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."