontractor LawyersSBA Small Business Affiliation Rules have been relaxed in recent years. However, more and more small businesses are being investigated by the Department of Justice and SBA OIG. Even though understanding that people make mistakes, more and more convictions are occurring for either PPP loan fraud or size standard noncompliance in size protests. Do your teaming agreements, joint venture and prime-subcontractor relationships avoid exposure under SBA affiliation rules?

Many small businesses that are doing business with the federal government have probably heard of SBA affiliation rules but never really pay attention to them. The reality is that it can be a very dangerous weapon when your competition files a small business-size protest to the SBA, alleging ostensible subcontractor affiliation with other entities based on your NAICS code. What does all of this mean? The shocking reality is that your company forfeits the contract if your competition wins in an SBA size protest.

As a small business receiving federal government contracts, grants, loans, etc., you must comply with certain federal small business and SBA affiliation rules. This is an ongoing requirement for each NAICS code. As a sub-issue to the overshadowing affiliation rules, the Ostensible Subcontractor Rule is one of many instances where the SBA can find that your company is affiliated with another subcontractor or teaming partner. 

Overview of the SBA Affiliate Definition and Considerations

The Small Business Administration (SBA) Affiliate Definition is a set of criteria used to determine whether a business is considered an affiliate of another entity for the purpose of determining size eligibility for certain SBA programs. The SBA uses the affiliate rules to prevent businesses from circumventing size limits by aggregating their resources or affiliating with other businesses.

According to the SBA, affiliation arises when one business controls or has the power to control another or when a third party has the power to control both businesses. The SBA considers several factors when determining affiliation, including ownership, management, contractual relationships, and economic dependence.

Here are some key aspects of the SBA Affiliate Definition:

1. Ownership: The SBA looks at ownership interests to determine if one business has control over another. This includes both direct and indirect ownership, as well as options, convertible securities, and other agreements that give control.

2. Management: The SBA examines the power to control the management of a business. This includes common management or a close identity of interest between the management of multiple businesses.

3. Relationships: The SBA considers contractual relationships, such as joint ventures or teaming agreements, to determine if there is an affiliation between businesses.

4. Common Investments or Economic Dependence: Affiliation may also exist if two businesses have significant economic dependence on each other or share investments, such as financial assistance, loans, or investments in other businesses.

It’s important to note that the specific criteria and rules for affiliation may vary depending on the SBA program or procurement involved. It’s recommended to consult the SBA’s regulations, guidance, or seek legal advice to understand how the affiliate rules apply in a particular situation.

SBA Affiliate Definition and Affiliation Meaning Under 13 CFR 121.103

What does affiliation mean in business under SBA regulations? According to the SBA website, affiliation exists when a company controls or has the power to control another or when a third party (or parties) controls or has the power to control both businesses when selling products or services to the government. Control between affiliates may arise through ownership, management, or other relationships or interactions between the parties. SBA affiliation rules can be seen in 13 CFR1.103. 

In a nutshell, SBA regulations governing affiliation promote arms-length business transactions when government contracts are awarded. The awarded company must be in total control of the contract and its own business. It cannot be perceived as a ‘front’ for gaining federal government contracts and allowing other ineligible companies to control the action and money.

  • The SBA Affiliatedefinition translates to having a company that either performs the primary and vital parts of the contract or a company where the prime is unusually reliant or controls the small business prime.
  • If you are deemed to be an SBA-affiliated business, you can lose the entire contract. Depending on the facts, you may find yourself under government investigation or facing criminal charges.

However, there is a multitude of cases where SBA OHA has interpreted various facts to reach a legal decision about the government affiliation definition of a targeted company. For example, Contractual relationships or economic dependency have become a hot topic in recent small business size protest litigation.

  • Given the reality that commercial business formations and investments take various forms, a small business that has various management roles in third-party companies, or ownership in other companies must be extremely careful not to fall prey to the brutal SBA’s business affiliation definition.

See information about buying and selling a government contracting business.

