On May 2, 2025, in Size Appeal of Bowhead Enterprise, Science, and Technology, LLC, SBA No. SIZ-6352, the Small Business Administration (“SBA”) Office of Hearings and Appeals (“OHA”) ruled that for service and manufacturing contracts, there cannot be a finding of an ostensible subcontractor if the contractor is in compliance with the applicable limitations on subcontracting requirement.

Eligibility for a small business set-aside contract award requires the competing firm to be “small” under the primary NAICS code assigned to the contract at the time the firm submits its offer plus price to the government. A concern’s size is determined by the revenue or employee count of the concern and all of its affiliates. The SBA uses various criteria, such as common ownership or management, to find that a concern is an “affiliate” of another firm, such that revenue and employees of both entities would be aggregated for purposes of size. One of these criteria is called the “ostensible subcontractor rule” found at 13 CFR 121.103(h)(3).

Under the ostensible subcontractor rule, a subcontractor is an “ostensible subcontractor,” and thus affiliated with the prime contractor, if (1) the subcontractor will perform the “primary and vital” requirements of the contract, and/or (2) the prime contractor is unduly reliant on its subcontractor. If the SBA finds the subcontractor is an ostensible subcontractor, the SBA treats the prime and ostensible subcontractor as joint venturers and thus affiliated for size determination purposes. If the combined size of the prime contractor and ostensible subcontractor render the “joint venture” other than small for the underlying contract award, the joint venture will be ineligible to receive or perform the award.

A corollary to the ostensible subcontractor rule are the Limitations on Subcontracting that apply to small business contracts. A contractor awarded a prime contract through a small business set-aside program (i.e. 8(a), HUBZone, WOSB, etc.) is limited in the amount of work that can be subcontracted out to firms that are not similarly situated entities: 50% for service contracts, 85% for construction contracts, and 75% for specialty construction contracts. A concern is a similarly situated entity if it has the same small business program status as the prime contractor (for example, if the prime contractor is an 8(a) certified small business, a similarly situated subcontractor must also be an 8(a) certified small business) and is small for the NAICS code assigned to the prime contract.

In Size Appeal of Bowhead Enterprise, the protestor filed a size protest against DNI, a tribally owned firm, claiming DNI did not have the requisite experience or past performance required by the solicitation. The protestor claimed that DNI was in violation of the ostensible subcontractor rule because “at least in terms of evaluations for this specific proposal, DNI was entirely reliant on its subcontractor for evidence of past performance.” The protestor argued that because DNI could not perform the primary and vital requirements of the contract on its own, it was unduly reliant on its subcontractors in violation of the ostensible subcontractor rule.

OHA disagreed.  Applying the SBA’s recently revised rule found at 13 C.F.R. § 121.103(h)(3)(iii), OHA determined the revised rule applies a “bright line” test mandating a finding that the small business prime contractor is performing the primary and vital requirements if the prime contractor, together with its small business subcontractors, meets the limitations on subcontracting. The relevant part of 13 C.F.R. § 121.103(h)(3)(iii) states:

that SBA will find a small business prime contractor is performing the primary and vital requirements of a contract for services, specialty trade construction or supplies, where the prime contractor can demonstrate that it, together with any subcontractors that qualify as small businesses, will meet the limitations on subcontracting provisions of 13 C.F.R. § 125.6.

OHA, applying this brightline test for determining compliance with the ostensible subcontractor rule on certain contracts, held that because DNI met the limitations on subcontracting, no further evaluation of the traditional ostensible subcontractor factors was needed and affirmed DNI’s size determination based solely on DNI’s compliance with the limitations on subcontracting standard stating: “[t]hat DNI is meeting the applicable limitations on subcontracting, in turn, provides sufficient evidence to overcome [protestor’s] claim — indeed, any claim — regarding the existence of an ostensible subcontractor.”

This article summarizes aspects of the law. This article does not constitute legal advice. For legal advice for your situation, you should contact an attorney.