A small business that relies too heavily on another business for subcontracting may trigger affiliation under the Ostensible Subcontractor Doctrine. The Ostensible Subcontractor Doctrine holds that a small business which “is unusually reliant” on a subcontractor may be deemed affiliated for size determination purposes.
This occurs if the subcontractor performs the primary and vital requirements of the prime contract. The regulation defines Ostensible Subcontractor as follows:
A contractor and its ostensible subcontractor are treated as joint venturers, and therefore affiliates, for size determination purposes. An ostensible subcontractor is a subcontractor that performs primary and vital requirements of a contract, or of an order under a multiple award schedule contract, or a subcontractor upon which the prime contractor is unusually reliant. All aspects of the relationship between the prime and subcontractor are considered, including, but not limited to, the terms of the proposal (such as contract management, technical responsibilities, and the percentage of subcontracted work), agreements between the prime and subcontractor (such as bonding assistance or the teaming agreement), and whether the subcontractor is the incumbent contractor and is ineligible to submit a proposal because it exceeds the applicable size standard for that solicitation. 13 C.F.R. § 121.103(h)(4).
There are many reported cases concerning the Ostensible Subcontractor Doctrine at the SBA Office of Hearings and Appeals. A business arrangement between a small business and a subcontractor may result in affiliation if the subcontractor supplies the vital/primary requirements of the prime contract, even if the limitations on subcontracting requirements are met. The following protest decisions illustrate this point:
RTL Networks, Inc., SBA No. SIZ-4923. Mantech subcontracted with an SDVOSBC to provide technical security support services. The SDVOSBC represented that it would be performing at least 51% of the work. Even so, the SBA held that Mantech was an ostensible subcontractor because of the (1) unusual reliance on the wholesale hiring of Mantech’s incumbent staff, and (2) the unusual reliance on Mantech’s past performance history in the past performance submittals.
CardioMetrix, Inc., Docket No. SIZ-95-1-11-4. CardioMetrix, a small business, subcontracted with National, a large business, to provide medical laboratory testing services. CardioMetrix would perform 55% of the work and National 45%. Even though CardioMetrix would be performing more than 50% of the work, the SBA held that this was improper because National would be performing the vital and primary requirements of the solicitation. i.e. medical laboratory testing. The SBA held that a review of the records, including CardioMetrix’s tax returns, indicated that it was not in the medical laboratory business and that it would be relying on National to perform that work. Because the average annual receipts of the two firms must be therefore be combined, the SBA held that CardioMetrix was not a small business and did not qualify to compete in the set-aside procurement.
Hamre Associates, Inc. Docket No. SIZ-94-06-28-084. In the Hamre Associates case, a prime contractor/small business concern was financed by a large business subcontractor. The Large business/subcontractor was responsible for performing most of construction activities, such as site preparation and installation of modular buildings. The small business concern was held to act merely as an intermediary between the contracting agency and its subcontractor.
The ostensible subcontractor regulation and related protest decisions make it clear that, if asked, the SBA has the discretion to look at a variety of factors. This includes, but is not limited to:
- Examination of whether the large business is performing the vital component(s) of the prime contract rather than the small business.
- Determining if the small business has the requisite experience to perform the work as opposed to unduly relying on the large business to do so.
- Inquiring into tax records, bonding, and other financial documentation to determine if the small business will be relying on the financial support of the large business.