Beware of Backtracking: SBA Reminds Small Business Offerors That Affiliation Cannot Be Fixed After the Fact

6 min

The U.S. Small Business Administration's (SBA) Office of Hearings and Appeals (OHA) recently issued a pair of decisions that highlight an important message for all companies competing for government contracts, specifically those set aside for small businesses. Because the SBA generally determines an offeror's size status as of the date of the self-certification included in its proposal, certain actions taken after that date to mitigate any perceived affiliation will not offset an adverse size determination. The SBA's current rulemaking continues this approach, so small business contractors should make every effort to comply with relevant size standards prior to their proposal submission.

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On January 24, 2020, OHA released its decision in Warrior Service Company, in which the petitioner appealed an Area Office determination that it was affiliated with its subcontractor under the SBA's ostensible subcontractor rule. See Warrior Serv. Co., SBA No. SIZ-6046 (Jan. 24, 2020). The rule "'asks, in essence, whether a large subcontractor is performing or managing the contract in lieu of a small business [prime] contractor.'" Id. (quoting Colamette Constr. Co., SBA No. SIZ-5151 (Aug. 19, 2010)). The petitioner's August 3, 2018 proposal identified it as the prime contractor and another company as its sole subcontractor and teaming partner. The contracting officer found the petitioner to be non-responsible due to a lack of experience and concluded that the subcontractor "would be 'providing most of the necessary personnel, skills, expertise, equipment, technical capability and experience needed to successfully perform the vital and primary functions of the requirement.'" Id. The contracting officer referred the matter to the SBA for a Certificate of Competency (COC) review, during which the petitioner submitted an October 23, 2019 "COC Proposal", in which – for the first time – it was stated that the petitioner "will self-perform [a majority] of the work and" the subcontractor the remaining portion. Id.

The Area Office concluded that the petitioner and its subcontractor were affiliated under the ostensible subcontractor rule because the petitioner "did rely upon [Subcontractor's] experience and expertise to win the contract, and also must rely upon [Subcontractor] for financial assistance," and because "[Subcontractor] will perform a majority, if not all, of the primary and vital contract requirements." Id. The petitioner appealed this size determination to OHA, arguing that "the Area Office clearly erred by disregarding the assertions in the COC Proposal that [Subcontractor] will be responsible for only" a minority of the work under the contract. Id.

OHA denied the appeal. In reaching this decision, OHA explained that the petitioner's October 2019 statement that the subcontractor would not perform the majority of the work was irrelevant because "pursuant to 13 C.F.R. § 121.404(d), Appellant's compliance with the ostensible subcontractor rule is determined as of the date of its proposal for the subject procurement." Id. OHA went on to note that "[i]t is well-settled law that changes of approach occurring after the date to determine size do not affect a firm's compliance with the ostensible subcontractor rule because size is assessed as of that specific date." Id. (emphasis added). Thus, because the petitioner waited until its October 2019 COC review to explain that it would self-perform a majority of the work, rather than including this information in its August 2018 proposal, this fact could not remove the affiliation concern.

The SBA issued another decision on February 13, 2020 which confirms that this principle extends to affiliation matters outside of the ostensible subcontractor rule. In Cazador Investments, an Area Office determined that the petitioner did not qualify as a small business because of its affiliation with a large business subcontractor through their familial identity of interest. See Cazador Investments LLC, SBA No. SIZ-6048 (Feb. 13, 2020). Specifically, the Area Office concluded that the large business was 50% owned by the father of the petitioner's 100% owner, and that the petitioner "did not show a clear line of fracture" between the two businesses. Id. SBA regulations provide that "[f]irms owned or controlled by . . . parents, children, and siblings are presumed to be affiliated with each other if they conduct business with each other, such as subcontracts or joint ventures or share or provide loans, resources, equipment, locations or employees with one another," but that "[t]his presumption may be overcome by showing a clear line of fracture between the concerns." Id. (quoting 13 C.F.R. § 121.103(f)(1)).

Among its arguments appealing this determination to OHA, the petitioner claimed that since submitting its proposal, it had "decided not to use [the large business] as a subcontractor on this contract or any other contract during this period." Id. Again, OHA rejected this line of reasoning in denying the appeal:

In seeking to overturn the size determinations, Appellant contends that it has now decided not to use [the large business] as a subcontractor on this contract . . . This argument fails because, under 13 C.F.R. § 121.404(a), SBA determines the size status of a concern, including its affiliates, as of the date the concern submits a written self-certification that it is small as part of its initial offer including price. Applying this rule, OHA has repeatedly held that events occurring after the date to determine size are not relevant in a size determination . . . Here, Appellant submitted its proposal self-certifying as small on June 4, 2019, and the Area Office examined Appellant's size as of this date . . . While it may be true that Appellant no longer intends to utilize [the large business] as a subcontractor, this change of approach occurred after June 4, 2019 and thus does not affect whether Appellant qualified as a small business as of June 4, 2019.

Id. (emphasis added).

OHA's decisions in Warrior Service Company and Cazador Investment are a good reminder that the time to ensure compliance with applicable size standards, including addressing any potential affiliation issues, is before proposal submission. The SBA's currently pending proposed rule, "Consolidation of Mentor Protege Programs and Other Government Contracting Amendments," demonstrates that this will continue to be a key consideration, as the SBA is clarifying that the rule will "amend § 121.404(d) to clarify that size status for purposes of compliance with the nonmanufacturer rule, the ostensible subcontractor rule and joint venture agreement requirements is determined as of the date of the final proposal revision for negotiated acquisitions and final bid for sealed bidding." See 84 Fed. Reg. 60846, 60851 (Nov. 8, 2019). Small businesses competing for set-aside contract awards should consult legal counsel for advice on how best to ensure compliance with the SBA's affiliation regulations.