Why is Small Business Affiliation an Important Issue in Federal Government Contracting and PPP Loans?

Awarded contracts are frequently taken away because your company no longer meets the small business legal definition. Your competitor will often initiate a small business-size protest and claim that your company is affiliated with another business. This can be with a teaming partner or subcontractor or even a large business.  Such arrangements can violate the SBA affiliation regulations and Ostensible Subcontractor Rule. SBA determines whether an entity qualifies as a small business concern by counting its receipts, employees, or another measure, including those of all its domestic and foreign affiliates, regardless of whether the affiliates are organized for profit. 13 CFR 121.103(a)(6).

SBA PPP Loan Fraud. Many small businesses are being investigated for PPP loan fraud violations. The rules are very tricky and can be mistakenly applied by the SBA. See our PPP loan fraud page. 

SBA Affiliation and Relevance to Business Control

Under the SBA small business affiliation rules, affiliation cues of control may arise through ownership, management, or other relationships or interactions between the two companies. Individual relationships can also impact how the SBA views the entire situation. These are serious issues that you must carefully review when contemplating business relationships with other government contractors.

Business control may be affirmative or negative: The SBA affiliation rule takes into account the relevant facts and analyzes negative control by looking at situations where for example, a minority shareholder has the ability, under the concern’s charter, by-laws, or shareholder’s agreement, to prevent a quorum or otherwise block action by the board of directors or shareholders. SBA will consider the totality of the circumstances when determining whether affiliation exists and may find that a small business concern is ostensibly affiliated based on the totality of the circumstances, even though no single factor alone may be sufficient to constitute affiliation.

Small Business Affiliation with another company is based on the power to control, whether exercised or not. Such factors as common ownership, common management, and identity of interest (often found in members of the same family), among others, are indicators of affiliation. The power to control exists when a party or parties have 50 percent or more ownership. It may also exist with considerably less than 50 percent ownership by contractual arrangement or when one or more parties own a large share compared to other parties. Affiliated business concerns need not be in the same line of business. The calculation of a concern’s size includes the employees or receipts of all affiliates.

  • Awardees must prove prime management of the project from the onset.
  • Failure to do would increase the chances of losing the bid protest.

What Happens When the SBA Finds Affiliation Between Two Companies?

 Once the SBA decides that affiliation exists, it will count the receipts/ employees, or another measure of size for the concern whose size is at issue and then combine it with the receipts, number of employees, or another measure of size for all of its domestic and foreign affiliate companies, regardless of whether the affiliates are organized for profit.

SBA Affiliation and Criminal Liability for small business subcontracting fraud

 Many of the criminal cases brought by the Department of Justice stem from affiliation between companies. Thus, leading to government contract fraud and criminal charges that all stem from the underlying business relationship between the companies. See example of a case where a large business was found liable for subcontractor fraud.

 New SBA Affiliation Rules

 Under the new SBA affiliation business rules, and in the case of a solicitation for a bundled contract, a small business contractor may enter into a Small Business Teaming Arrangement with one or more small business subcontractors and submit an offer as a small concern without regard to small business affiliation rules and being ostensibly affiliated, so long as each team member is small for the size standard assigned to the contract or subcontract

Under the new rules, the SBA has also relaxed your company’s ability to enter into teaming agreements and small business joint ventures without fear of affiliation. However, in situations where your company violates the limitations on subcontracting rule, a terrible result is still possible. Government contractors should make sure that their business relationships are above-board before the competition sets out to attack them in an SBA size protest.  

Do Government SBA Affiliation Business Rules Apply When You Acquire a Business? 

If a concern has acquired an affiliate or been acquired as an affiliate during the applicable period of measurement or before the date on which it self-certified as small, the annual receipts used in determining size status include the receipts of the acquired or acquiring concern. This aggregation applies for the entire period of measurement, not just the period after the affiliation arose.

