The Small Business Administration's (SBA) much anticipated
new regulations on small business size and status integrity
implement key provisions of the Small Business Jobs Act of 2010
(Jobs Act). Most notably (and as anticipated), the
regulations implement the strict liability provisions of the Jobs
Act by imposing penalties on businesses that willfully misrepresent
their small business size or status in order to obtain contracts,
subcontracts, grants, cooperative agreements, or research and
development cooperative agreements. The regulations also
require signed size and status certifications from company
officials as well as annual size and status certifications in the
System for Award Management (SAM). As a result of these new
regulations, small businesses must be vigilant in accurately
calculating and representing their size and status. Otherwise
such companies risk ruinous contractual, civil, and criminal
penalties that can far exceed even the value of the contract,
regardless of whether the government receives the actual product or
service sought under the contract.
Penalties for "Willful" Misrepresentation of
Small Business Size and Status
The SBA's new regulations impose penalties on any business that
"willfully" seeks and receives a contract award by
misrepresentation of its small business size and status.
Three actions are generally deemed to be willful certifications
under the regulations:
- Submitting a response to a solicitation (for a contract, subcontract, grant, or cooperative agreement) specifically intended for award to a small business;
- Submitting a response to a solicitation (for a contract, subcontract, grant, or cooperative agreement) that, if successful in obtaining an award, would encourage the government to classify the award as being made to a small business; and
- Registering on a government contracting database, such as SAM, as a small business concern.
Thus, if a concern holds itself out to be a small business in
any of these three ways and is later found not to satisfy the
applicable small business requirements, it is deemed to have
willfully misrepresented its small business size and status, and is
subject to penalties unless certain exceptions apply.
The new regulations create a presumption that the government's
loss caused by a small business status misrepresentation is equal
to the amount expended by the government — be it on a
contract, subcontract, grant, or cooperative agreement —
thereby potentially requiring a contractor to return all money paid
under the contract. The new regulations also explicitly
discuss civil penalties under the False Claims Act and the Program
Fraud Civil Remedies Act, as well as criminal penalties under the
Small Business Act. This suggests that agencies may not limit
their damages to contract expenditures. Furthermore, a
contractor misrepresenting its small business status is subject to
suspension and debarment under these regulations.
Annual Small Business Certification on SAM
From a practical standpoint, the new regulations' most
noteworthy requirement is that small businesses must certify their
status in SAM at least annually. If a business fails to make
an annual certification, it will not be listed as a small business
in SAM until it recertifies its status. Such a loss of status
obviously impacts a contractor's ability to obtain contract
awards. In the comments accompanying the regulations, SBA
clarified that annual recertification on SAM is meant only for
purposes of future awards, not continuing eligibility for
previously awarded long-term contracts.
Given the myriad problems SAM has faced since it went online last
year, only time will tell whether this process will be a simple
administrative function for small businesses.
Requirement for Signed Certification of Size
Status
The new regulations contain a similar requirement that a small
business responding to a solicitation must include in its response
a certification of its small business size and status, signed by an
authorized official of the business on the same page as the claimed
size status.
The regulations also make slight changes to the timing of a small
business size determination for participants in the 8(a) Business
Development program. Where such a determination previously
was made as of the date of the business's application and the
date of certification by the SBA, under the new regulations, a
determination is made as of the application date and, where
applicable, the date the SBA program office requests a formal size
determination.
Exceptions and Safe Harbors
The new regulations are intended to impose penalties only on those
contractors that willfully misrepresent their small business size
and status. The regulations therefore include limitations of
liability in the event of:
- "Unintentional errors;"
- Technical malfunctions; and
- "Other similar situations" showing that any misrepresentation was not affirmative, intentional, willful, or actionable under the False Claims Act.
The regulations further state that a prime contractor relying in
good faith on a subcontractor's representation regarding small
business status will not be held liable for any misrepresentation
by the subcontractor about its size. The new regulations also
exempt contractors from liability in cases where government
personnel have erroneously identified a contractor as a small
business if the contractor has made no such representation and had
no knowledge of the erroneous identification.
How Small Businesses Can Avoid Liability
When these new regulations go into effect on August 27, 2013, the
burden will be on small businesses to certify their small business
size and status in SAM annually, as well as in every response to a
government procurement solicitation. To avoid the heavy
penalties called for in the regulations, it is paramount that small
business contractors be careful and thorough in assessing their
size and status.
Some steps small businesses can take to limit potential liability
include the following:
- Assign one primary, and a secondary, individual for ensuring the representations in SAM are always accurate and are updated once annually;
- Clarify who will be the authorized official responsible for signing the small business size and status certification;
- Establish and maintain internal management procedures governing size representation or certifications;
- Ensure all representations and certifications are clear and unambiguous; and
- Make efforts to correct an incorrect or invalid representation or certification in a timely manner.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.