D. K. Dixon and Company, Inc., No. 4047 (June 6, 1995) Docket No. SIZ-94-12-17-166 UNITED STATES OF AMERICA SMALL BUSINESS ADMINISTRATION OFFICE OF HEARINGS AND APPEALS WASHINGTON, D.C. _______________________________ ) SIZE APPEAL OF: ) ) D.K. Dixon and Company, Inc. ) ) Appellant ) ) Re: Test Systems Associates, ) Inc. ) Docket No. SIZ-94-12-17-166 ) Solicitation No. ) N000189-93-R-0378 ) Department of the Navy ) Fleet and Industrial Supply ) Center ) Norfolk, Virginia ) _______________________________) DIGEST Where the challenged firm performs at its own facility all engineering and design functions of a highly technical and sophisticated engineering item, and these functions constitute the essential parts of the transformation of certain materials into the finished product, the challenged firm will be considered the manufacturer of the end item being procured under 13 CFR 121.906(b)(2). Where the challenged firm will perform over 50% of the total contract work and its employees will be responsible for the principal engineering, logistics, quality assurance, design development, and accounting and administrative management functions, the challenged firm and its subcontractor will be considered a legitimate prime contractor/subcontractor relationship, and not a joint venture under the "ostensible subcontractor" rule, 13 CFR 121.401(l)(4). DECISION June 6, 1995 BLAZSIK, Administrative Judge: Jurisdiction This appeal is decided under the Small Business Act of 1958, 15 U.S.C. Section 631 et seq., and 13 CFR Part 121. Issues Whether the Regional Office correctly concluded that the challenged firm was the manufacturer of the end product and not a regular dealer. Whether the Regional Office correctly found the challenged firm and its subcontractor engaged in a legitimate prime/subcontractor relationship, and not joint venturers under the "ostensible subcontractor" rule, 13 CFR 121.401()l(4). Facts On October 27, 1993, the Contracting Officer for the Department of the Navy, Fleet and Industrial Supply Center, Norfolk, Virginia, issued this solicitation for "Intermediate Level Operational Test Program Sets," and classified it under Standard Industrial Classification code 3812 (Search, Detection, Navigation, Guidance, Aeronautical, and Nautical Systems and Instruments), having a 750-employees size standard if a manufacturer or, if a non-manufacturer, having a 500-employees size standard. The Contracting Officer set the solicitation aside for small businesses. The Contracting Officer awarded the contract on March 15, 1994, to Test Systems Associates, Inc. (Test), the low bidder. An unsuccessful offeror, D.K. Dixon & Company (Dixon or Appellant), filed a protest with the General Accounting Office (GAO) and a civil suit in the U.S. District Court against Test, on the grounds that Test did not comply with the "non- manufacturer rule" since the firm had certified as a regular dealer utilizing the end product of Grumman Aerospace and Electronics Group (Grumman), a large firm. As a result the Contracting Officer terminated the award for convenience, and awarded it to Dixon. Thereafter, Test filed both a protest with the GAO and a civil suit on the grounds that the solicitation was defective in using an obsolete small business representation clause, which led Test to certify incorrectly as a non-manufacturer. The GAO affirmed the protest on the issue of the obsolete representation clause, and recommended that the matter be referred to the Small Business Administration (SBA) for a size determination. Specifically, the GAO recommended that the SBA resolve the issue of Test's "undue reliance on Grumman." [1] Accordingly, the Contracting Officer requested the SBA's New York Regional Office (Regional Office) to conduct a size determination. The Regional Office file contains Test's SBA Form 355, its employee breakdown, corporate documents, financial statements for the fiscal year ending December 31, 1993, and a Dun and Bradstreet report on Grumman. Additionally, the Regional Office file contains the following: 1. Portions of Test's Technical Proposal; 2. The solicitation's Statement of Work; 3. Test's payroll records; and 4. The Contracting Officer's statement regarding the solicitation. Test's Technical Proposal shows that Arthur Affa, Test's President, will be responsible executing the contract and the following specific tasks: Contract negotiations and payments; contract execution and performance; and maintenance of all accounting and administrative records. All engineering personnel and tasks will be located at Test's facilities and performed its employees. Test's Project Engineering Manager will be responsible for all design and development of the test program sets, and Test's Logistics Manager will be in charge of all logistics tasks. Finally, Test's Quality Assurance Manager will develop a Quality Control Plan for both the hardware and software to be used in the contract. Test's SBA Form 355 shows that its total employment is less than 750 persons and that it has no affiliates. In a letter to the Regional Office, the Contracting Officer stated that the Department of the Navy's audit personnel had concluded that Test would be "expending more than fifty percent of the total effort of the contract performance." In its determination issued on December 14, 1994, the Regional Office found that, upon review of Test's documents, Test will perform 52%, Grumman will perform 42%, and Automation Delectronics Corp., an 8(a) firm, will perform 6% of the contract's costs. The Regional Office also found that, based upon the Contracting Officer's statement, supra, Test would be expending more than 50% of the total contract performance. The Regional Office, therefore, concluded that, since Test would be performing the majority of the contract value in transforming the components into the end product, Test is the manufacturer of the end product and meets the applicable size standard. The Regional Office also concluded that Test, and its subcontractor Grumman, are involved in a legitimate prime contractor/subcontractor relationship that does not rise to the level of a joint venture. See 13 CFR 121.401(l)(1) and (4). Dixon received the size determination on December 19, 1994, and filed an appeal that was postmarked December 27, 1994. Arguments on Appeal Appellant asserts that, contrary to the Regional Office's determination, Test