However, if a concern has acquired a seggregable division of another business concern during the applicable period of measurement or before the date on which it self-certified as small, the annual receipts used in determining size status do not include the receipts of the acquired division prior to the acquisition. Read about 8a Program Size Determination & SBA Non-Manufacturer Rule. SBA-affiliated business decisions can have grave consequences for a business. If your company faces such a dilemma, you may want to seek an experienced SBA affiliation lawyer. 

How Can You Avoid SBA Affiliation?

The application for SBA affiliation is not an easy one. Even the SBA sometimes fails to apply its own regulations. A few common ways to avoid affiliation include (1) making sure that other business owners and partners cannot outvote you in business decisions; (2) making sure that all subcontractor personnel including its managers have to report and get approval from your managers and supervisors; (3) Make sure that you clearly identify where your company is in charge of the primary and vital parts of the contract.

Does Your Company Violate the SBA Ostensible Definition – 13 CFR 121.103

SBA affiliate definition: The “ostensible subcontractor” rule provides that when a subcontractor is actually performing the primary and vital requirements of the contract, or when the prime contractor is unusually reliant upon the subcontractor, it means that the two firms are affiliated for purposes of the procurement at issue. 13 CFR 121.103(h)(4). Being affiliated can mean that the agency may ultimately have to take away the awarded contract.

Intent of Ostensible Subcontractor Rule

Under SBA affiliation regulations, meeting the SBA ostensible subcontractor business affiliation definition can cause pain for a government contractor that finally receives a contract after hard work and using resources to get the result.

What does ostensible mean also includes knowing that it is defined to prevent other than small firms (large businesses) from forming relationships with small firms to evade SBA’s size requirements? Size Appeal of Fischer Business Solutions, LLC, SBA No. SIZ-5075. When investigating business relationships between the prime contractors and the subcontractor’s firm, the SBA will examine all aspects of the business 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 affiliation. See OHA Appeals & SBA Affiliation Rules Identity of Interest 13 CFR 121.103 & 13 CFR 121.301.

Despite the SBA’s new rules that minimize the possibility of small business affiliation definition between ostensible subcontractors and prime contractors, the crust of the SBA’s size protest investigation looks to see whether the subcontractor is performing the primary and vital contract requirements are those associated with the principal purpose of the acquisition. See also Signs of Being Under Investigation (Federal)

Can You Avoid SBA Affiliation Liability?

There are some avenues that your company can pursue, given the new rules. However, it is critical to assess the situation when you contemplate bidding on federal government contracts. Having experienced SBA affiliation lawyers that can assess your specific situation and provide suggestions and guidance can be extremely beneficial.  Here are a couple things to consider when you decide to move forward.

  • Look for small business subcontractors that are similarly situated entities.
  • Avoid subcontracting agreements with the incumbent (unless you carefully consider what the SBA looks for when you enter such relationships)
  • Make sure your bid shows that you are not violating the limitations on subcontracting rules.
  • You should also dive into whether the control is actual or apparent (ability to control or negative control can lead to disastrous results)
  • Find out if your company is in violation of the ostensible subcontractor rule

Clues that Your Company May be at Risk of Violating SBA Affiliation Regulations

  • If you are a small business that owns, manages or in some fashion performs with other businesses.
  • Your spouse or other family member owns or manages another business
  • If your company is a newly-formed entity
  • If you are the awardee and have relied on the incumbent contractor’s employees or past performance
  • If you rely on another company to perform the primary and important aspects of the awarded contract.

Get Immediate Help from Experienced SBA Small Business Affiliation Lawyers

Watson & Associates have experienced SBA affiliation rules lawyers. We frequently represent small businesses to file or defend against allegations in SBA size protest litigation. We also provide SBA consulting services for firms that need an overall audit and report of their business relationships and teaming / joint venture arrangements.

For additional help or representation in an ongoing SBA size protest case about the SBA affiliation, or whether you are an affiliate under the SBA ostensible subcontractor guidelines, call Watson & Associates, LLC government small business lawyers and SBA attorneys at 1-866-601-5518 for a Free Initial Consultation. Speak with Theodore Watson.

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