United Native American Telecommunications, Inc., No. 3934 (June 21, 1994), Docket No. SIZ-94-3-22-27 UNITED STATES OF AMERICA SMALL BUSINESS ADMINISTRATION OFFICE OF HEARINGS AND APPEALS WASHINGTON, D.C SIZE APPEALS OF: ) ) United Native American ) Telecommunications, Inc. ) ) Appellant ) ) Solicitation Nos. ) NK20JUL930303 ) Docket Nos. SIZ-94-3-22-27 RG09DEC930073 ) SIZ-94-3-22-28 RG09DEC930066 ) SIZ-94-3-22-29 AZ28SEP934841 ) SIZ-94-3-22-30 AZ28SEP934841 ) SIZ-94-3-22-31 D004JAN940039 ) SIZ-94-5-4-61 AM13DEC930376 ) SIZ-94-5-4-62 DU21MAR940231 ) SIZ-94-5-6-66 CL26AUG930135 ) SIZ-94-5-6-67 DNA14DEC930500 ) SIZ-94-5-10-70 DN02FEB940020 ) SIZ-94-5-10-71 ) Department of Defense ) Defense Information Systems ) Agency ) Scott Air Force Base, Illinois ) DIGEST Where the ostensible subcontractors of the primary contractor will perform the vital and primary requirements of the contract, and the primary contractor's duties will be confined to adminis trative functions, the relationship will be regarded as a joint venture and the firms will be considered affiliated for the purposes of the contract at issue under the "ostensible subcontractor" rule set forth at 13 CFR 121.401(1)(1). DECISION June 21, 1994 WRIGHT, Administrative Judge, Presiding: Jurisdiction This consolidated appeal is resolved in accordance with 15 U.S.C. 632 et seq., and the regulations codified at 13 CFR Part 121. Issue Whether the prime contractor is so reliant upon its subcontrac tors for the primary and vital requirements of these contracts as to result in affiliation based upon the "ostensible subcon tractor" rule set forth at 13 CFR 121.401(1)(4). Facts On the following dates and for the following purposes, the Department of Defense, Defense Information Agency, Scott Air Force Base, Illinois, issued these solicitations: Solicitation Number Date of Issuance Purpose of Solicitation NK20JUL930303 January 19, 1994 Lease analog circuit between Camp Lejeune and Cherry Point, North Carolina. RG09DEC930073 January 18, 1994 Installation, operation, and maintenance of a leased digital circuit between Fort Belvoir, and Richmond, Virginia. RG09DEC930066 January 18, 1994 Installation, operation, and maintenance of a leased analog circuit between Camp Lejeune and Cherry Point, North Carolina. AZ28SEP934841 January 18, 1994 Maintenance of a leased analog circuit between Seymour-Johnson Air Force Base and San Manteo, North Carolina. D004JAN940039 Feb. 28, 1994 "[L]ease 1.544 MB, TI circuit between Fort Detrick, MD and Damascus, MD." AM13DEC930376 Feb. 5, 1994 "[P]rovide a 56 KBPS circuit to AF concentrator located at McClellan AFB, CA." DU21MAR940231 March 26, 1994 Installation, operation, and maintenance of a circuit between Norfolk, and Fort Belvoir, Virginia. CL26AUG930135 March 22, 1994 Installation of a circuit between Governor's Island, New York and Sewaren, New Jersey. DNA14DEC930500 March 29, 1994 Start of a circuit between Norfolk, Virginia and Cutler, Maine. DN02FEB940020 March 29, 1994 Start of a circuit between Finksburg, Maryland and Neeham, Massachusetts. Each of the foregoing solicitations was classified under Standard Industrial Classification (SIC) code 4813, "Telephone Communications," which bears a size standard not to exceed 1,500 employees. While each solicitation was unrestricted, each involved a Small Disadvantaged Business (SDB) price evaluation preference. In each instance, the agency contracting officer protested the eligibility of United Native American Telecommunications, Inc. (UNAT or Appellant) as a small business concern. Regarding solicitation AZ28SEP934841, Electra Ltd, Inc. (Electra), a bidder on the pertinent solicitation, was a second protestant of UNAT. Ten size determinations were made at various times by the Small Business Administration's (SBA) Seattle Regional Office, each of which found Appellant other than small for purposes of the pertinent procurement. We will briefly discuss the rationales of these size deter minations, which subsequently became subjects of the present Appeal. 