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No Ostensible Subcontractor Affiliation With ANC Parent & Sister Companies, Says SBA OHA

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Koprince Law LLC

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An Alaska Native Corporation subsidiary was not affiliated with its parent company and two sister companies under the ostensible subcontractor affiliation rule, even though the company in question would rely on the parent and sister companies for managerial personnel, financial assistance and bonding.

A recent decision of the SBA Office of Hearings and Appeals highlights the breadth of the exemption from affiliation enjoyed by ANC companies.

OHA’s decision in Size Appeal of Olgoonik Diversified Services, LLC, SBA No. SIZ-5825 (2017) involved a Department of State solicitation seeking a contractor to provide design-build construction services in Baghdad.  The solicitation was issued as a small business set-aside under NAICS code 236220 (Commercial and Institutional Building Construction), with a corresponding $36.5 million size standard.

After evaluating competitive proposals, the agency announced that Olgoonik Diversified Services, LLC was the apparent successful offeror.  An unsuccessful competitor subsequently filed a size protest.  The protester alleged, in part, that Olgoonik was affiliated with other entities under the ostensible subcontractor rule.

The SBA Area Office determined that Olgoonik was established in 2011 as a wholly-owned subsidiary of Olgoonik Development, LLC (“OD”), an ANC holding company.  OD, in turn, was a wholly-owned subsidiary of an ANC.  OD had 11 other subsidiaries besides Olgoonik, referred to as Olgoonik’s “sister companies.”  These sister companies included O.E.S., Inc. (“OES”) and Olgoonik Specialty Contractors, LLC (“OSC”).

The SBA Area Office found that Olgoonik had relied on OES and OSC for the relevant past performance identified in its proposal.  OD would provide bonding and other financial assistance to allow Olgoonik to perform the contract.  All six key employees listed in the proposal (including the Program General Manager responsible for overall project management) were OSC employees.

Although Olgoonik had not named OES or OSC as subcontractors in its proposal, the SBA Area Office found that Olgoonik was unusually reliant on its sister companies for contract performance.  The SBA Area Office issued a decision finding Olgoonik affiliated with OES and OSC under the ostensible subcontractor rule (the SBA also found an affiliation for another reason, which is outside the scope of this post).

Olgoonik filed a size appeal with OHA.  Olgoonik argued that the ostensible subcontractor rule did not apply because OSC and OES were not proposed as subcontractors for the project.  Additionally, Olgoonik argued that a regulatory exemption from affiliation precluded a finding of affiliation.  That exemption, which is found in 13 C.F.R. 121.103(b)(2)(ii), provides, in part, that businesses owned and controlled by Indian Tribes, ANCs, Native Hawaiian Organizations, and Community Development Corporations are not considered affiliated with other businesses owned by these entities “because of their common ownership or common management.”  However, “[a]ffiliation may be found for other reasons.”

OHA first addressed the low-hanging fruit: the fact that OD, OES and OSC were not proposed to be subcontractors on the State Department project.  OHA wrote that it has “consistently held that in order for the ostensible subcontractor rule to apply, the alleged affiliate must actually be a subcontractor of the challenged concern.”  In this case, “there is no record of subcontracting in [Olgoonik’s] proposal,” meaning that OD, OES and OSC could not be Olgoonik’s ostensible subcontractors.

But OHA didn’t stop there: it also found that the SBA Area Office had erred by failing to apply the “common ownership” and “common management” exceptions from affiliation.  OHA wrote that “an ANC transfers personnel among its sister companies as part of the common management of its concerns, and an ANC’s exercise of common management is a clear exception to a finding of affiliation.”  Additionally, OHA explained, “relying on its parent company for financial assistance in justifying a finding of affiliation based on a joint venture or ostensible subcontractor is equally illogical.”  ANCs are “excepted from affiliation based on common ownership, thus it would be reasonable for a subsidiary to rely on its parent company’s financial resources, and for bonding . . ..”

OHA granted Olgoonik’s size appeal.

The SBA’s regulations do not expressly exempt ANCs, Tribes, NHOs and CDCs from ostensible subcontractor affiliation.  But as the Olgoonik Diversified Services size appeal demonstrates, the types of relationships that might ordinarily be deemed indicative of ostensible subcontractor affiliation are often part and parcel of common ownership and management.  Olgoonik Diversified Services confirms that OHA will broadly apply the regulatory exception to cover things such as transferred personnel, financial assistance, and bonding assistance.


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