Marwais Steel Company, No. 3884 (February 10, 1994) Docket No. SIZ-93-12-15-137 UNITED STATES OF AMERICA SMALL BUSINESS ADMINISTRATION OFFICE OF HEARINGS AND APPEALS WASHINGTON, D.C. SIZE APPEAL OF: ) ) Marwais Steel Company ) ) Appellant ) ) Re: Engineered Air Systems, ) Docket No. SIZ-93-12-15-137 Inc. ) ) Solicitation No. ) F09603-92-R-71002 ) Department of the Air Force ) Robins AFB, Georgia ) DIGEST A formal size determination that consists of summary conclusions and lacks sufficient identification of the facts relied upon by the Regional Office and its reasoning therefrom fails to comply with the requirements of 13 CFR 121.1606(f), and provides neither adequate notice to interested parties nor an appropriate basis for review by this Office and will be remanded to the Regional Office, in consequence. Where the Regional Office has failed to obtain or to consider the proper data in assessing compliance with the nonmanufacturer or 50 percent rule, the case will be remanded for further investigation. The ostensible subcontractor rule does not apply where an offeror's eligibility to participate in a small business set aside is based on an evaluation of an offeror's small business size status under the nonmanufacturer rule. Where persons are employed by both an offeror and its affiliate, they will be counted only once in determining the offeror's size status. An appellant has standing to address all issues resolved in the size determination, including those not raised in its size protest. In determining compliance with the 50 percent rule in 15 U.S.C. 644(o)(1) in the context of a contract for supplies, the offeror's total contract cost (including profit) less sub contracting costs and materials costs must be compared with all subcontracting costs less subcontractor materials costs. DECISION February 10, 1994 PHILLIPS, Administrative Judge, Presiding: Jurisdiction This appeal is resolved under the Small Business Act of 1958. 15 U.S.C. 631 et seq., and the regulations published at 13 CFR Part 121. Issues Whether the Regional Office investigation with respect to Engineered Air System's (EASI) number of employees, status as the manufacturer of the product to be supplied under the solicitation and compliance with the 50 percent rule was adequate and whether the determination complies with the requirements of 13 CFR 121.1606(f). Whether the Regional Office erred in failing to evaluate EASI's relationship with its subcontractor under the ostensible contractor rule and to consider the latter's number of employees in evaluating EASI's size status. Whether Appellant has standing to address an issue that it failed to raise in its protest but that was resolved in the size determination appealed. Whether EASI is the manufacturer of the revetment kits under 13 CFR 121.906(b). Whether the Regional Office applied the correct standard in evaluating EASI's compliance with the 50 percent rule in 15 U.S.C. 644(o)(1). Facts Warner Robins Air Logistics Center issued the captioned solicit ation for the acquisition of "revetment kits" on February 18, 1992, as a small business set aside classified under Standard Industrial Classification code 3448, to which a 500-employee size standard applies. Initial offers were due on September 18, 1992; best and final offers were due on September 23, 1993. On November 10, 1993, the Contracting Officer issued a notice to all unsuccessful offerors that the contract would be awarded to EASI. The contract was awarded on December 8, 1993; work has been suspended following the filing of a protest with the General Accounting Office. Marwais Steel Company (Marwais) filed a timely protest with the Contracting Officer on November 18, 1993, which she forwarded to the SBA's Kansas City Regional Office for investigation. Marwais supplemented its protest on December 7, 1993. In its size determination issued on December 8, 1993, finding EASI to be small, the Regional Office summarized the protest allegations as follows: 1. EASI has not been a qualified small business since December 30, 1992 when its parent company Engineered Support Systems, Inc. (ESSI) agreed to acquire Associated Products, Inc., (API) and its subsidiaries which consist of two business entities, Wycot Corporation (Wycot) whose name has since been changed to Engineered Specialty Plastics, Inc. (ESPI), and Lifetime Faucets, Inc. (Lifetime). Dunn & Bradstreet reports were furnished for ESSI, EASI, API, ESPI, and Lifetime indicating that the total employees of the above concerns could be anywhere from 471 to 932 based on the above submitted material. 