SBA and The Rules of Affiliation – Is Your Business In Compliance?
The SBA provides significant Federal Contract advantages to certain small businesses pursuant to the regulations and laws of Federal procurement law under the Small Business Act. However, these advantages were created for small businesses only. Over the years large businesses have attempted to gain access to these opportunities by owning, teaming or joint venturing with small businesses, both innocently and willfully. Congress, to identify when a small business and a large business have improperly joined, has created the rules of affiliation. They are located at 13 CFR 121.103. A violation of these rules can result in a determination of Federal Fraud, both civilly and criminally.
This means that Federal Regulations dictate the amount of ownership, control and management a large business may have over a small business. The SBA uses the rules of affiliation to determine such issues as Identity of Interests, inter affiliate transactions, common ownership and control, Common Management, Newly Organized Concern Rule, and Successor in Interest, among other potential rules. In addition, the Totality of Circumstances, and Economic Dependence tests will apply.
Where 51% ownership, and 100% Control and Management MUST be by a specific small business category, such as Service Disabled Veterans or Women owned small businesses, no negative controls may exist as deceitful impediments to either the overall control, or the day to day operations of the small business. Examples include hiring and firing, purchase of all material, supplies and equipment, accounting for Federal standards (including payroll and single control for writing checks). This is not an exhaustive list, but a sample of some of the more common areas that arise in investigations.
The SBA has become quite sophisticated at analysis of company structures for this purpose, and regularly look into the affiliation issues of a company. Companies may be visited by the SBA’s Inspector General without any warning to determine if Federal fraud has occurred. These investigations may be raised by anyone, and are commonly raised by competitors as well as the SBA.
Affiliation is best defined by Case law:
“Firms are affiliated when one firm controls or has the power to control the other, or a third party controls or has the power to control both. 13 C.F.R. § 121.103(a)(1). Further, affiliation arises where one or more officers, directors, managing members, or partners who control the board of directors and/or management of one concern also control the board of directors or management of one or more other concerns. 13 C.F.R. § 121.103(e).
In order to find that firms are affiliated due to common management, both concerns must be controlled by the same person or persons.” Size Appeal of US Builders Group, SBA
No. SIZ-5519 (2013)
The SBA does not typically monitor small businesses for size. Most challenges to size come from competitors though the vehicle of a Protest, irrespective of the authority the Government Contracting Officer can individually exercise to raise a challenge. The SBA’s Area Directors are the initial decision makers, with possibility of appeal only to the SBA’ Office of Hearing and Appeals (OHA). These challenges are frequent.
This is a brief exert from Mr. Krause’s Article, The Rules of Affiliation – an Overview. If you would like to read the article in its entirety, you can find it in our Articles page.