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SBA Affiliation Ostensible Subcontractor Rule Litigation Services
- Counseling on building subcontractor teaming arrangements and joint venture relationships
- Filing and intervening in small business size protest cases
- Assessment of teaming agreements and relationships with prime and subcontractors
- Application of subcontractor rules and regulation to adverse decisions made by the SBA
- Determinations on whether the SBA committed clear error
- Intervening on behalf of federal contract awardees
- Litigation SBA size appeals at the SBA Office of Hearings and Appeals (SBA OHA)
- Legal counsel on legal issues to avoid under the Ostensible Contractor Affiliation
- Appellate cases before the US Court of Appeals for the Federal Circuit
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Ostensible Subcontractor Rule Analysis
The “ostensible subcontractor” rule provides that a subcontractor which is not a similarly situated entity to the prime contractor challenged concern, and which either is actually performing the primary and vital requirements of a contract, or upon which the prime contractor is unusually reliant, is treated as a joint venturer, and thus an affiliate, of the challenged concern. 13 C.F.R. § 121.103(h)(4).
13 CFR 121.103 & SBA Affiliation Rules
The SBA definition of Ostensible Subcontractor Affiliation Rule under 13 CFR 121.103 is a subtle provision in government contracting that can impact the award decision by the agency. Without proper legal representation, companies lose lucrative government contracts every day. SBA subcontractor rules and regulation rules are very potent weapons that your competition can use against you when they do not win a contract. Alternatively, if you have lost a contract when the awardee has violated the Ostensible Subcontractor Rule can be to your benefit.
- Many small businesses find themselves defending their business arrangements due to violation allegations during a size standard bid protest.
- The legal analysis in SBA size protests cases includes a variety of approaches that companies may not be familiar with during the size protest litigation stage.
- Note that affiliation does not apply to large prime contractors
At Watson & Associates, LLC, our SBA lawyers frequently help small businesses to deal with legal challenges to the relationships between prime and subcontractors doing business with the Federal Government. We understand then when a small business size protest occurs, your company can miss out on substantial amounts of revenues for your business. Whether you are filing a size protest or the intervenor, you want to make sure that your legal position is legally sound.
Our team of government contract attorneys ensures that small businesses can reduce liabilities while safeguarding their revenues. The law firm uses over 30 years of combined experience to protect your federal projects and reputation while safeguarding your bottom line.
You gain access to seasoned federal procurement law professionals who consistently work within the courts and understand how to craft sound legal arguments regarding ostensible subcontractor issues. We have earned a reputation for gaining favorable results for small businesses through vigorous representation.
Our SBA subcontracting law firm has represented government contractors in a variety of situations relevant to Ostensibly related companies and affiliated business arrangements. We appear not only before the SBA and the SBA Office of Hearings and Appeals but also before the US Court of Federal Claims and US Court of Appeals for the Federal Circuit.
Having a deep understanding of the SBA subcontracting rules and ostensible definition can make the difference between keeping the award and losing it. The SBA has issued new rules that limit the possibility of affiliation for similarly situated small businesses.
Our goal is to help small businesses in various industry groups, and even DOD contractors, to understand SBA subcontractor rules and regulations and to overcome the complex rules involving the ostensible subcontractor affiliation rule and how it can impact the facts of the case. We help clients to seek out certain challenges that can potentially defeat or prove SBA affiliation allegations. See some of our top cases.
Definition of Ostensible Under SBA Rules
If you are a small business doing business with the federal government, you must be very much aware of your relationships with other small businesses and even large businesses that are subcontractors. Under SBA rules, both your company as the prime contractor and your subcontractor can be deemed affiliated if the subcontractor is determined to be an “ostensible subcontractor”.
When this happens, the SBA will then merge both businesses as a joint venture. This will have the legal effect of joint both companies resources for purposes of revenues or employees and could violate the small business size standards.
Under SBA definition of Ostensible , the SBA will deem your subcontractor is an “ostensible subcontractor” when:
- The subcontractor performs the primary and vital requirements of a contract, or of an order under a multiple award schedule contract; or
- The prime contractor is unusually reliant on the subcontractor.
The SBA looks at all aspects of your relationship and could find a violation of the Ostensible Subcontractor Rule for various reasons. Having a lawyer that understands the rules and regulations can save your company headaches.
