The Small Business Administration (SBA) has ruled in favor of one of the firm’s clients in size-determination case.

In April 2014, the U.S. Army Contracting Command issued a request for proposals (RFP) for the Army Evaluation Center. Task order 3 (TO3) of this RFP was set aside entirely for small businesses and used a size standard of $35.5 million in average annual receipts.

As part of its proposal, the contractor provided résumés from a subcontractor for three key positions: a general engineer, a systems analyst, and systems engineer. The contractor’s proposal also indicated their work would be supervised by its own personnel: a technical director and an assistant program manager. But the contractor did not furnish résumés for these two individuals because the RFP (1) did not request their résumés and (2) indicated that the proposal was to be kept brief.

On January 6, 2015, the contracting officer announced that the contractor had been awarded TO3. On January 9, 2015, an unsuccessful offeror filed a size protest, alleging that the contractor was affiliated with the subcontractor under the ostensible subcontractor rule. 13 C.F.R. § 1211.103(h)(4). The SBA’s area office dismissed the unsuccessful offeror’s size protest for not being filed on time, but the SBA’s area director initiated her own size protest against the the contractor, adopting the unsuccessful offeror’s allegations.

The area office found that the contractor was not a small business for purposes of bidding on TO3. Furthermore, the area office found that the contractor had violated the ostensible contractor rule by finding that the size of TO3 was five times greater than the contractor’s largest contracts listed in the federal government database (Federal Procurement Data System–Next Generation or FPDS-NG) and by finding that the number of subcontractor personnel (based on the number of submitted résumés) to be employed for TO3 was too high. These facts, the area office said, made the contractor unusually reliant on the subcontractor.

Dale Gipson and Clark Pendergrass appealed the areas office’s decision to the SBA’s Office of Hearings and Appeals. The administrative law judge found in favor the contractor, for the following reasons:

  1. The idea that TO3 was greater in size than any other contracts handled by the contractor was wrong. The area office looked at only the contracts in the federal government database, which did not reflect nine active contracts the contractor is currently working on. Two of these contracts—one valued at over $24 million and another at over $25 million—exceed the estimated value of TO3 (at $10.2 million).
  2. The area office overlooked the requirements of the RFP that limited the bidders to providing only one résumé for each position. Although the contractor had submitted résumés of subcontractor personnel, it had also proposed using it own personnel. For that reason, the contractor was not dependent (unusually reliant) on the subcontractor to fill these positions.

The administrative law judge concluded that from the evidence he reviewed, the contractor was not unusually reliant on the subcontractor and therefore not in violation of the ostensible contractor rule. But because the area office’s decision hadn’t been based on the contractor’s final proposal, the decision had to be remanded to the area office for further review.

More background on the ostensible subcontractor rule

In 1958, Congress enacted the Small Business Act, which requires that a sizeable portion of government contracts be awarded to small businesses. In addition, in 1978, Congress required prime contractors to subcontract to small businesses. This means a business classified as “small” has an advantage in some government procurements. As an aside, there is no single definition of small, but the small status varies by industry—usually based on the business’ North American Industry Classification System (NAICS) code.

Some have sought ways to manipulate this system to secure the advantage of being small and therefore having limited competition or no competition for government contracts. In reaction, the SBA has issued the affiliation rule. If the SBA finds certain things to be true, the “small” business will designated as an affiliate of a large business and therefore ineligible to bid on the contract set aside for a small business. In some cases, two small businesses can be found to be affiliated—usually through combining the number of employees and revenue—so that when these factors are added together, the two small businesses are considered one ineligible large business.

To determine whether businesses are affiliated, the SBA primarily considers the ability of one business to control the other. Indicators of such control include such things as—

  1. One company owning enough stock in another company to control what the other company does. (Because minority shareholder interests can negatively control a company, this does not mean merely owning over 50% of the stock in the other company.)
  2. Two companies having common shareholders, officers, directors, management, or personnel.
  3. Previous or current relationships.
  4. Mutual control of the two companies by a third party.
  5. Belonging to a joint venture.

In this case, the SBA’s area office found that the contractor’s subcontractor was really not a subcontractor, but was an ostensible subcontractor. An ostensible subcontractor is one that (a) performs primary and vital requirements of a contract or (b) the prime contractor has to unusually rely upon. In determining whether a subcontractor is an ostensible contractor, the SBA considers the terms of the proposal: contract management, technical responsibilities, percentage of subcontracted work, and agreements between the prime and subcontractor. Something that is almost guaranteed to make the subcontractor ostensible is when the subcontractor is the incumbent contractor and is ineligible to submit a proposal because it is too large to meet the size requirement.

In the case of the contractor, the administrative law judge decided there was insufficient evidence to support a finding that the contractor’s subcontractor was an ostensible subcontractor. See size determination 3-2015-035 (SBA No. SIZ-5658) decided on May 20, 2015.

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