Affiliation: Hiring Subcontractor's Project Manager Does Not Violate the Ostensible Contractor Rule

On October 29, 2015, the Small Business Administration (SBA) Office of Hearings and Appeals (OHA) issued a decision in the Size Appeal of:  Giacare and Medtrust JV, LLC, SBA No. SIZ-5690.  The appeal, filed by GiaCare and Medtrust JV, LLC (an unsuccessful offeror) arose from a size determination which concluded that Global Dynamics, LLC (GDL) was not affiliated with its subcontractor, OMV Medical, Inc. (OMV) and was therefore a small business.

The issue here was whether the ostensible subcontractor rule had been violated.  Ostensible subcontractor affiliation is detailed in 13 CFR 121.103(h)(4) and defines an ostensible subcontractor as a "subcontractor that performs the primary and vital requirements of a contract, or a subcontractor upon which the prime contractor is unduly reliant."

Background and Facts

The Request for Proposal (RFP) in this case was issued by the U.S. Army Medical Command for nursing services in the San Antonio Military Health System.  The procurement was set aside entirely for small businesses and was assigned NAICS Code 621399 which has a corresponding size standard of $7 million in average annual receipts.  The RFP specified that offerors could submit past performance pertaining to subcontractors or other entities within a teaming arrangement.

GDL submitted a proposal which identified provided the following information:

• Identified GDL as the prime contractor and OMV as its subcontractor. 
• Stated that GDL will perform 51% of the effort and OMV will perform 49%.
• GDL will supply the full-time Senior Project Manager who will be responsible for day-to-day contract management and communication with the Government.  OMV will provide a Project Manager and both the Senior Project Manager and the Project Manager will be supervised by GDL's CEO.
• GDL submitted 5 past performance references, 1 for itself and 4 for OMV.

After all offerors were notified that GDL was the apparent awardee, GiaCare protested GDL's size, alleging that GDL is not a small business due to violation of the ostensible subcontractor rule, i.e., that GDL and OMV are affiliated.  Specifically, GiaCare claimed that:  (1) because GDL is a young company with little experience performing contracts as large as the subject contract, GDL would be heavily reliant upon OMV to perform the contract; (2) GDL lacks financial capability to perform the contract; (3) GDL would not have won the contract without OMV's past performance references; and (4) GDL is dependent upon OMV because the Senior Project Manager was currently an OMV employee (although by the time of contract award, this individual would be an employee of GDL).

SBA OHA's Decision

After the SBA's Area Office determined that GDL and OMV were not affiliated under the ostensible subcontractor rule, GiaCare filed a protest with the OHA. In issuing its decision, the OHA upheld the Area Office's size determination that GDL was a small business.

1. Financial Capability:  In light of the evidence GDL provided regarding lines of credit, the OHA summarily dismissed the claim that GDL lacked financial capability to perform the contract.  
2. Past Performance:  The OHA relied upon more recent cases which indicated that past performance is just one factor evaluated.  They also seemed to indicate the in the absence of other factors which would tend to demonstrate dependence, use of the subcontractor's past performance will not be dispositive of an unusual reliance determination.
3. Senior Project Manager:  The OHA pointed out that they have, on numerous occasions held that hiring key personnel from a subcontractor is not necessarily a violation of the ostensible subcontractor rule.  In this case, because GDL adequately established that once the Senior Project Manager became employed by GDL he/she would be under the supervision and direction of GDL, there was no ostensible subcontractor affiliation.

Lessons Learned

While OHA"s decision in this case isn't shocking, there are some takeaways:

• Determining whether the ostensible subcontractor rule has been violated is a very fact-specific inquiry and a decision will take into account all the circumstances of the situation at issue.
• Hiring a subcontractor's key personnel such as a Senior Project Manager will not necessarily implicate ostensible subcontractor affiliation; a key factor supporting a negative finding of ostensible subcontractor affiliation is establishing that the prime contractor will in fact have ultimate supervision and control over the key personnel.

If you have any questions about whether a specific teaming arrangement will possibly implicate or violate the ostensible subcontractor rule and result in affiliation, please contact us at:  (808) 369-9710 or info@holomuaconsulting.com.