How Does the SBA Ostensible Subcontractor Rules and Regulations Analyze Potential Violations Under the Ostensible Subcontractor Definition?
Under 13 CFR 121.103, the ostensible contractor definition extends to an existing or proposed subcontractor that is not a similarly situated entity and has a questionable affiliated business arrangement. The SBA definition also would show that the subcontractor would perform the primary and vital requirements of the contract.
- If you are a subcontractor upon which the prime is unusually reliant, your company can also be subject to the ostensible definition.
You Performing Primary and Vital Requirements? The SBA Office of Hearings and Appeals has recognized that the “primary and vital” contract requirements are those associated with the principal purpose of the acquisition. Not all the requirements identified in a solicitation can be primary and vital. When there is a small business set aside, courts look at each case’s facts.
- The mere fact that a requirement is a substantial part of the solicitation does not make it primary and vital under the SBA size standards rule.
- In evaluating claims under SBA affiliation rules, the appeals court will base its analysis on the solicitation and proposal before it.
When Does Affiliation Not Impact My Company Under the Ostensible Subcontractor Rule? If your proposed subcontractor is a small, similarly-situated entity that follows the relevant rules, the ostensible subcontractor rule under 13 CFR 121.103 does not apply. See Size Appeal of The Frontline Group, SBA No. SIZ-5860 (2017)
As a Small Business, Are You Found Affiliated When You Hire the Incumbent Employees Under 13 CFR 121.103?The SBA can find affiliation under the affiliation under ostensible subcontractor rule if your company plans to hire the large business incumbent’s workforce en masse, and almost entirely rely on that large business as subcontractor for managing the contract. See Size Appeal of Automation Precision Technology, LLC, SBA No. SIZ-5850 (2017).
Also, the SBA can find affiliation under the rule if the subcontractor was incumbent contractor and prime’s proposed workers were former subcontractor employees. See Size Appeal of Charitar Realty, SBA No. SIZ-5806 (2017).
Can You Be Found in Violation of the Ostensible Contractor Rule If As the Prime You Only Manage the Contract? More than likely yes. The SBA can find you affiliated with the subcontractor if you are only responsible for management while your subcontractor provides all primary and vital requirements of the contract. See Size Appeal of Hamilton Alliance, Inc. SBA No. SIZ-5698 (Dec. 8, 2015).
AVOIDING COSTLY LEGAL MISTAKES
Allowing a Large Business Subcontractor to Perform Too Much of the Work
Recent cases show that small business contractors fall into some common, but potentially avoidable, traps where large business subs perform so much of the work under the contract that it puts the small business’s size standard at risk. As discussed above, the two main pitfalls are where:
- The small business prime is “overly reliant” on the large business subcontractor; and
- The small business prime is not doing enough of the “primary and vital” work under the contract – a large business subcontractor is doing that.
What is Power to Control?
SBA affiliation regulations suggest that 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 may also look at some other factors for power to control such as ownership, management, previous relationships with or ties to another company, and contractual relationships.
- Business affiliation may arise among two or more individuals or entities which have “identical business or economic interests.” See 13 CFR 121.103(f).
There is a rebuttable presumption that companies share an identity of interest if the concern in question derived 70% of more of its receipts from another concern over the previous three fiscal years. 13 CFR 121.103(f)(2).
Are you automatically affiliated under the Ostensible Subcontractor Rule simply because you subcontract to a large business? No.
Note that the SBA Office of Hearings and Appeals has recognized it is a common practice in government services contracts for successor awardee companies to hire employees from the incumbent. See Size Appeal of Human Learning Systems, LLC, SBA No. SIZ-5785 (2016).) SBA OHA has also recognized an en masse hiring of incumbent workforce and management personnel from an alleged ostensible subcontractor could be, but not necessarily, grounds to find unusual reliance upon the alleged ostensible subcontractor. See Size Appeal of Wichita Tribal Enterprises, LLC, SBA No. SIZ-5390 (2012).
- Showing that hiring of incumbent large business employees as the best choice has survived scrutiny. See Size Appeal of Inquiries, Inc., SBA No. SIZ-6008 (2019)
- Avoid overlap of ownership, management, family members, or interest between the firms.
