Size Matters: the Ostensible Subcontractor Rule

by Linda Rawson | Mar 31, 2017 | Federal Government Contracting

Size Matters

First, what in the world does “Ostensible” mean?

According to dictionary.com, is an adjective and has two meanings:

1. Outwardly appearing as such; professed; pretended: an ostensible cheerfulness concealing sadness.
2. Apparent, evident, or conspicuous: the ostensible truth of their theories.

Does anyone else find this humorous?  Really?  Cheerfulness concealing sadness?  The Ostensible Subcontractor Rule is anything but cheerful.

An “Ostensible Subcontractor” is one that “performs primary and vital requirements of a contract,” or is a subcontractor that the prime contractor is “unusually reliant” upon.  The Small Business Administration (SBA) regulations affiliate a prime contractor with all of its ostensible subcontractors for size determination purposes.

Affiliation is not a word anyone wants to hear in the government contracting arena.  Especially after an award has been made.

Affiliation can disqualify companies for set-asides due to a partners combined size.  The location and industries are not relevant.  It is about power and control of the large subcontractor over the prime contractor.  The “Ostensible Subcontractor” rule is often the most common type of affiliation found between a prime contractor and the subcontractors with which it teams.

The purpose of the rule is to prevent other than small firms from forming relationships with small businesses to evade the SBA’s size requirements.

The key for a Small Business to avoid falling victim to the ostensible subcontractor trap is to ensure that its proposal, proposal-related documentation, and teaming agreements do not indicate, on their face, that an ostensible subcontractor relationship exists.

Specifically, small businesses must be careful not to “oversell” the technical expertise, past experience, or work to be performed by their subcontractors in the proposal or proposal-related documentation.

While it may be necessary for a small business to emphasize the positive qualities of a large subcontractor to compete effectively for a contract award, the small business does not want to make it evident that they are solely relying on the large subcontractor to perform.

A small business must ensure that it proposes to perform a significant portion of the contract work or management with its own resources or to spread this work and management out amongst multiple subcontractors to ensure it is not “unusually reliant” on one subcontractor.

According to the article, Ostensible Subcontractor Affiliation: Beware These “Four Key Factors,” Says SBA OHA, the proposal in question had a small business prime contractor that perform 51.1% of the contract services, and the large business would perform the remaining 48.9%.  Of a total workforce of 20 personnel, 10 employees would go to the prime contractor and 10 employees would work for the subcontractor.

A very typical scenario is to split the employees between two contractors to meet the subcontracting percentages.

The four factors from this article that can contribute to this affiliation are:

1. The proposed subcontractor was the incumbent contractor, and not eligible to compete for the procurement.
2. The prime contractor planned to hire the vast majority of its workforce from the subcontractor.
3. The prime contractor’s proposed management previously served with the subcontractor on the incumbent
4. The prime contractor lacked relevant experience and was obliged to rely on its more experienced subcontractor to manage the contract.

As a small business, you must be very careful to follow all the rules completely.  The small business mentioned in this article tried to fight the size standard ruling and lost.