Can a Small Business Subcontractor Pass The Work to a Large Business -- Repost

[outsidelegalguy]

[i posted this last week in the "Subcontracts and Subcontract Management" discussion area, but didn't get much of a reaction, so I thought I'd try reposting it here. Maybe it will catch the interest of people more focused on small business issues.]

A prime contract awarded to a small business on a small business set-aside procurement generally requires the small business prime to perform at least 50% of the work. That’s implemented by the Limitations on Subcontracting clause, 52.219-14. If the prime serves as a "front" for a large business and passes the vast bulk of the work through to the large business, it violates the clause and may find itself the subject of a criminal action based on fraud.

How does it work on the subcontract level? Here’s the scenario: A prime contractor has a small business subcontracting plan, requiring it to make a good faith effort to award some amount of subcontracts to various types of small businesses. Is there any problem (for the prime, the sub, or the sub’s sub) if the prime awards the subcontract to a small business, and that small business then passes the vast bulk of the work through to a large business? Put another way, is there anything wrong with a small business acting as a "front" for a large business with respect to the performance of a subcontract that the prime is awarding as part of satisfying its small business subcontracting plan. There’s no requirement for the prime to include the Limitations on Subcontracting clause in the subcontract – it’s not a required flowdown – so there’s no contract violation.

I’ve certainly heard stories about this happening. Although it’s always made me feel a bit uncomfortable, I’ve never been able to identify anything that makes it illegal, a contract violation, or otherwise improper. Can you?

[Heretalearn]

I’ve certainly heard stories about this happening. Although it’s always made me feel a bit uncomfortable, I’ve never been able to identify anything that makes it illegal, a contract violation, or otherwise improper. Can you?

I don't know the answer. I suspect you won't get a better one than you got in the "Subcontract Management" discussion. But your scenario begs a few questions. Does the price to the Government include fee for the first-tier small business subcontractor? If so, does the first-tier subcontractor add any value? Does the second-tier, large business subcontractor have any affiliation (meaning here legal affiliation, parent/subsidiary relationship or common ownership/control) with either the first-tier subcontractor (in which case the first-tier may not actually be small) or the prime contractor? If the subcontract(s) require CO approval, will they pass the sniff test?