A small business prime contractor must zero in on the essential objective of its contract and make sure to perform those requirements with its own employees. If those requirements are subcontracted out to others, the SBA will have all the ammunition it needs to find affiliation.
While the “primary and vital” requirements test is the most commonly cited metric for the Ostensible Subcontractor Rule, a recent Small Business Administration Office of Hearings & Appeals decision reminds us that there is another factor to consider. Namely, affiliation can also arise under the Ostensible Subcontractor if the small business prime contractor is unusually reliant on its subcontractor.
The SBA considered a General Services Administration custodial, landscaping, and grounds maintenance services contract set aside for small businesses. On the facts presented in the appeal, it appears that the small business prime contractor would meet the requirement to perform the contract’s primary and vital requirements by, among other things, providing custodial services and controlling all contract management activities
Digging deeper, however, the SBA determined that the primary and vital issue was irrelevant to the final analysis.
According to the SBA, the Ostensible Subcontractor Rule is “disjunctive” – which is to say that the contractor must perform the primary and vital requirements AND cannot be unduly reliant on its subcontractor. The inquiries are totally independent and a black mark on either is enough to tip the scales towards affiliation.
So, getting back to the appeal, the SBA looked at the small business’s relationship with its subcontractor and found a textbook example of over-reliance:
- The subcontractor was the incumbent contractor on the project, but ineligible to submit its own proposal on the restricted set-aside contract
- The small business prime planned to staff its part of the contract almost entirely with the subcontractor’s former employees
- The proposed project manager previously served with the subcontractor on the incumbent contract, and
- The small business prime lacked its own experience and needed the subcontractor to successfully perform (including a stated intent to sub-out 49% percent of the work to one entity)
Cumulatively, these factors were enough for the SBA to find affiliation based on the Ostensible Subcontractor Rule (and, specifically, the prohibition against undue reliance). No further inquiry into performance of the primary and vital requirements was necessary.