- If you have a large business subcontractor it would be better to have not its revenue from it over the three-year measuring period. This could help in avoiding affiliation under 13 CFR 121.103(a)(1)-(a)(2).
Kûpono Government Services: The contractor was to provide training services for a nuclear power facility. In this somewhat tricky case, OHA began the discussion by stating,“[T]he initial step in an ostensible subcontractor rule analysis is to determine whether the prime contractor will self-perform the contract’s primary and vital requirements… The “primary and vital” requirements are those associated with the principal purpose of the acquisition…. Not all the requirements identified in a solicitation can be primary and vital, and the mere fact that a requirement is a substantial part of the solicitation does not make it primary and vital… Frequently, the primary and vital requirements are those which account for the bulk of the effort, or of the contract dollar value… It is, however, also appropriate to consider qualitative factors, such as the relative complexity and importance of requirements…” [citations omitted; emphasis supplied]
Here, the prime contractor fell into the trap of not taking a deep enough look into contract’s “overall objective.”
While the government’s request for proposal (RFP) called for performance of support services, the RFP’s “primary purpose” was found by OHA to be training. OHA looked at various facts of the situation to figure out what was the primary purpose. For example, OHA looked at:
- The NAICs code assigned by the CO – The NAICS code was 611430, “Professional and Management Development Training. “ OHA looked at the description of the work for this code provided in the NAICS Manual, as well.
- How the work performed by the prime was characterized in the RFP – OHA looked at the fact that the RFP “made clear” that the work was incidental, e. g. “in support of” the training, not the actual training.
- The way the prime’s proposal was structured – OHA looked at what the prime’s proposal said the prime focused on, and OHA looked at where the prime put “the largest portion of contract value and contract labor.” The majority of the proposed labor hours were allocated to training CLINs (which were mostly performed by the sub), not the prime’s support work.
- Comments from the Contracting Officer – OHA normally “ascertains a contract’s primary and vital requirements from the solicitation itself, and not from comments by the procuring agency,” but in this case OHA decided that it would “nevertheless attach some weight to the CO’s opinion of the primary and vital contract requirements.” OHA looked at the fact that the SBA Area Office contacted the CO about how to characterize the primary and vital work, and the CO’s statement, “I agree” was considered by OHA as weighing in favor of the SBA office’s decision.
- Which entity is “predominantly responsible” for performing the primary and vital work – Once OHA figured out what the “primary and vital work” was, it looked at who was “predominantly responsible for performing this work.” Because the sub was to perform a large majority of the work, even though the sub wasn’t performing all of the work, the SBA office’s decision was upheld.
- Relative expertise – This was a contract for training at a nuclear facility. In this case, the sub had very indepth understanding and subject matter expertise, as well as experience, compared to the prime. This, too, weighed against the contractor, in OHA’s estimation.
- Whether SBA made a clear error in its determination – To get the SBA decision overturned, the contractor had a difficult burden of proof. It had to prove that the SBA office made a “clear error.” OHA was only looking for “clear error,” when it reviewed the SBA office decision. When OHA looked at the totality of the circumstances, no clear error was found.
See: Size Appeal of Kûpono Government Services, LLC, SBA No. SIZ-5967 (2018)
Watson’s SBA OHA Small Business Affiliation & Ostensible Subcontractor Rule Appeal Lawyers
With law offices in Washington DC and Colorado, the government contract law attorneys at Watson & Associates, LLC frequently file or defend SBA affiliation rules and cases under the Ostensible Subcontractor Rule both at the SBA level and appeals at SBA OHA. Our SBA Subcontracting lawyers frequently represent clients before the SBA, and SBA Office of Hearings and Appeals when there is an adverse decision or disputes about the ostensible definition.
Our SBA attorneys have a deep understanding of government small business affiliation rules and how small business ostensible subcontractor affiliation applies when looking at bidding opportunities.
Call Our CO and Washington DC SBA Ostensible Subcontractor Rule Lawyers
To preserve your rights under the SBA’s legal Ostensible meaning, 13 CFR 121.103, and Ostensible subcontractor rules and regulations, affiliation meaning in appeals cases, and adverse SBA decision Call Watson & Associates’ SBA Subcontracting Lawyers at 1866-601-5518 for a Free Initial Consultation.