OHA Clarifies Ostensible Subcontractor Rule

At the end of last year, the Small Business Administration Office of Hearings and Appeals (“OHA”) issued a decision that further clarified the “ostensible subcontractor” rule. This rule may result in affiliation when a small prime contractor is unduly reliant on its subcontractor.

In Emergent, Inc. v. Kapsuun Group, LLC, SBA No. SIZ-5875 (Dec. 19, 2017) Emergent, Inc. (“Emergent”) appealed the size determination of the SBA area office, which determined that Kapsuun Group, LLC (“KG”) was a small business for the procurement at issue. The contract was for linguist and analyst support services in support of intelligence operations for the Air Force. KG, a subsidiary of Chenega Corporation, submitted a proposal with its two main subcontractors, Booz Allen Hamilton (BAH) and PMC. PMC is a large business and was the incumbent contractor.

The case has an interesting procedural history. Following the award to KG, Emergent, a disappointed offeror, protested the award alleging KG was unduly reliant on its sister company, Chenega Federal Systems, LLC, to perform the contract in violation of the ostensible subcontractor rule. The Area Office disagreed that KG was reliant on its sister company, but issued a size determination finding that KG was affiliated with PMC under the ostensible subcontractor rule. Part of the Area Office’s finding was based on the fact the proposed project manager was an executive of PMC. KG appealed the decision to OHA, who remanded the case back to the Area Office for a new size determination since the Area Office did not have complete documentation when it made the initial size determination. The Area Office then reversed its size determination and concluded that KG is a small business for the procurement. Emergent appealed the new size determination to OHA, arguing KG lacked appropriate past performance and experience to perform the contract without undue reliance on its subcontractor.

In evaluating the application of the ostensible subcontractor rule, OHA stated an area office must examine all aspects of the relationship, including the terms of the proposal and any agreements between the firms. In situations where the prime contractor and its subcontractors are performing the same type of work, the firm that will perform the majority of the total contract must be deemed to be performing the primary and vital contract requirements. OHA described four key factors that contribute to the findings of unusual reliance: (1) the proposed subcontractor is the incumbent contractor and is ineligible to compete for the procurement; (2) the prime contractor plans to hire the large majority of its workforce from the subcontractor; (3) the prime contractor’s proposed management previously served with the subcontractor on the incumbent contract; and (4) the prime contractor lacks relevant experience and must rely upon its more experienced subcontractor to win the contract. The first factor alone is not sufficient to show unusual reliance.

OHA determined that only the first factor applied to KG. On its second pass, the Area Office determined the proposed Project Manager had not been employed by PMC for several months prior to the submission of the proposal and that the other factors also were not met.

For more information, refer to previous blog post here.