Business Size Matters with the Small Business Administration (SBA) | Whitcomb Selinsky, PC

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In public procurement, there are specific contracts reserved for small businesses. For a business to be eligible for these contracts, the business must meet specific standard size requirements established by the Small Business Association (SBA). The size standard represents the largest size that a business, including its subsidiaries and affiliates, can be classified as a small business. In general, size standards are based on average annual revenue (“total revenue” or “gross revenue” plus “cost of goods sold”) or average number of employees (all persons employed on a full-time, part-time or other basis, including employees obtained from a temporary agency, professional organization of employees or a hiring company). The definition of “small” varies by industry and North American Industry Classification System (NAICS) codes.

If a small business has been awarded one of these specific contracts, another business, a contracting officer, or the SBA could file a size protest against the recipient claiming that the business does not meet the size requirements. to be considered a small business. The protest could allege that the recipient alone is too tall, or that the company is affiliated with one or more other companies and together the recipient exceeds the size standard. If the SBA determines that the business does not meet the size standard requirements, the business may appeal to the Office of Hearings and Appeals (OHA). Leumas Residential, LLC (Leumas) faced such a protest, and below is the subsequent appeal to the OHA.

Size Calls from Leumas Residential, LLC SBA No. SIZ-6091
Decision rendered March 16, 2021

SOLICITATION

On October 17, 2019, the U.S. Navy (Navy) issued a Request for Proposal (RFP) for Grounds Maintenance Services for Naval Support Activity South Potomac (NSASP) Dahlgren, Virginia, and four other locations. This contract was reserved for 8(a) companies. The contracting officer has assigned NAICS code 561730, Landscaping Services, to the RFP. Originally, the business size standard associated with code 561730 was $7 million in annual revenue. However, on August 19, 2019, the SBA raised the size standard to $8 million.

On December 23, 2019, Leumas submitted a proposal to the contracting officer. In the proposal, Leumas has been identified as the 8(a) prime contractor and ProDyn, LLC (ProDyn) – the majority partner of PD&E, the incumbent contractor of NSASP Dahlgren, Virginia and Indian Head – has been identified as the subcontracting.

In its proposal, the Leumas-ProDyn team said it plans to hire two project managers from PD&E and that Leumas-ProDyn management will provide the project managers with “direction, advice, policies, procedures and processes to excel”. For past performance experience, Leumas provided work experience performed at multiple locations by PD&E for grounds maintenance or work performed by the Leumas-ProDyn joint venture. On September 15, 2020, Leumas won the contract.

THE PROTESTATION

On September 22, 2020, DSA, LLC (DSA) filed a sizable protest alleging that Leumas was too dependent on ProDyn to qualify and perform the contract in violation of the apparent subcontractor rule. DSA argued that ProDyn, not Leumas, would perform the “primary and vital requirements” of the contract as well as supply the equipment and personnel.

On November 10, 2020, the SBA regional office agreed with DSA and found that Leumas was “generally affiliated” with ProDyn and was therefore “other than small”, meaning Leumas was no longer classified as a small business as required by NAICS 561730. The regional office based its conclusions on two main factors. First, the regional office assessed whether Leumas and ProDyn were affiliated as joint ventures. She concluded that the existence of the joint venture did not preclude a small business from being affiliated with a large business. Then the regional office reviewed Leumas’ proposal. Noting PD&E and the Leumas-ProDyn joint venture as the main contributors for resources, equipment and experience, the regional office determined that it was clear that the proposal came from the Leumas-ProDyn joint venture and not from Leumas.

THE CALL

On November 24, 2020, Leumas filed an appeal with the Office of Hearings and Appeals (OHA) arguing that the regional office’s decision that Leumas was not eligible to be a small business was clearly wrong. Leumas argued that the regional office based its “other than small” determination solely on the existence of the joint venture to find an affiliation with a large company and failed to consider the apparent subcontractor relationship rule. Further, Leumas said the regional office erred in treating the proposal as if it came from the Leumas-ProDyn joint venture and not from Leumas. Finally, Leumas took issue with the regional office’s statement of facts in its determination that Leumas was “other than small.”

THE RESULT

DSA’s only allegation against Leumas was that the relationship between Leumas and ProDyn violated the apparent subcontractor rule. Since the regional office did not address the apparent issue of the contractor, the OHA Administrative law judge (ALJ) overseeing the appeal said the OHA was obligated to remand the size determination. In its analysis of the apparent contractor rule, the OHA made two conclusions that the regional office was required to make: “(1) whether a business will meet the primary and vital requirements of the market in question, and (2 ) if the prime contractor is exceptionally dependent on its subcontractor to perform the functions required under the contract.” To determine whether Leumas would meet the primary and vital requirements of the contract, the regional office first had to determine which main object of the contract.

The OHA ALJ also determined that the regional office had enough information to perform an analysis of accessible contractors, but did not do so. In fact, even the regional office said it didn’t need to perform an apparent contractor analysis, as it instead found out that Leumas was affiliated with ProDyn. The ALJ further issued the following opinion:

“The OHA has extensive case law providing guidance on how to assess affiliation, whether based on an allegation of an apparent contractor relationship or other findings of affiliation, but the regional office’s analysis contains no reference to an OHA case in reaching its conclusion of affiliation. OHA case law has been published for the purpose of providing guidance, transparency, and predictability to small businesses and how their size will be determined in the event of a dispute over their status.

The OHA found the regional offices’ analysis deficient and sent it back for further analysis to determine whether Leumas violated the apparent contractor rule in a re-size determination.

TAKE AWAY

If the SBA issues a size determination finding that your business is “other than small,” it can significantly affect your small business. An unfavorable size determination may cause you to lose the contract and may prevent you from identifying yourself as a small business for potential future contracts. If the SBA concludes that your business is “other than small,” you have the right to file an appeal with the OHA. These appeals are urgent and must be filed immediately. In the case of Leumas, it is unclear how the regional office will perform its apparent contractor analysis and whether the outcome for Leumas will be different. If the regional office finds Leumas in violation of the apparent subcontractor rule, that case may end up on the OHA docket.

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