Small business government contractors are (or should be) aware of the SBA’s affiliation rules. In a nutshell, the rules set the standard for whether/when another business controls – or has the ability to control – the small business.
Affiliation is a huge red flag for small business contractors. A finding of affiliation can lead to lost contracting opportunities and the inability to access the set-aside contract marketplace.
The kind of control that leads to affiliation can manifest in many ways. Often, it arises out of the business’s corporate control and management structure. However, contractors need to understand that there are other kinds of relationships and interactions that can lead to affiliation – often on a project-by-project basis.
A good example of the kind of affiliation that can manifest on a stand-alone project is the Ostensible Subcontractor Rule. A small business is deemed affiliated under the Rule when a subcontractor performs the primary and vital requirements of the contract (or the small business prime contractor is unusually reliant on the subcontractor).
The steps required to avoid Ostensible Subcontractor affiliation are fairly straightforward (but not always as simple as they seem). Make a good faith/common sense effort to determine the key/principal purpose of the contract and ensure that your business (as the prime contractor) fulfills a meaningful role in providing that service to the government.
If your business fills only a mere ministerial or administrative role on a contract where it is the prime contractor – consider an immediate affiliation check-up with a trusted advisor.
A recent SBA Office of Hearings and Appeals (OHA) decision shows that there are no acceptable shortcuts in this area. In the appeal, a disappointed contractor size protested the awardee on an herbicide application contract. The protester argued that the awardee violated the Ostensible Subcontractor Rule by subcontracting the primary and vital contract services (specifically, physically spraying the herbicide) to a subcontractor.
The small business prime contractor argued that it did not violate the Ostensible Rule because it designated the companying spraying the herbicide as a “vendor” — not a subcontractor. OHA was not convinced.
In the decision, OHA states that a mere administrative designation by the prime contractor does not change the analysis or the requirements related to performing the primary and vital contract services. Because the small business contracted out those services, there was Ostensible Subcontractor affiliation.
The decision services as a helpful reminder for small business prime contractors that meaningful participation in performing the contract is always required.
Nick Solosky is a Partner in Fox Rothschild’s Government Contracts Practice Group. You can reach Nick directly at nsolosky@FoxRothschild.com or 202-696-1460.