is a "regular dealer," not the manufacturer, because Test represented itself as a "regular dealer" during the certification process. Appellant further asserts that Grumman, not Test, is the manufacturer because Test must use Grumman's facilities, employees, and products. Moreover, Test cannot be the manufacturer since its only office space is in an area that, in accordance with the applicable zoning laws, prohibits manufacturing. Thus, Test is substantially reliant upon Grumman and contributes nothing material to the final product. Finally, Appellant asserts that Test and Grumman are engaged in a joint venture under the "ostensible subcontractor," 13 CFR 121.401(l)(4), rendering them affiliates for size determination purposes, citing Size Appeal of Sonex Enterprises, Inc., No. 3948 (1994), in support. In a timely response to the appeal, Test generally asserts that the Regional Office determination was correct and should be sustained. Discussion Since the appeal was filed within the five-business-day requirement of 13 CFR 121.1705(a)(2), it is timely and applies to this solicitation. Appellant's first argument is without merit. The record demonstrates that Test had mistakenly relied upon an outdated regulation and, therefore, incorrectly certified itself as a "regular dealer" instead of the manufacturer. Test's certification is, thus, not conclusive on this issue. In order to qualify as a manufacturer for size determination purposes, Test must be evaluated under 13 CFR 121.906(b)(2). This regulation states: [t]here can be only one manufacturer of the end item.... The manufacturer... with its own facilities, performs the primary activities in transforming inorganic or organic substances, including the assembly of parts and 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 posses before the original substances, parts or components were assembled or transformed.... The following factors are evaluated in determining whether a concern is the manufacturer....[Emphasis supplied.] (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 functions of the end item regardless of their relative value. Appellant's assertion that the zoning laws prohibit Test from being designated a manufacturer is erroneous, because manufacturing includes engineering and design. Test performs both of these functions exclusively at Test's facilities and are not prohibited by zoning laws. The manufacturing process of "transforming" materials into end products includes engineering and design. The express exclusions in subparagraph (i), supra, are overhead, testing, quality control, and profit, but not engineering. Subparagraph (ii), supra, measures the importance of the elements added to the end product, regardless of the relative value of each element. Since the contract involves a technically sophisticated product, engineering and design are essential parts of the transformation of materials into the finished product. Therefore, the firm responsible for all the engineering and design functions will be the manufacturer for this contract. As shown, Test will complete 52% of the contract work, including engineering, design, management, and transformation of components into the end product. According to the Department of Navy's audit, supra, Test will expend over 50% of the total effort. Although it will not assemble the products at its own facility, "all engineering personnel and tasks will be located and performed at Test's facilities and by its employees," supra. Accordingly, Test is the manufacturer because it is responsible for most of the transformation process. Appellant's argument that the subcontract between Test and Grumman is a joint venture under the "ostensible subcontractor" rule as applied in Sonex is also without merit. The "ostensible subcontractor" rule, 13 CFR 121.401(l)(4), states: 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 venture 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. Sonex, contrary to Appellant's argument, is distinguishable from the Test/Grumman relationship. In Sonex, the prime contractor was found to be unusually reliant upon the larger subcontractor because there was no possibility of delineating the tasks or duties; the subcontractor provided the key employees; and the facilities and the technological equipment were provided by the subcontractor. In Sonex, the teaming contract failed to mention any tasks that were specifically allocated to either the prime contractor or subcontractor. The Test technical proposal, supra, however, provides that, all engineering...tasks will be...performed by Test's employees at Test's facilities; Test's Project Engineering Manager will be responsible for all design and development of the test program sets; Test's Logistics Manager will be in charge of all logistics tasks; and Test's Quality Assurance Manager will develop a Quality Control Plan for both hardware and software.... In addition,ssssssss the Department of the Navy determined that Test would perform more than 50% of the total contract work. Thus, the tasks in the Test/Grumman contract are sufficiently delineated. In Sonex, the key management officials were employees of the subcontractor. Here, Test's employees will be responsible for contract execution and performance, and for maintaining all accounting and administrative records. Thus, Test's employees will perform the principal managerial functions. Finally, in Sonex, the subcontractor's facility was listed as the "Team's Principal Facility" and was, in fact, the only facility the prime contractor was able to use. Here, all engineering and design functions, as well as many administrative and managerial matters, will be performed at Test's facility. Thus, Test is not unusually reliant upon Grumman's facilities. Accordingly, the Regional Office was correct in concluding that Test is the manufacturer of the end product. Further, Test will perform the primary and vital tasks associated with the contract, and is not unusually reliant upon Grumman. As shown before, Test's meets the applicable size standard. Conclusion Based upon the above analysis, the Regional Office's determination is AFFIRMED, and the appeal is DENIED. This is the final decision of the Small Business Administration. See 13 CFR 121.1720(b). Gloria E. Blazsik Administrative Judge ____________________ [1] The record fails to show the result of the civil suit.