In government contracting, there are specific contracts reserved for small businesses. For a company to be eligible for these contracts, the business must meet specific size standard requirements established by the Small Business Association (SBA). The size standard represents the largest size a business, including its subsidiaries and affiliates, may be to be classified as a small business. In general, size standards are based on the average annual receipts (the “total” or “gross income” plus the “cost of goods sold”) or the average number of employees (all individuals employed on a full-time, part-time, or another basis including employees obtained from a temporary employee agency, professional employee organization or leasing concern). The definition of “small” varies by industry and by North American Industry Classification System (NAICS) codes.
If a small business has been awarded one of these specific contracts, another company, a contracting officer or the SBA could file a size protest against the awardee claiming the company does not meet the size requirements to be considered a small business. The protest could allege the awardee on its own is too large, or that the company is affiliated with one or more other companies and together the awardee exceeds the size standard. If the SBA determines the company does not meet the size standard requirements, the company can 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.
Leumas Residential, LLC Size Appeals SBA No. SIZ-6091
Decision issued March 16, 2021
On October 17, 2019, the U.S. Navy (Navy) issued a Request for Proposals (RFP) for grounds maintenance services for Naval Support Activity South Potomac (NSASP) Dahlgren, Virginia, and four other locations. This contract was set aside for 8(a) companies. The contracting officer assigned NAICS code 561730, Landscaping Services, to the RFP. Originally the company size standard associated with code 561730 was $7 million in annual receipts. 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 was identified as the 8(a) prime contractor and ProDyn, LLC (ProDyn) - the majority partner of PD&E, the incumbent contractor at NSASP Dahlgren, Virginia, and Indian Head - was identified as the subcontractor.
In its proposal, the Leumas-ProDyn team stated it planned to hire two project managers from PD&E and the Leumas-ProDyn leadership would provide the Project Managers with “direction, guidance, policies, procedures, and processes to excel”. For its past performance experience, Leumas provided work experience performed at several locations by PD&E for grounds maintenance or work performed by the Leumas-ProDyn joint venture. On September 15, 2020, Leumas was awarded the contract.
On September 22, 2020, DSA, LLC (DSA) filed a size protest alleging Leumas was overly reliant on ProDyn to qualify for and perform the contract in violation of the ostensible subcontractor rule. DSA argued that ProDyn, not Leumas, would be performing the “primary and vital requirements” of the contract as well as providing the equipment and personnel.
On November 10, 2020, the SBA’s Area 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 under NAICS 561730 requirements. The Area Office based its findings on two main factors. First, the Area Office assessed if Leumas and ProDyn were affiliated as joint ventures. It found the existence of the joint venture did not protect a small business from being affiliated with a large business. Next, the Area Office examined Leumas’ proposal. By noting PD&E and Leumas-ProDyn joint venture as main contributors for resources, equipment, and experience, the Area Office determined it was clear the proposal came from Leumas-ProDyn joint venture and not from Leumas.
On November 24, 2020, Leumas filed an appeal with the Office of Hearings and Appeals (OHA) arguing the Area Office’s decision that Leumas was not eligible to be a small business was clearly erroneous. Leumas argued the Area Office based its “other than small” determination solely on the existence of the joint venture to find affiliation with a large business and did not look at the ostensible subcontractor relationship rule. Furthermore, Leumas stated the Area Office erred in treating the proposal as if it came from the Leumas-ProDyn joint venture and not from Leumas. Finally, Leumas took exception to the Area Office’s recitation of facts in its determination that Leumas was “other than small”.
DSA's sole allegation against Leumas was the relationship between Leumas and ProDyn violated of the ostensible subcontractor rule. Due to the fact the Area Office did not address the ostensible subcontractor question, the OHA Administrative Law Judge (ALJ) overseeing the appeal stated that the OHA was required to remand the size determination. In its analysis relevant to the ostensible subcontractor rule, the OHA articulated two findings the Area Office was required to make: “(1) whether a concern will perform the primary and vital requirements of the subject procurement, and (2) whether the prime contractor is unusually reliant on its subcontractor to perform the functions required under the contract”. To determine whether Leumas would perform the primary and vital requirements of the contract, the Area Office needed to first determine what requirements constituted the principal purpose of the procurement.
The OHA ALJ also determined the Area Office had more than enough information to conduct an accessible subcontractor analysis but did not do so. In fact, even the Area Office commented it did not need to perform ostensible subcontractor analysis because it found instead that Leumas was affiliated with ProDyn. The ALJ further opined:
“OHA has extensive case law providing guidance on how to assess affiliation, whether based on an allegation of an ostensible subcontractor relationship or other findings of affiliation, yet the Area Office’s analysis contains not one reference to an OHA case in reaching its conclusion of affiliation. OHA’s case law has been issued with the objective of providing guidance, transparency, and predictability to small business concerns and how their size will be determined should a dispute over their status arise.”
The OHA found the Area Offices analysis deficient and remanded for additional analysis to determine if Leumas violated the ostensible subcontractor rule in a new size determination.
If the SBA issues a size determination finding your company is “other than small”, it can dramatically affect your small business. An adverse size determination can cause you to lose the contract and could prevent you from identifying as a small business for future potential contracts. If the SBA finds your company is “other than small”, you have the right to file an appeal to the OHA. These appeals are time-sensitive and must be filed immediately. In the case of Leumas, it is difficult to know how the Area Office will perform its ostensible subcontractor analysis and whether the result for Leumas will be different. If the Area Office finds Leumas in violation of the ostensible subcontractor rule, this case may end up back on the OHA’s docket.