Appeal of the area office’s determination that the appellant is not an eligible small business is granted, where the appellant’s proposed subcontractor was not the incumbent on the requirement; where the subcontractor would perform only ancillary functions; where the appellant did not plan to hire the majority of employees from the subcontractor; and where the subcontractor employees proposed for key positions would become employees of the appellant before contract performance began and would be under its control.

Residential Enhancements Inc. appealed the Small Business Administration area office’s determination that it was not an eligible small business for a Department of Housing and Urban Development procurement for asset management services.

HUD planned to award a single IDIQ contract in each of three geographic areas, seeking a contractor to manage HUD properties in the region. The CO set aside the procurement entirely for small businesses under NAICS code 531210, Offices of Real Estate Agents and Brokers. Following a successful NAICS code appeal at OHA, the CO changed the NAICS code to 531390, Other Activities Related to Real Estate, with a corresponding size standard of $7.5 million in annual receipts.

After the CO identified Residential as the apparent awardee, eight unsuccessful offerors filed size protests alleging the awardee was affiliated with one of its subcontractors under the ostensible subcontractor rule. The area office sustained the protests, agreeing that Residential was affiliated with the subcontractor, a large business.

During its review, the area office concluded that Residential is affiliated with three other companies through common ownership by Residential’s sole owner, who also holds controlling interests in the three affiliates. The area also concluded that Residential was affiliated with a fourth company, which is owned by the husband of Residential’s owner and which provides payroll assistance and other services to Residential.

The area office also concluded that Residential was affiliated with its proposed large business subcontractor under the ostensible subcontractor rule. The area office found that Residential had proposed two employees of the subcontractor to serve as Project Manager and Contract Manager, and proposed that the subcontractor would be responsible for quality control functions. Because Residential planned to hire key employees from its proposed subcontractor, and because those employees would manage the primary and vital requirements of the contract, the area office found Residential was unusually reliant on its subcontractor and therefore the firms were affiliated. Because their combines receipts exceeded the size standard for the relevant NAICS code, the area office held that Residential was not an eligible small business for the procurement.

In its appeal, Residential argued that the area office ignored the fact that its subcontractor is not the incumbent prime contractor, and pointed out that OHA had overturned adverse findings of affiliation in such cases. Residential also noted that it would not hire the majority of its workforce from the subcontractor. Although it did propose to hire two key personnel away from the subcontractor, these individuals signed letters of commitment to become Residential employees upon contract award. Once performance begins, all but two of the key personnel will be employees of the appellant.

Residential also disputed the area office’s finding that the subcontractor would perform the vital requirements of the contract. According to the appellant, the subcontractor’s only involvement in performance will be to serve as the designated quality control vendor, and the only key personnel not employed by Residential will be the two quality control managers. In all, fewer than 50 percent of the proposed key personnel will be former employees of the subcontractor. The appellant affirmed that the subcontractor will have no role in the management of the contract.

Residential also argued the area office improperly treated the employees of an affiliate of the subcontractor as its actual employees. Residential explained that this business is not a proposed subcontractor and may not even be in business. According to Residential, it cannot be unduly reliant on its subcontractor if it hires employees from a third business, which is neither a proposed subcontractor, nor in business.

Residential also argued that its lack of experience performing HUD Asset Management prime contracts does not establish that it has no relevant experience. Residential explained that its owner has nine years of experience in asset management functions and more than 15 years of experience as a licensed realtor, broker and real estate instructor. Further, Residential had previously managed HUD contracts worth millions of dollars. Residential again noted that its proposed subcontractor would have no role in performance, except for quality control.

Residential also argued the area office exaggerated the significance of its plan to license software from its proposed subcontractor. Specifically, the appellant noted that the RFP did not require the contractor to use any software except for software provided by HUD. While Residential plans to license software to support tracking assets and managing vendor tasks, it explained that these capabilities were not specifically detailed in its proposal nor do they interface with HUD’s database. Because this software was not an RFP requirement, it could not have been a determining factor in HUD finding Residential’s proposal technically acceptable.

OHA agreed that the area office had erred in its conclusions. First, OHA agreed Residential will self-perform all, or nearly all, of the required real estate asset management services, which OHA previously found were the primary requirements of the contract during the NAICS code appeal. Further, the proposal made clear that the proposed subcontractor would have no operational role in contract performance, other than quality control. While an important function, OHA found that quality control was not the major purpose of the contract, but rather an ancillary function supporting the real estate asset management services. Based on these findings, OHA agreed the area office erred in determining which vendor would perform the primary requirements of the contract.

OHA also disagreed that Residential would be unusually reliant upon its proposed subcontractor, finding that none of the four factors contributing to such a finding were absent. First, the proposed subcontractor is not the incumbent. Further, there is no indication Residential would hire a majority of its workforce from the subcontractor, or that the subcontractor will perform 40 percent or more of the requirement. Finally, while the parties debate whether Residential has the relevant experience needed to perform the requirement, there is no evidence Residential relied on its proposed subcontractor to win the contract. In fact, the RFP did not include past performance as an evaluation factor.

According to OHA, the only factor that supported a determination of unusual reliance is Residential’s plan to hire many of its key personnel from its proposed subcontractor. Nevertheless, OHA identified errors in the area office’s findings. First, many of the key personnel are not employed by the subcontractor, but by its affiliated business concern, which is not a proposed subcontractor. OHA also found the area office could not reasonably have found these businesses were affiliated. Given that only one of the proposed key personnel—the proposed quality control manager—was a current employee of the subcontractor, OHA found the area office clearly erred. Second, OHA noted that the employees Residential planned to hire from the subcontractor would become its own employees and would be under its control.

Residential Enhancements Inc. is represented by James C. Fontana and Jeffry R. Cook of Dempsey Fontana, PLLC. Owen REO LLC is represented by Antonio R. Franco, Michelle E. Litteken, Ambika J. Biggs, and Meghan F. Leemon of PilieroMazza PLLC.