2. EASI does not qualify as a small business manufacturer of the revetment kits required by FAR Clause 52.219-6 (Notice of Total Small Business Setaside). Marwais contends that EASI is not a past or current manufacturer of the revetment kits required for this solicitation and questions whether EASI qualifies as a small business manufacturer or regular dealer as required by FAR 22.606-1 and 2; 19.102(f) and 13 CFR 121.906. Marwais alleges that EASI's Annual Report and related public filings provides [sic] no evidence that EASI has the plant, equipment and personnel capable of producing such supplies. Based upon these allegations, EASI was required to submit a completed SBA Form 355, reports of its number of salaried and hourly employees for pay periods September 28, 1991 through September 12, 1992 and answers to the allegations contained in Marwais' letter of protest. In its determination the Regional Office noted that EASI has conceded affiliation with ESSI, API, ESPI and Lifetime; however, it found that their combined number of employees during the relevant accounting period, when added to those for three additional affiliates, was below 500. The Regional Office further determined that EASI is the manufacturer of the revetment kits to be procured under the solicitation based upon the requirements of SBA's nonmanufacturer rule set forth at 13 CFR 121.906(b). The determination provides the following explanation for this finding: EASI certified as the manufacturer of the revetment kits. EASI admits that they have never manufactured this exact item but they have fabricated similar items that have involved sheet metal fabrication almost identical to that of the revetment kits. EASI has the plant, equipment, personnel and capability to perform the entire work required for this solicitation in-house but has chosen to subcontract some of the work. EASI is adding the greater total value and elements of importance to the end item and is considered to be the manufacturer of the revetment kits under the applicable regulations...for size purposes.... To this analysis the Regional Office added the following comments concerning compliance with the 50 percent rule, 1/ based upon EASI's statement during the investigation that, although "EASI... has established itself as a manufacturer of sheetmetal fabricated items that are almost identical to Revetment Kits" and "currently has the people, expertise, plant, and equipment available to manufacturer Revetment Kits," 2/ it intends to subcontract some of the work necessary to performing this contract: Another provision of the set-aside is FAR Clause 52.219-14 Limitations on Subcontracting which requires that a prime contractor under a small business setaside perform work for at least 50% of the cost of manufacturing the supplies, not including the cost of materials. EASI has submitted information substantiating that they are performing at least 50% of the work with their own labor force. EASI is a small business under 500 employees; is found to be the actual manufacturer of the products for size purposes; and to be in compliance with the Limitations on Subcontracting clause. Marwais filed a timely appeal of the determination on December 15, 1993, alleging that the Regional Office had calculated EASI's number of employees incorrectly, that the investigation was inadequate because it failed to include an on-site investigation of EASI's plant and to address all issues presented in the protest, that EASI's proposed contribution to performance of the contract had not been evaluated under the ostensible subcontractor rule and that it had been incorrectly evaluated under the nonmanufacturer rule and the 50 percent rule. Following an extension to the record closing date, Marwais filed a discovery request on December 30, 1993, seeking release of previously withheld documents in the Regional Office file as well as other documents in EASI's possession concerning its number of employees, and the respective proposed roles of EASI and its subcontractor in performing the contract. Several filings by both parties ensued concerning the discovery request, in which EASI opposed Marwais' request as violative of SBA's regulations governing releases of information to the public under the Freedom of Information Act, 3/ argued that Marwais was "not entitled to conduct discovery unless and until it has established error" in the Regional Office determination, contended that Marwais' failure to question EASI's compliance with the 50 percent rule in its protest precluded its appeal on that issue, and asserted that Marwais' protest and supplement thereto had alleged noncompliance with the Walsh Healy Act, 4/ which is beyond the jurisdiction of the Office of Hearings and Appeals. In light of our remand, we decline to consider or to grant Marwais' motion for discovery. With respect to EASI's number of employees, Marwais contends that the Regional Office erred if it failed to count "those persons on the payroll of more than one of [EASI's] affiliates ...as employees of each such affiliate" and to count any of the employees of EASI's subcontractor. Marwais also contends, without substantiation, that EASI failed to report all part-time and temporary employees to the Regional Office 5/ and that the Regional Office erred in failing to evaluate EASI's affiliation with its subcontractor and its consequent size status under the ostensible subcontractor rule in 13 CFR 121.401(1)(4). 