1/ Appeal 27 In this determination, dated March 8, 1994, the Regional Office observed that [f]or the subject procurement, UNAT is not performing the primary or vital requirements...and acts as a conduit between the government and the subcontractors, the circuit providers (Bell Atlantic and Carolina Telephone). UNAT also "tracks outage credits" as a billing function. Furthermore, UNAT "maintains and operates two 24-hour toll free trouble reporting numbers. Likewise, these are not primary and vital requirements of the contract. All of the primary and vital requirements, such as the supplying of the circuit along with its installation, testing, and maintenance, will be performed by the subcontractors. * * * * * * UNAT has also failed to demonstrate that its few employees...are performing primary or vital contract functions...In evaluating the relationship between UNAT and its subcontractors, in order to determine if there is unusual reliance, the "seven factors" described in SIZ Appeal of D.P. Associates. Inc., 2719 (1987) were addressed...UNAT will manage the contract...There is no evidence of record to demonstrate that UNAT has the technical capability to perform this contract. UNAT will not be physically involved in performing any of the primary or vital requirements of the contract...Regarding the relative amount of work to be performed by each, it is clear that the subcontractors perform the more complex and costly contract functions. While UNAT has submitted figures supporting its claim that it will perform at least 50 percent of the costs associated with the performance of the contract with its own personnel, these figures are not supported by data which proves this contention. * * * * * * Based on the regulations, precedent decisions and the totality of the circumstances, UNAT is unusually reliant upon its "ostensible subcontractors", Bell Atlantic and Carolina Telephone, for the performance of the primary and vital requirements of the subject procurement. UNAT's minimal contribution is in the form of administrative support. The Regional Office found UNAT affiliated with Bell Atlantic and Carolina Telephone for the purposes of the procurement, pursuant to 13 CFR 121.401(1)(4). Appeal 28 Following analysis identical to that in the size determination in Appeal 27, the Regional Office found UNAT affiliated with Bell Atlantic based on the "ostensible subcontractor" rule. Appeal 29 Following analysis identical to that in the size determination in Appeal 27, the Regional Office found UNAT affiliated with Bell Atlantic following the "ostensible subcontractor" rule. Appeal 30 Following analysis identical to that in the size determination in Appeal 27, the Regional Office found UNAT affiliated with Bell Atlantic and Carolina Telephone based on the "ostensible subcontractor" rule. Appeal 61 Following analysis similar to that in Appeal 27, the Regional Office found UNAT affiliated with Bell Atlantic, WilTel and MCI, based on the "ostensible subcontractor" rule. It also cites for the first time, in support of its conclusion, a recent case from the Office of Hearings and Appeals, Size Appeal of Liqhtcom International Inc., No. 3906 (1994). Appeal 62 Following analysis identical to that in Appeal 61, the Regional Office found UNAT affiliated with Pacific Bell and MCI, based on the "ostensible subcontractor" rule. Appeal 66 Following analysis identical to that in Appeal 61, the Regional Office found UNAT affiliated with Bell Atlantic and WilTel, based on the "ostensible subcontractor" rule. In addition, the Regional Office stated as follows: The Small Business Administration (SBA) does not have jurisdiction to determine compliance with the limitations on subcontracting clause, or "508 rule", as a size protest for the Department of Defense's Small Disadvantaged Business Program. However, the SBA does have jurisdiction in this case as it involves allegations of ostensible subcontracting creating a possible joint venture affiliation. Appeal 67 Following analysis identical to that in Appeal 66, the Regional Office found UNAT affiliated with NYNEX, Bell Atlantic and WilTel, based on the "ostensible subcontractor" rule. Appeal 70 Following analysis identical to that in Appeal 66, the Regional Office found UNAT affiliated with Bell Atlantic, NYNEX, WilTel, and MCI, base on the "ostensible subcontractor" rule. Appeal 71 Following analysis identical to that in Appeal 66, the Regional Office found UNAT affiliated with Bell Atlantic, WilTel, and MCI, based on the "ostensible subcontractor" rule. Each of the appeals of the adverse decisions of the Seattle Regional Office, made by United Native American Telecommunica tions, Inc. was timely 2/ filed with the Office of