SBA OHA Affiliation Decision Defeats Contractor Argument that Subcontractor Was Similarly Situated

Given the new SBA regulations that address affiliation and whether the subcontractor was similarly SBA OHA Affiliation Decision Defeats Contractor Argument that Subcontractor Was Similarly Situatedsituated, prime contractors can still find out the painful results if they do not adequately prepare their proposals and apply the legal standards.

In the case of  SIZE APPEAL OF The Frontline Group, SBA OHA made some very revealing findings that should send a message that by not adequately consider the regulations governing teaming agreements and affiliation, their federal contracts can be subject to withdrawal even after award.

In the Frontline Group case,  DAK Resources, Inc’s proposal was silent as to the division of labor and contractual responsibilities between itself and TSI the subcontractor.

Companies should not simply rely on the basic language of a teaming agreement or subcontract to carry the day.

Instead, small businesses should seriously consider the level of work that the subcontractor will perform, and whether the subcontractor is truly a similarly situated small business. The proposal must consider all of the possibilities for attack if the competition decides the protest the contract award.

Frontline Group in the size appeal argued that DAK Resources, Inc is not an eligible small business for the government procurement because TSI, its subcontractor,  will perform the contract’s primary and vital requirements, in violation of the ostensible subcontractor rule, 13 C.F.R. § 121.103(h)(4).

SBA OHA further found that although TSI would primarily perform the contract with minimal oversight or participation from DAK, such a technical approach was contrary to the ostensible subcontractor rule.

  • A prime contractor cannot comply with the ostensible subcontractor rule merely by overseeing a subcontractor in its performance of the work. E.g., Size Appeal of Hamilton Alliance, Inc., SBA No. SIZ-5698 (2015); Size Appeal of Shoreline Servs., Inc., SBA No. SIZ-5466 (2013).

Similarly Situated Small Business Requirements

Looking at the new SBA OHA affiliation rules that address a similarly situated small business, SBA OHA stated that “[a]n ostensible subcontractor is a subcontractor that is not a similarly situated entity, as that term is defined in 13 CFR 125.1 of this chapter. . . .” 13 CFR 121.103(h)(4); 81 Fed. Reg. 34,243 (May 31, 2016).  See Consequences of Procurement Fraud Schemes & Avoiding Criminal Liability

A “similarly situated entity” as “a subcontractor that has the same small business program status as the prime contractor. This means that . . . for a small business set-aside, partial set-aside, or reserve a subcontractor that is a small business concern.”

  • Small business prime contractors cannot ignore the legal requirements for similarly situated subcontractors or teaming partners.

In this case, OHA found that the SBA did not consider whether the subcontractor was indeed a similarly situated small business and the case was remanded back to the SBA for further investigation. See 13 CFR 125.6 Understanding Rules of Prime Contractor’s Limitations on Subcontracting FAR 52.219 14

SBA OHA Message to Prime Small Business Contractors

Simply relying on the generic language in a teaming agreement will not withstand a size protest based upon SBA affiliation and the Ostensible Subcontractor Rule. Getting the right application of the legal standards to withstand a size protest is critical.

When it comes to deciding whether your subcontractor is a similarly situated small business, there is more effort required in the bid submission. Affiliation based upon the Ostensible Subcontractor Rule is still alive and well. Taking a proactive approach can save your company from losing a multi-million dollar government contract.

See How We Can Help With Size Protest Litigation

For help with affiliation based on the Ostensible Subcontractor Rule and the application of the similarly situated small business status, call our SBA OHA lawyers at 1-866-601-5518. FREE INITIAL CONSULTATION.