6/ Marwais contends that EASI is impermissibly reliant upon its subcontractor because it does not have the equipment and expertise necessary to produce the revetment kits and must thus "effectively 'team' with its ostensible subcontractor to perform the more complex tasks related to manufacture of the revetment kits," including final inspection and "manufacturing work... amounting to 40-50%." With respect to the finding that EASI is the manufacturer of the revetment kits, Marwais contends as follows: Based upon the facts available, Marwais submits that Region VII erred in finding EASI to be the "manufacturer" of the revetment kits. Sheet metal fabrication of environmental control equipment (e.g., heating and air conditioning systems) does not involve sheet metal fabrication "almost identical to that of revetment kits." A different, thicker grade of steel is required for revetments, and the size of the B-1, pin-type, revetments requires larger rollforming equipment than is used for heating/air conditioning systems. Furthermore...specialized equipment and tooling is [sic] also necessary to pierce and notch the revetments properly so that they may be assembled.... [Emphasis in original.] * * * * * * * [E]ach revetment kit consists of 252 side panels, 324 cross panels, 72 end cross panels, 36 end brace panels and 1056 connecting pins. Moreover, each of the 684 steel panels and various connecting pieces must be pierced and notched at numerous precise locations or such parts will not be able to be assembled as required. In short, revetment kits complying with Military Specification MIL-R-87989 are not an item which can be produced by any "sheet metal fabricator," nor is an existing manufacturer of heating and air conditioning systems (e.g., EASI) likely to be able to do so without the purchase of the necessary specialized equipment. * * * * * * * [A]fter excluding the costs of overhead, testing, quality control, and profit, EASI is not adding the greater total value to the end item. Marwais contends that the Regional Office investigation was inadequate because it failed to consider all of the information it supplied concerning the fabrication and assembly of revetment kits 7/ and because the Regional Office did not conduct an "on site survey of EASI's plant or an assessment of EASI's capabilities by an engineer qualified in the manufacture of specialized steel products." Marwais states that it "was advised...that Region VII's conclusions were based upon one telephone call from a regional Certificate of Competency specialist to EASI inquiring if they could manufacture the end item." 8/ With respect to EASI's compliance with the 50 percent rule, Marwais contends that, although the Regional Office "acknowledged the proper standard for supply contracts," it determined EASI to be a small business for purposes of the present solicitation because it was "performing at least 50 percent of the work with its own labor force." Marwais contends that this statement demonstrates legal error because "[t]he amount of work performed by EASI's own labor force is not the proper standard for a supply contract." Marwais contends that when Marwais inquired regarding the standard used by Region VII, appellant was advised the determination was that 50% of the direct labor cost was being provided by EASI. The SBA has held that all costs, including overhead, subcontracting, and G&A are to be included in determining compliance with the 50% rule. Marwais asserts that "the proper assessment requires a comparison of EASI's total cost of contract performance less the cost of materials and subcontracting costs, with all subcontracting costs less the cost of materials." Emphasis in original. The worksheets contained in the Regional Office file indicate that the Regional Office computed and compared only the direct labor costs to be borne by EASI and its subcontractor. 