Hearings and Appeals, within the meaning of 13 CFR 121.1705(a)(2). On April 7, 1994, the first five appeals captioned above were ordered consolidated. On the same date, the Small Business Administration's (SBA or Agency) motion to intervene in those cases was granted. Subsequently, the remaining six appeals were filed with the Office of Hearings and Appeals and are hereby, for convenience, consolidated with the earlier appeals. We further observe that Appeals 30 and 31 involve a challenge of the same Regional Office size determination involving Solicitation No. AZ28SEP934841 by the Appellant, although the determination was made pursuant to two original protests. We therefore reduce that appeal to one, herein denominated Appeal 30. The arguments presented by Appellant are described, seriatim. Appeal 27 In the pleading for this Appeal, as it does in the subsequent appeals, Appellant first acknowledges that it "does not present any new issues on appeal," but alleges that the following errors occurred in the size determination: A "misinterpretation of the scope of services to be provided under the...procurement." Thus, "the circuit is completely automated and...very little human labor is required for [contract]...performance" and the scope of the...[services] is limited to what the... [solicitation] states, i.e. , the installation, operation, and maintenance of the circuit itself, and not the provisions or maintenance of hardware needed to access the circuit, such as telephone lines, or the provision or maintenance of hardware needed to interface with the circuit, such as telephones or modems. * * * * * * UNAT was not unusually reliant on its "ostensible subcontractor" because UNAT was "physically involved in performing the primary and vital requirements of the contract" and the more complex and costly function . Appellant argues that the scope of the contract should be limited to what it calls for; thus, as in the present solicitation, Appellant is to..."provide the circuit; the [contract]...does not include the provision of maintenance or hardware needed to access the circuit, such as telephone lines; nor does it require provision of maintenance or hardware needed to interface with the circuit, such as telephones or modems. Appellant argues that UNAT is simply following "standard business practices and laws governing the industry," and appears to sug gest that the Regional Office's decision reflects insufficient understanding of the technology of this segment of the industry. Appellant argues that it meets the seven factors described in Size Appeal of D.P. Associates. Inc., No. 2719 (1987). Appeal 28 The arguments in UNAT's pleading for this case recapitulate those of Appeal 27. Appeal 29 The arguments in UNAT's pleading for this case recapitulate those of Appeal 27 Appeal 30 The arguments in UNAT's pleading for this case recapitulate those of Appeal 27 Appeal 61 While the arguments in UNAT's pleading for this case track those made in the prior appeals, it also asserts, for the first time, that the Limitations on Subcontracting Clause, the so-called "50% rule" does not apply to unrestricted procurements, like those involved in the present appeals. This was not, however, an issue raised below by a protestant, or discussed by the Seattle Regional Office in any size determination, except in the size determinations forming the basis for Appeals 66, 67, 70, and 71. Appellant also notes the recent decision in Size Appeal of Lightcom International. Inc., No. 3906 (1994), citing the reconsideration request of the Agency in that case. Appeals 62, 66, 67, 70, and 71 make arguments identical in all material respects to Appeal 61. Electra, a protestant below, filed a "Statement" in timely response to the appeal of UNAT. In its response, Electra notes "that UNAT does not assert that any task or subcontracting relationship on any of the contracts at issue in its appeal is contract specific." Therefore, it reasons, its "Statement" applies to all of the consolidated appeals. First, Electra claims that UNAT's relationship with its subcon tractors is not clearly described in the pleadings submitted by Appellant. As UNAT does not own or operate a telecommunications network, it must purchase and resell local and long distance services from local exchange carriers (LEC's), such as Bell Atlantic or Carolina Telephone and interexchange