Small businesses in the aerospace and defense industry often lose federal contact awards because during their proposal writing they fail to consider whether a business which they have identified as a subcontractor could bring the small business within the ostensible subcontractor rule losing eligibility for a contract award as a small business. Briefly, an ostensible subcontractor is a subcontractor that is not a similarly situated entity and performs primary and vital requirements of a contract or is one upon which the prime contractor is unusually reliant.
In plain English, the small business is the prime, but the subcontractor does the work. The businesses are considered affiliated for size determination purposes. Usually, the rule is triggered in the small business to large business prime – subcontracting relationship, however, protests have been filed where two small businesses have been involved and a question of affiliation has been raised for size determination purposes. The totality of the circumstances is considered to determine affiliation between two businesses. Whereas the ostensible contractor analysis looks at all aspects of the prime – sub relationship.
Not a similarly situated entity
Under 13 CFR § 125.1, a similarly situated entity is a subcontractor that has the same small business program status as the prime contractor. That is a small business set aside, a subcontractor that is a small business concern; for a SDVOB requirement, a subcontractor also a SDVOB. In addition, a similarly situated entity “must also be small for the NAICS code the prime contractor assigned to the subcontract the subcontractor will perform.” When choosing an entity, therefore, to be a subcontractor attention should be paid also whether the subcontractor is a similarly situated entity. To be clear, this doesn’t mean that one should not contract with a large business, however, one must make sure in selecting a subcontractor that in doing so one doesn’t trigger the ostensible subcontractor rule.
This is also an imperative you’re a selecting a similarly situated entity and not reach immediately the conclusion that because you are subcontracting with a small business you are excluded from the ostensible subcontractor rule. This was the case in Size Appeal of Lost Creek Holdings, LLC d/b/a All-STAR Health Solutions, SBA No. SIZ-5848 (2017). There, Lost Creek Holdings (“Lost Creek”) appealed an SBA Area office decision finding that a contract awardee was small for a Florida National Guard procurement. Lost Creek argued that SBA Area Office erred to consider whether the prime and the subcontractor were affiliated under the ostensible subcontractor rule because the two companies operated as a de facto joint venture.
The SBA Area Office had reached a size determination and reasoned that since the two businesses involved in the procurement were small businesses there was no need to perform an ostensible subcontractor analysis. The OHA disagreed with the Area Office. The OHA noted that save for similarly situated entities the ostensible subcontractor rule does not exclude from its reach all small businesses. The OHA concluded that “the ostensible subcontractor rule remains in full force and effect, with its explicit requirement that firms deemed to be joint venturers under it are affiliated, whether or not they are both small.” As a small business choosing a subcontractor make sure that they are similarly situated and if not, do pay attention to the ostensible subcontractor rule.
Primary and vital requirements of a contract
Once you have identified the subcontractor, read the solicitation carefully to understand the crux of the contracts requirements before a small business can determine the division of work. Determine what is the primary purpose of the solicitation. Then determine if you the small business will perform the primary and vital requirements of the contract. If the solicitation contains a limitation of subcontracting clause understand what percentage of the work you can subcontract and understand the limitations on subcontracting rules that apply to that contract.
The third prong of the ostensible subcontractor rule is whether the prime is unusually reliant on the subcontractor. Based on case law, four factors demonstrate unusual reliance on a subcontractor: (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 experience and must rely upon its more experienced subcontractor to win the contract.
Keeping these factors in mind will help guide your decision making however know the fact that the analysis of the ostensible subcontractor rule is fact specific and procurement specific. So, you must know not only this rule but also how the facts change from one procurement to the next for an ostensible subcontractor rule analysis.
As a small business doing business with the defense industry while you’re maximizing your capacities and capabilities by subcontracting with other businesses keep front center of your decision making the ostensible subcontractor rule so you can avoid any bid protests or worse losing a contract award.
If you have questions related to the ostensible subcontractor rule contact me at email@example.com or at 734 – 746 – 5006.