9/ Discussion Section 121.1606(f) of SBA's size regulations requires that the Regional Office "base its formal size determination on the record, including reasonable inferences therefrom" and that it "state in writing the basis for its findings and conclusions." The absence of such specificity in a determination would preclude any meaningful appeal or review of the determination by this Office, and constitutes a clear basis for remand. See Size Appeal of Knowledge Base Engineerinq, No. 3666 (1992). The nonmanufacturer rule in §121.906(b) provides as follows: (1) Nonmanufacturers. (1) A concern need not be the manufacturer of the item(s) being acquired under a manufacturing contract, if the concern: (i) Is a small business concern under this Part under a 500 employee size standard; (ii) Is primarily engaged in the wholesale or retail trade; (iii) Represents that it will supply the product of a small business concern that is the manufacturer of the end product, as defined in paragraph (b)(2) of this section.... and (iv) Represents that it will furnish an end product that was manufactured or produced in the United States. (2) For size determination purposes, there can be only one manufacturer of the end item being acquired. The manufacturer for the purposes of this provision is the concern which, with its own facilities, performs the primary activities in transforming inorganic or organic substances, including the assembly of parts and b components, into the end item being acquired. The end item of a manufacturer possesses characteristics which, as a result of mechanical, chemical or human action, it did not possess before the original substances, parts or components were assembled or transformed. The end item of a manufacturer may be finished in the sense that it is ready for utilization or consumption, or it may be semifinished to become a raw material for a concern engaged in further manufacturing. Firms which perform only minimal operations upon the item being procured do not qualify as manufacturers. The following factors are evaluated in determining whether a concern is the manufacturer for the procurement: (i) The proportion of total value in the end item added by the efforts of the concern, excluding costs of overhead, testing, quality control, and profit; and (ii) The importance of the elements added by the concern to the function of the end item, regardless of their relative value. In finding EASI to be the manufacturer of the revetment kits despite its intended use of a subcontractor, the Regional Office offered no description of the respective roles of EASI and its subcontractor but merely provided the summary statement that "EASI is adding the greater total value and elements of importance to the end item and is considered to be the manufacturer of the revetment kits." This is insufficient both to notify potential appellants if any viable bases for appeal and to afford meaningful review of this portion of the size determination by this Office. Furthermore, the record itself is deficient and affords no basis for either a positive or an adverse determination on the issue, were we disposed to render one de novo, rather than remanding the case to the Regional Office. The only pertinent information contained in the record is a list of components and their respective providers and a "flow chart," both of which fail to provide a coherent picture of the division of labor or to establish which participant will add "the greater value" or perform the "primary activities" in manufacturing the revetment kits. Hence there is no basis in the record for OHA to render a determination on this point, and the case must be remanded to the Regional Office for further investigation. The deficiencies in the record concerning compliance with the 50 percent rule are of a similar nature. 10/ Cost data in the record concerning manufacturing, tooling and other activities are not attributed specifically to either EASI or its subcontractor. Although the Region's worksheets identify their respective overhead rates, as well as their direct labor costs, the derivation of the former is nowhere identified, and the latter represent an incorrect basis for determining compliance with the 50 percent rule. We agree with Marwais that the Regional Office appears to have based its analysis on the data concerning direct labor costs only and that this is erroneous as a matter of law. 11/ Consequently, the Regional Office's finding on this issue cannot be sustained, and the case must be remanded for further investigation. In this regard, we note that EASI's total contract cost (including profit) less materials costs and subcontracting costs must be compared with all subcontracting costs less the subcontractor's materials costs, in order to determine whether EASI is in compliance with the 50 percent rule. See Size Appeal of Eagle Mill Supply, Inc., No. 3796 (1993) and Size Appeal of Phoenix Systems & Technologies Inc., No. 3220 (1989). Marwais has raised three additional issues, concerning the Regional Office's computation of EASI's number of employees, that can be disposed of prior to remand. It contends that EASI failed to report its hourly and part-time employees and that any persons employed by both EASI and its affiliates must be counted twice when determining EASI's compliance with the 500-employee size standard. Marwais has failed to sustain its burden of going forward on the first of