This update will briefly review a SBA decision enforcing an affiliation rule as well as a review of the Council of Defense and Space Industry Associations letter/comment to the SBA regarding the SBA’s proposed rule to give credit for using small business at all tiers.

SBA Decision on Affiliation

One of the basic questions when determining whether companies are affiliated is whether one business has the power to control another business (or businesses). This control may be positive or negative and is judged by a totality of circumstances. Notably, it does not matter whether that control is actually exercised—only that it exists.

In Appeal of Potomac River Group, LLC, Size No. 5689, the SBA’s Office of Hearings and Appeals (OHA), examined an operating agreement that required a supermajority approval for decisions, while the small business only owned a simple majority interest.

Even though the agreement was not followed, according to the evidence submitted by the business, the fact that the supermajority was required in the operating agreement, the governing document for the business, the agreement was enough to cause affiliation by its very existence; thereby rendering the business “other than small.”

This type of analysis follows SBA general rules and is analogous to future stock type options in that if those options exist in a company, the SBA will generally consider those options exercised and then determine the size of the firm.

Industry Group Feedback on the SBA’s Proposal of Lower Tier Subcontracting Credit

On December 7, 2015, the Council of Defense and Space Industry Associations (CODSIA) offered comments to the SBA on its proposed rule for Credit for Lower Tier Small Business Subcontracting, as published in the Federal Register on October 6, 2015. The proposed rules are to implement section 1614 of the National Defense Authorization Act (NDAA) of 2014. The Act allows a prime contractor to receive credit towards its small business subcontracting goals for subcontracting with small business at any tier (with a small business subcontracting plan) and implements compliance sections for large business with respect to the aforementioned goals and reporting.

CODSIA had some of the same concerns that were voiced by small business in that the data for who was going to be used would have to be supplied before award and/or negotiations with of subcontractors.

CODSIA also interprets the rule that prime contractors would be responsible for subcontractors at various tiers of the chains to meet their small business goals (this I think is a basic misinterpretation or misapplication of the rule of who can certify what).

I do believe that CODSIA’s concerns about setting forth small business subcontractors at lower tiers where it becomes “blurry” is legitimate. I believe the SBA answered this concern, and we will know for sure when the final rule comes out, by making good faith efforts subject to change to use the stated subcontractors so the upper tiers or primes are not tied to an untenable negotiating position.

While I believe CODSIA’s concerns are legitimate, I believe the SBA can effectively address these concerns. We may have some indication of which way the wind will blow on these concerns when the SBA issues the subcontracting plan regulations for small businesses.