On October 12, 2016, the SBA Office of Hearings & Appeals (OHA) issued a decision in the matter of: Size Appeal of: Greener Construction Services, Inc. This appeal arose out of the SBA's size determination which concluded that Greener Construction Services, Inc. ("Greener Construction") is affiliated with its subcontractor EnviroSolutions, Inc. ("ESI") under the ostensible subcontractor rule and is therefore not a small business under the applicable size standard.
On September 10, 2015, the Army issued an RFP for solid waste diversion, disposal, and related waste stream management utility services at the Adelphi Laboratory Center and the Blossom Point Research Facility. The procurement was set aside entirely for 8(a) BD program participants and assigned a NAICS Code of 562111, Solid Waste Collection, with a corresponding size standard of $38.5 Million.
Under the Performance Work Statement, the contractor would dispose of refuse from both facilities and reduce quantities of material disposed of in landfills by increasing diversion by any legal process that avoids landfill disposal. Under the contract, the contractor would be responsible for providing all personnel, equipment, supplies, facilities, transportation, tools, materials and supervision necessary to perform the required services. Additionally, the contractor would be responsible for providing the Army with monthly reports, safety & quality control reports, damage reports and training. The only required key personnel was a contract manager to provide overall management of the work to be performed under the contract.
On September 25, 2015, Greener Construction was named the apparent awardee. In response, RJ's Disposal Services, an unsuccessful offeror, timely protested Greener Construction's size based on affiliation with its subcontractor ESI. On July 29, 2016, the Area Office issued its size determination finding that Greener Construction was not a small business for the procurement at issue and under NAICS Code 562111. As a result, Greener Construction appealed the Area Office's size determination.
Basis for SBA's Size Determination
The Area Office's size determination that Greener Construction was other than small based on affiliation with its subcontractor ESI was based on the following:
- The Area Office determined the primary and vital requirements of the contract are "diversion, disposal, and related waste stream management utility services of solid waste." The Area Office determined that trucking was a vital component of that requirement and found that the trucking was to be handled entirely by the subcontractor, ESI.
- The Area Office also noted that because Greener Construction would not be providing any trucks or drivers to provide the services, they would be unable to perform a primary and vital requirement without ESI.
- The Area Office noted that simply supervising the tasks that compose the primary and vital requirements, without actually performing any of the actual work, is insufficient to establish that a prime contractor will be performing the contract's primary and vital requirements.
- The parties' Teaming Agreement stated that the team was to be comprised only of Greener Construction and ESI and that any addition to the team would require ESI's prior written consent.
As part of its appeal, Greener Construction argued that (1) they would be adding additional members to the team in addition to ESI that would perform waste hauling and therefore ESI would only be 1 of 3 that would be performing the hauling; and (2) they would be purchasing the containers required to fulfill the contract. As noted below, OHA rejected both of these arguments.
In denying Greener Construction's appeal and upholding the Area Office's size determination, the OHA Judge made the following conclusions:
- For purposes of the ostensible subcontractor rule, a business' size is determined as of the date of final proposal revisions. Therefore, any planned changes of approach that occur after the final proposal revisions are irrelevant to the ostensible subcontractor affiliation analysis. As applied to this case and because tOHA rejected Greener's argument that they would be adding members to the team and that they would be acquiring the containers required for the work.
- The ostensible subcontractor rule is violated when the prime contractor will have no meaningful role in performing the contract's primary and vital requirements. To that end, where the prime contractor would rely exclusively on a subcontractor to perform those requirements, ostensible subcontractor affiliation exists.
Things To Note
As always, there practical lessons to be learned from this case, including:
1) Teaming Agreements are important when it comes to ostensible subcontractor affiliation. Although not necessarily highlighted, the fact that the prime contractor needed to obtain its subcontractor's written consent before adding team members is a huge NO NO. That will almost always be indicative of an ostensible subcontractor relationship. It is all too common for contractors to slap together and sign a Teaming Agreement without understanding the significance of this document when it comes to protests and other disputes.
2) Contractors that don't understand a contract's primary and vital requirements put themselves at risk for violating the ostensible subcontractor rule. Take the time to analyze and understand the primary and vital requirements of any opportunity you decide to pursue and make sure that you as the prime contractor will be performing those tasks.
For questions about ostensible contractor affiliation, feel free to contact us at: email@example.com.