LEGAL GUIDE
Written by attorney David Allen Rose | Nov 23, 2010

BEWARE OF AFFILIATION: THE OSTENSIBLE SUBCONTRACTOR RULE IS STILL ALIVE AND WELL IN THE LIMITATIONS

The economy is continuing to tighten the purse strings of struggling companies, both large and small and as firms look for innovative ways to increase revenue streams to generate capital, one of the more inventive methods is to team up with small businesses to take advantage of inventive programs offered through regulations administered through the Small Business Administration (SBA). The regulations allow for set aside contracts for various types of small businesses if the particular qualifies. For instance, if a business is owned by a Service Disabled Veteran, an Economically Disadvantaged Enterprise, or a Minority owned Business Enterprise (sometimes referred to as an 8(a) company).

A Government contract can, under the right circumstances, be set aside for one of these firms and the contract can be awarded through negotiated procurement. Since many small companies do not have the capability to perform a multi -million dollar Federal contract, it is often advantageous to team with and subcontract some of the work to a large partner to enhance the capabilities of the small business to enable it to adequately perform the contract. The regulations are complicated for how this is done, but generally there are certain requirements, including Limitations of the amount of work the large business can perform or how much the small business must perform called Limitations on Subcontracting that demonstrate the small business is managing the work and is not simply a sham for the large business to win the award of the contract without competition. In the event a large business is determined to be performing too much of the work, or conversely the primary and vital requirements of the contract.

A recent case Morris-Griffin v. C&L Service Corporation, 2010 WL 3221975 (E.D. Va), brought to light the flagrant level to which some of the violations of the "ostensible subcontractor" rule have become. In Morris-Griffin, (MGC) the large business had been an 8(a) contractor handling mortgage applications for the Department of Housing and Urban Development (HUD) for years but because of their success had graduated from the program and were now a large business.

Because of their exceptional service to HUD, they had excellent past performance and when the new solicitation came out as a set aside for an 8(a) they needed a teaming partner to prime the contract in order to be the successful offeror. They chose C&L, an 8(a) company to be the prime and work with them. Incidentally, C&L was a janitorial company with no background or experience in servicing HUD loans.

The subcontract that C&L entered into with MGC was to allow MGC to basically run the contract and submit invoices to C&L for payment. C&L with little to no experience in loan management had little to do with project financing nor day to day performance. In the opinion of the Federal District Court, C&L was simply a nominal 8(a) contractor and MGC was a classic example of an ostensible subcontractor. The rule at 13 CFR 121 is intended to protect the public from large businesses who might seek to obtain access to contracts set aside for small businesses through the use of an 8(a) business acting as the prime to circumvent the intent of the regulations. The purpose of these regulations is "to promote the business development of small business concerns owned and controlled by socially and economically disadvantaged individuals." 15 U.S.C. 631(f)(2); (637(a)).

Conclusion: The lesson to take from this case is not that teaming is a bad thing. Rather it is that when companies are selecting teaming partners they need to be somewhat selective and find partners that bring their strengths to the table and not just an 8(a) or SDVOSB tag. In an athletic vernacular, always keep your eye on the ball of what the SBA program and incentives are about, and you most likely will stay out of trouble. It probably doesn't hurt to obtain solid legal advice from a firm that specializes in SBA and Federal Procurement Law to assist with the agreements and some counseling.

_The summaries below are suggestions of the author based on a current reading and facts and circumstances of the Government, economy and other factors within the drafters reach at the time written. They are not to be construed as legal opinions nor is it recommended they be relied on as such. You are always advised to seek competent legal advice regarding any such matters prior to making any form of business decision. _

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