The U.S. Small Business Administration’s Ostensible Subcontractor Rule

There are several common pitfalls that small businesses can succumb to, including the U.S. Small Business Administration’s (SBA) ostensible subcontractor rule. Under this rule, a small business contractor will be deemed affiliated with its subcontractor whenever the subcontractor performs the primary and vital work required by the prime contract. The rule can be difficult given the lack of regulatory clarity surrounding it, which can lead to challenges for small businesses.

A recent decision from SBA’s Office of Hearings and Appeals (OHA), “Size Appeal of WG Pitts Company,” argued that it should not be affiliated with its large business subcontractor because it was performing the primary and vital work of the contract by having assigned only one of seven sites to the contractor to perform. OHA held, however, that the contractor’s proposal did not make this clear and OHA would not consider after-the-fact arrangements in applying the subcontractor. The lesson from the ruling is that if there are uncertainties, such as the number of sites that will be awarded, those should be explained in a way that makes it clear the small business itself will perform the primary and vital work of the contract under all circumstances.

In a different decision, “Size Appeal of Competitive Innovations,” OHA held that a contractor was affiliated with four subcontractors, because they were collectively performing the primary and vital delivery of instructional services called for by the prime contract. The SBA sided with the contractor primarily because each subcontractor only had a small portion of the instructional work. OHA, however, reversed the decision finding the ostensible subcontractor rule applied given that the prime contractor would not be performing a significant portion of the contract’s primary and vital work. While there is an exception to the ostensible subcontractor rule for SBA approved mentor-protégés, the exception only applies if the mentor-protégé actually submits a proposal as a joint venture.

To learn more about the ostensible subcontractor rule, including affiliation instructions, visit www.sba.gov.