What is the "Ostensible Subcontractor Rule"

The "ostensible subcontractor rule" is a concept that arises when the SBA (Small Business Administration) is determining whether a firm is considered a small business for purposes of bidding on Government contracts.

The ostensible subcontractor rule treats a prime contractor and its subcontractor as joint ventures and therefore affiliates, for size determination purposes when the subcontractor performs primary and vital requirements of a contract or the prime contractor is unusually reliant upon the subcontractor. This rule is designed to prevent other than small firms from forming relationships with small firms to evade SBA size requirements.

To determine whether the relationship between a prime contractor and a subcontractor violates the rule, SBA considers all aspects of the relationship including the terms of the proposal (such as contract management, technical responsibilities, and the percentage of subcontracted work), agreements between the prime and subcontractor (such as bonding assistance of the teaming agreement), and whether the subcontractor is the incumbent contractor and is ineligible to submit a proposal because it exceeds the applicable size standard for that solicitation.

The SBA evaluates ostensible subcontractor affiliation on a case-by-case basis. Factors that may be relevant include prime contractors that rely upon the subcontractor to provide key personnel, the relative inexperience of the prime contractor, the subcontractor supplying critical bonding, financing, or equipment, the subcontractor drafting the proposal, profit sharing arrangements, and hiring subcontractor rank and file employees, among many others.

A recent SBA size determination case illustrates the application of some of these concepts (see Size Appeal of Giacare and Medtrust JV (Giacare/Medtrust) versus Global Dynamics (GDL). In a solicitation issued by the Army Material Command, GDL submitted a proposal whereby it would perform 51 percent of the effort and OMV, a subcontractor, would perform the remaining 49 percent. GDL would also supply the full-time senior project manager to be responsible for day-to-day contract management and communication with the Government.

When the Army announced that GDL was the winning bidder, Giacare/Medtrust appealed on the basis that GDL was in violation of the ostensible subcontractor rule. Giacare/Medtrust alleged that GDL was a young company that began conducting business in 2010, had modest revenues, fewer than 10 employees, and little experience with contracts as large as the subject ID/IG (up to $200 million).

The SBA denied the protest based on three considerations. First, OMV (the subcontractor) employees will be under GDL's supervision. Second, GDL is not dependent on OMV for financial resources because GDL has sufficient financial resources to run the contract. Finally, GDL has experience in the health care industry (the nature of the contract).