carriers (IXC's) such as AT&T or Sprint. Electra claims that "[e]ach circuit to be provided under these contracts is composed of two LEC segments and one IXC segment." Given this, Electra further asserts that [p]oint-to-point, inter-LATA telecommunications circuits are provided on LEC and IXC networks; not in UNAT's computer. Circuits are not in place prior to a contract, but rather must be engineered by IXC and LEC network technicians and physically installed at each user site by LEC service personnel. LEC and IXC networks must be continually maintained by the human beings that the network operators employ to assure reliability, and when a circuit has a problem, the problem must be analyzed by a technician, using test equipment attached to the network. Once a problem is identified, a technician, using LEC or IXC equipment, repairs it None of the "human labor" described above is performed by UNAT. Regarding installation, Electra claims that "UNAT does little more than act as an information conduit between the circuit providers (UNAT's subcontractors) and the government." Regarding operation and maintenance, Electra notes that ...the circuits under each contract is [sic] installed, maintained and repaired by the IXC's and the LXC's ...UNAT has no physical access or connection to any of the circuits supplied by its subcontractors...[and] cannot monitor, test, or repair the circuits. Electra claims that "UNAT's role in tasks associated with repairs is merely that of a conduit between Government users and UNAT's subcontractors. Electra also asserts that UNAT's claim that, "according to DFAR 252.219-7006(d)(I)(i) [the "50 percent rule"], if there is no charge for labor under the contract, there is not labor attributable to the contract," is not supported by the facts. Electra disputes UNAT's claim to "pass" all of the seven factors described in Size appeal of D.P. Associates. Inc., No. 2719 (1987). Regarding management of the contract, as UNAT does not control installation, operation, or maintenance of the circuits, UNAT cannot carry out the contract, but is dependent on subcon tractors to carry them out. Regarding chasing the contract, Electra asserts that subcontracting to SDB resellers is a "marketing advantage to some IXC's." Regarding collaboration on the bid, Electra asserts that UNAT has neither the technical capacity nor knowledge of pricing without collaboration with its subcontractors, nor could it establish a delivery date alone. Electra asserts that UNAT's claim to be "...discretely responsi ble for operating the circuit and performing 100% of the mainte nance, and that it performs a majority of the installation work," has no factual support. Regarding relative amounts of work, Electra claims that "...the vast majority of the work attributed to the contracts is performed by UNAT subcontractors...[, its] labor contribution is minimal, is not devoted to the primary requirement of the contracts, and demonstrates that UNAT is not in control of the contracts." Finally, regarding complex and costly contract functions, Electra claims that Appellant "...does not install, operate, or maintain the circuits which are not only the primary tasks of the contracts, but also the most complex and costly." The Agency's Response to the Notice of Appeal, pursuant to its intervention above, limits its arguments to the application of SBA's "ostensible subcontractor" rule to requirements for telecommunications services, specifically excluding the application of the 50 percent performance of work requirement. The Agency, in its response to this appeal, observes that, in construing the "ostensible subcontractor" rule, the Office of Hearings and Appeals evaluates subcontractors' contributions to contract performance in terms of both labor-hour and revenue allocations and has found a "wide range of subcontractor contributions constituting undue reliance." Thus, it claims, this Office held that where a subcontractor performs the vital and primary requirements of the contract, the relationship will be considered to be that of a joint venture. See Size Appeal of Neal Systems Group. Inc., No. 3579 (1992). The Agency also asserts that "determining what is the primary or vital requirements of a contract is not, however, always an easy determination." The Agency further states that [t]here is no doubt that these solicitations [which form