Many small businesses that are doing business with the federal government have probably heard of SBA affiliation rules but never really pay attention to it. The reality 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.
SBA Affiliation Meaning 13 CFR 121.103.
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. Control may arise through ownership, management, or other relationships or interactions between the parties. SBA affiliation rules can be seen in 13 CFR1.103. See www.sba.gov/size.
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 to allow other ineligible companies to control the action and money.
However, there is a multitude of cases where SBA OHA has interpreted various facts to reach a legal decision about the small business affiliation meaning of a targeted company. For example, Contractual relationships or economic dependency has 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.
Why is Affiliation an Important Issue in Federal Government Contracting?
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).
Affiliation and Control
Under the SBA’s affiliation meaning, 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.
Control may be affirmative or negative
The SBA 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.
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 other measure of size for the concern whose size is at issue and then combine with the receipts, number of employees, or other measure of size for all of its domestic and foreign affiliate companies, regardless of whether the affiliates are organized for profit.
- Your primary objective is to avoid affiliation outcomes
- Before submitting your bid, you may want to assess the potential for affiliation before finalizing the relationship through a teaming agreement or subcontracting agreement.
The ultimate reason for the SBA a small business firm is determined to be ostensibly affiliated is to impute revenues of the alleged affiliation (another small business or large business ,or its employees) to the awarded prime contractor in an effort the go over the required small business size standard allowances. Once this happens, then the contract is taken away.
- If the SBA area office decides that your company is other than small through affiliation, your company will be barred from bidding on government contracts under the NAICS code in question. This will remain in effect unless SBA OHA reverses the decision on appeal.
Small Business Affiliation New Rules
Under the new affiliation 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 a small business size protest.
Does SBA Affiliation 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 includes 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 segregable 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.
Does Your Company Violate the SBA Ostensible Meaning?
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).
The intent of Ostensible Subcontractor Rule
Under SBA affiliation regulations, meeting the SBA ostensible subcontractor 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 firm (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.
Despite the SBA’s new rules that minimize the possibility of 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.
Can You Avoid SBA Affiliation Rules and Liability?
There are some avenues that your company can pursue given the new rules. However, its is critical to assess the situation when you contemplate bidding on federal government contracts. 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 control is actual or apparent (ability to control or negative control can lead to disastrous results)
Get Immediate Help
For additional help or representation in an ongoing size protest case about the SBA affiliation meaning, and the ostensible definition and meaning, call Watson & Associates, LLC government small business contract attorneys at 1-866-601-5518 for a Free Initial Consultation.