By J. Patrick McMahon and William T. Welch

McMahon, Welch and Learned, PLLC recently wrote about bid protests in general, discussing the pros and cons of undertaking or defending a protest. In this article we want to review another protest possibility that is often overlooked but which is of considerable importance in small business set-aside solicitations, the size protest. The federal government places great emphasis on awarding increasing shares of contract work to small businesses. The goal for small business contract work is about 23% of the federal services budget, but this does not always include additional set-aside goals for Veteran-Owned and Women-Owned businesses, HUB Zone work and the like. This equates to billions of dollars per year that are set-aside exclusively for small business competitions. Large businesses have not ignored the set-aside segment of the competitive market and often seek out qualified small businesses to lead competitive teams in which a large business can participate as a significant subcontractor.

If a solicitation is set-aside for small businesses (including, for example, Service Disabled Veteran Owned and SBA 8(a) set-asides), a qualifying small business must be the prime contractor and must do at least 50% of the labor-value of the work. Whether the small business prime contractor actually “qualifies” as a small business is determined for the most part by the size standard set for the solicitation corresponding to a designated NAICS code. Each NAICS code for services is associated with a size standard that is calculated by either the company’s gross revenue or number of employees. If the small business prime contractor’s size exceeds the size standard associated with the assigned NAICS code, then the prime contractor is not considered “small” for that solicitation and is not eligible for award of the small business set-aside contract. Because the size standard is obvious and because most small business owners know whether or not they are going to qualify under the size standard at the time that a proposal is submitted, it is infrequent that a small business will be disqualified based exclusively on its own revenue or number of personnel. This is not as true where the small business prime contractor has teamed with a large business.

The reason that the small-business prime contractor’s size is not always so apparent when it has teamed with a large business is due to SBA’s long-standing concern about these business relationships. The actual size of the small business will be determined by SBA after giving consideration to the size of any “affiliates.” SBA generally considers joint venture partners to be affiliated with one another, for example, and will combine their sizes to determine if the joint venture qualifies as a small business. Similarly, SBA will look carefully at teaming relationships to determine if the small business prime contractor is affiliated with its teaming partner. Companies can be found to be affiliated for various reasons, and the factors considered by SBA in making that determination vary, but SBA relies on the “totality of circumstances” in its reviews. One of the prominent circumstances prompting SBA to find affiliation is where they find that the apparent or “ostensible” subcontractor (usually a large business) has such control over the marketing, proposal development, and the customer that the small business prime contractor lacks sufficient control over the contract. As SBA likes to say, in this situation, the small business prime contractor is “unduly dependent” on the subcontractor in seeking the contract award.

Again, there are several factors that will be considered, but fundamentally SBA is looking at the relationship between the prime and the subcontractor and the relationship that each has to the particular solicitation. A “red flag” for SBA, for example, is a situation where your proposed large-business subcontractor is the incumbent contractor and is no longer eligible for contract award because it has been set-aside for small business. This single factor would not likely result in a finding of affiliation, without more, but if it also became apparent that the small business prime contractor had little to do with marketing the effort, allowed the large subcontractor to write the proposal, and gave most of the higher skilled work to the employees of the subcontractor, then SBA would likely find that the small business and the large business are affiliated.

If SBA finds the two companies are affiliated, the SBA will impute the gross revenue or employees of the subcontractor to that of the small-business prime contractor to determine its size. Thus, if the small-business prime contractor has subcontracted to Lockheed or General Dynamics, for example, and if SBA finds the prime and subcontractor are affiliated, the small business prime contractor will be disqualified because it is no longer small.

A size protest timely filed with the contracting officer asserting an affiliation between the small-business prime contractor and its subcontractor can seriously impact the contract award schedule and can result in a reversal of the award decision. Although the protest is filed with the contracting officer, the SBA (not GAO and not the contracting officer) will determine whether the small-business prime contractor is a qualifying small business. If affiliation is found and the small business is disqualified, then the contract award is reversed and the small business prime and its large business subcontractor are not only disappointed but have wasted considerable resources on an effort which, if properly managed at the outset (teaming phase), could probably have delivered a positive result.

For more information, including information on how to properly structure your teaming arrangements to avoid affiliation, please register for and attend our morning seminar on May 10, 2012 at the Sheraton Reston Hotel on Small Business Affiliation Rules: Teaming Agreements and Size Protests – http://mwl-seminar-small-business-affiliation-rules.eventbrite.com/

About McMAHON, WELCH and LEARNED

Our firm provides corporate and business-related support and legal services to federal government contractors as well as commercial entities. Our federal practice focuses principally on small to mid-sized federal contractors who provide a range of services to the federal government, including information technology services. We handle any issue involving federal government contracts, including bid protests, contract claims, termination settlement proposals, small business issues, and subcontract negotiation and disputes. We have supported and assisted the small and disadvantaged business community for many years, assisting minority-owned firms with certification and qualification for participation in the various programs administered by the Small Business Administration. Our corporate legal services include advice and assistance with business formations, business lifecycle support, and the merger and purchase/sale of business organizations.