Ostensible Subcontractor Rule

All government contractors need to understand the ostensible subcontractor rule and how SBA makes the determination.  This is especially true for new government contractors who lack past performance.  Even if a prime contractor is following the limitations on subcontracting, it does not mean that SBA cannot find affiliation between them.  Small business government contractors that rely too much on another business for subcontracting could raise concern for affiliation under the Ostensible Subcontractor Rule.

What is Ostensible Subcontractor Rule?

Ostensible contractor affiliate happens when a small business holds a prime contract, but a subcontractor ends up controlling the work.  SBA will review whether the subcontractor performed the primary and vital work of the contract.  If the subcontractor performs the primary and vital work on the contract, then SBA will deem that the small prime contractor is affiliated with the subcontractor based on the ostensible subcontractor rule.  The Ostensible subcontractor Rule also states that a small business is overly reliant on a subcontractor may be deemed affiliated for size determination purposes.  Therefore, small businesses must understand the potential risks under this rule when hiring subcontractors for government contracts.  By the way, this rule can also come into play when using teaming agreements and subcontracting agreements.

How This Rule Came To Be?

The rule was implemented to stop large businesses from entering relationships with small businesses to get around SBA’s size requirements.  Please see 13CFR121.404(d)(5) for the regulations governing this rule.

Let’s take a deeper look into this rule.  By now, you are asking yourself how SBA determines the primary and vital work of the contract.  That is a great question, unfortunately SBA does not provide any information on this matter.  The small business prime contractor must determine the main requirements of the contract and ensure that it is performing these tasks with its own employees.  If you let your subcontractor perform those tasks, you will have given SBA more reason to find affiliation. 

Another Factor

There is another factor that you must take into consideration and that factor is unusually reliant on your subcontractor.  In fact, in order to protect yourself you need to meet both conditions; perform primary and vital requirements AND cannot be overly reliant on your subcontractor.  These two items are independent and if you do not meet both you could be found affiliated with your subcontractor.

SBA’s Office of Hearings and Appeals has stated that SBA must examine all aspects of the relationship, including the terms of the proposal, and any agreements between the firms.  When the prime contractor and its subcontractor perform the same type of work, the firm that will perform the majority of the total contract must be deemed to be performing the primary and vital contract requirements.  This is different the primary and vital requirements. 

Four Key Factors

Below are Four Key Factors that will lead to unusual reliance:

Proposed subcontractor is the incumbent contractor that is not eligible to compete for the procurement; The Prime Contractor plans to hire the large majority of its workforce from the subcontractor; Prime contractor’s proposed management previously worked for incumbent on previous contract; The Prime contractor lacks relevant experience and must rely upon the experienced subcontractor to win the contract.

The first factor alone is not enough to show unusual reliance but add one or more factors and you are opening yourself up to a protest based up ostensible subcontractor rule.  Another important fact is SBA will look at the final revised proposal.  Don’t think that you can later make changes to this final proposal and fix your errors.  This will not work.

Conclusion

The goal with today’s topic is to make you aware of the ostensible subcontractor rule and provide some guidance for you.  If you are in doubt, contact your legal representative and run the circumstance by them. 

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