these issues. Review of the record establishes that the Regional Office required extensive documentation of EASI's number of employees; no irregularities are evident. Marwais' contention regarding the double-counting of employees is legally erroneous and finds no basis in the regulations or in case law. Marwais assertion that the number of persons employed by EASI's subcontractor must also be counted pursuant to the ostensible subcontractor rule in §121.401(1)(4) is also erroneous as a matter of law. The implications of a subcontractor's relationship to a bidder or offeror whose size must be evaluated under the nonmanufacturer rule are limited to the restrictions in that rule, whose application preempts use of the less-specific ostensible contractor rule. In essence, a determination that a firm is the manufacturer of the end item to be procured precludes its being found unduly reliant upon its subcontractor. In contrast, and as we have previously held, evaluation under the nonmanufacturer rule does not preclude evaluation under the more- specific rule that the bidder or offeror must perform work for at least 50 percent of the cost of manufacturing the supplies to be procured under a solicitation. Consequently, the Regional Office need not augment its investigation or reevaluate the data of record concerning the number of persons employed by EASI and its affiliates. Conclusion The Regional Office determination is VACATED, and the case is REMANDED for additional investigation and disposition in accordance with this opinion. ________________________________ Jane E. Phillips (Presiding) Administrative Judge ________________________________ Gloria E. Blazsik (Concurring) Administrative Judge ________________________________ Elwin H. White (Concurring) Administrative Judge _______________ 1/ The rule is codified at 15 U.S.C. 644(o)(1) and provides as follows: (A) in the case of a contract for services (except construction), the concern will perform at least 50 percent of the cost of the contract with its own employees; and (B) in the case of a contract for procurement of supplies (other than procurement from a regular dealer in such supplies), the concern will perform work for at least 50 percent of the cost of manufacturing the supplies (not including the cost of materials). 2/ EASI submitted a copy of a document it had prepared for the Contracting Agency, entitled "Pre-award Survey," as support for its contentions. 3/ See 13 CFR Part 102. The regulations governing informational releases in the context of proceedings before the Office of Hearings and Appeals are located at 13 CFR 121.1712 and 121.1717 and 13 CFR Part 134. 4/ Marwais contended in response that "EASI...mischaracterizes Marwais' appeal as raising Walsh-Healy act compliance as an issue on appeal" and contended further, with respect to the 50 percent rule, that OHA case law supports its right to address issues resolved in a Regional Office determination that it failed to raise in its protest. 5/ Marwais' protest merely asserts that EASI's number of employees, including its affiliates, is between 471 (which is within the size standard) and 932. 6/ Section 121.401(1)(4) provides as follows: (4) An ostensible subcontractor which performs or is to perform primary or vital requirements of a contract may have such a controlling role that it must be considered a joint venturer affiliated on the contract with the prime contractor. In determining whether subcontracting rises to the level of affiliation as a joint venture, SBA considers whether the prime contractor has unusual reliance on the subcontractor. 7/ Marwais supplied the Regional Office with a copy of its own "Technical Manual" for the revetment kits in support of its allegations. 8/ The Regional Office file contains a memorandum dated December 8, 1993, of a conversation with EASI concerning its capacity to make "sheet stock items similar in nature to the solicited item." It also contains a copy of a "Pre Award Survey" prepared by EASI and EASI's response to the protest, specifically addressing Marwais' allegations concerning the "specialized manufacturing techniques" necessary to performing the contract. 9/ The worksheets bear notations concerning the percentage overhead rates for both EASI and its subcontractor but the derivation of these rates is not apparent from the record. Nor is it clear from other cost data in the record what portions of the costs denominated "manufacturing" costs, including labor and overhead, are allocable to EASI or to its subcontractor. 10/ Although it failed to raise this issue in its protest, Marwais is not preclude on appeal from challenging the finding on this issue. 11/ Such error is not mitigated by the unsubstantiated speculation noted in the worksheet that "cost of labor for EASI would be even more including higher overhead."