the bases of the present appeals] require installation, maintenance and repair of dedicated telecommunications lines/circuits, and that these specifications are certainly important aspects of the total requirement. From what SBA has learned about the industry, however, so too is the centralized, personalized liaison and coordination aspects of these solicitations. The Agency further suggest that the "ostensible subcontractor" regulations ties primary or vital requirements of a contract to a "controlling" role in order to find unusual reliance. The Agency argues that, consequently, a prime contractor may subcontract specified work for which it lacks expertise, yet this may not result in a finding of undue reliance where the prime contract performs a significant portion of the work and maintains full control over the project, citing Size Appeal of Bender Ship- building & Repair Co.. Inc., No. 2273 (1985). It also suggests that Size Appeal of Econo Lodge, No. 2698 (1987), where "subcontractors are to perform a total of 73 percent of the total contract, but there is no evidence that either subcontractor has the power to control the contract," supports its claim that these appeals present no unusual reliance on the part of the prime contractor. Discussion We conclude that the arguments made by Appellant to support its allegations that the Regional Offices erred in their conclusions that Appellant was unduly reliant upon its subcontractors are without merit. The "ostensible subcontractor" rule, found at 13 CFR 121.401(1)(4) states, as follows: 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. This case is governed by our decision in Size Appeal of Liqhtcom International. Inc., No. 3917 (1994). See Size appeal of Liqhtcom International. Inc., No. 3906 (1994). Considering all of the assertions made and evidence adduced by Appellant, we conclude that UNAT has failed to demonstrate error in the Regional Office determinations that Appellant was unduly reliant upon its various subcontractors to perform the majority and vital requirements of the contracts. Appellant raises in this appeal an argument that it is in compliance with the "fifty percent" rule, an issue raised in Regional Office size determinations challenged in Appeals 66, 67, 70, and 71. It is unnecessary, however, to discuss this issue, as the present appeals are resolved against Appellant on the basis of 13 CFR 121.401(1)(1). 3/ In that Appellant is unduly reliant upon its subcontractors, the Seattle Regional Office was correct in finding it affiliated with the various concerns, as detailed in the factual section of this opinion, rendering Appellant an other-than-small business for purposes of these solicitations. Conclusion Accordingly, for these reasons, the Seattle Regional Office size determinations are AFFIRMED; and the relief sought in these appeals is DENIED. This constitutes the final decision of the Small Business Administration. See 13 CFR 121.1720(b). ________________________________ G. Stephen Wright (Presiding) Administrative Judge ________________________________ Gloria E. Blazsik (Concurring) Administrative Judge _______________________________ Elwin H. White (Concurring) Administrative Judge __________________ 1/ For purposes of simplicity and convenience, further reference to a specific appeal forming the present consolidated appeal will be made by use of the final two digits of the docket number assigned by the Office of Hearings and Appeals. 2/ The following list of appeals indicates, first, the date of receipt by the Appellant of the Regional Office size determination and, second, the date of filing with this Office: Appeal 27: March 9, 1994; March 16, 1994 28: March 9, 1994; March 16, 1994 29: March 9, 1994; March 16, 1994 30: March 10, 1994; March 17, 1994 31: March 10, 1994; March 17, 1994 61: April 19, 1994; April 28, 1994 62: April 19, 1994; April 28, 1994 66: April 23, 1994; April 29, 1994 67: April 23, 1994; April 29, 1994 70: April 28, 1994; May 4, 1994 71: April 28, 1994; May 4, 1994 3/ We note that the question of whether the SBA has the jurisdiction and responsibility to address this issue in an unrestricted procurement with an SDB evaluation preference has been recently addressed in Size Appeal of LDDS Metro- media Communications Corporation, No. 3929 (1994). See, also, Size Appeal of Electra Ltd.. Inc., No. 3931 (1994).