• New SBA Rule Creates New Contractor Requirements And Government Leverage Over Contractors To Combat Abuse In Small Business Contracting
  • July 9, 2013
  • Law Firm: Holland Hart LLP - Denver Office
  • On June 28, 2013, the Small Business Administration ("SBA") issued a final rule1 implementing provisions in the Small Business Jobs Act of 2010 ("Jobs Act") relating to small business size and status integrity. These provisions are intended to strengthen the government's hand to police long-standing, widely-reported abuses in procurement programs reserved for small business.2 The final rule applies to procurement contracts, grants and cooperative agreements (collectively "contracts") which are set-aside for small business concerns. The SBA's commentary indicates that the rule is to be interpreted broadly to cover not just traditional set-asides provided for in the Federal Acquisition Regulation ("FAR"), but rather any "set asides, reserves, partial set-asides, price evaluation preferences, source selection factors and any other mechanisms" to assist small businesses. This final rule creates substantial new regulatory for the government to prevent abuse in small business contracting programs, and associated new requirements and enhanced risk for contractors participating in set-aside contracting programs.

    The final rule implements the following Jobs Act provisions intended to prevent abuse in small business contracting programs3:

    • Presumption of Government Loss from Size Status Misrepresentations. The final rule creates a "presumption of loss" equal to the total value of the contract in which a business has "willfully sought" to misrepresent its ownership status or size in winning a government contract. This regulatory presumption of loss equal to total contract value provides a potentially powerful weapon to government attorneys and investigators, as it has often been difficult for the government to establish the extent of its loss from a false representation of small business size status.
    • Deemed Certifications. The final rule identifies the following instances where the contractor shall be "deemed" to have represented small business size status even without having executed a specific certification: (1) submission of a bid or proposal for award of a contract intended for award to small business; (2) submission of a bid or proposal for award of a contract which in any way encourages the contracting agency to classify the contractor as a small business with respect to the awarded contract; and, (3) registering as a small business in any government electronic database for the purpose of being considered for contract award as a small business. These "deemed" certification scenarios create traps for well-intentioned but careless contractors. Contractors - especially those which qualify as small under some but not all of the NAICS codes applicable to their government business activities - should exercise care to ensure that they are not unintentionally representing small business size status incorrectly via a "deemed" certification.
    • Signature Requirement. All bids or proposals for contracts submitted by small business concerns shall include a certification of small business size and status executed by an authorized employee, with the authorized signature included on the same page as the certification.

    The final rule provides that the provisions described above shall not apply in the case of "unintentional errors, technical malfunctions and other similar circumstances" demonstrating that a contractor's size status misrepresentation was not "affirmative, intentional, willful or actionable under the False Claims Act." While helpful, contractors should be aware that this exception to application of the new rule does not provide protection from all but intentional size status misrepresentations. In particular, the civil False Claims Act ("FCA") provides for coverage where the contractor acts with "reckless disregard" or "deliberate ignorance" (i.e., less than "intent" as traditionally understood). These lower FCA-based coverage standards could create liability under the final rule even for contractors acting in good faith, especially given that SBA regulations with respect to small business size status (i) sometimes contain ambiguities, and (ii) have been applied with apparent inconsistency in connection with SBA administrative law proceedings, particularly in the context of the SBA's "affiliation" rules.

    The final rule also provides that small business contractors must update their size status certification in the government's System for Award Management ("SAM") Database (www.sam.gov) at least annually. Contractors that fail to update their small business size status certification in SAM for one year will not be listed as a small business concern until such time as their certification is updated.

    This SBA rule is effective August 27, 2013.

    1The final rule is found at the following link: http://www.gpo.gov/fdsys/pkg/FR-2013-06-28/pdf/2013-15418.pdf. Previously, on October 7, 2011, the SBA issued a proposed rule for public comment on the same statutory provisions. SBA addresses the comments received in the final rule.

    2See, e.g., SBA Office of Inspector General Report No. 10-07 (January 25, 2010) (non-disadvantaged persons participating in benefits of the 8(a) program) http://www.sba.gov/sites/default/files/oig-report-10-07.pdf; Government Accountability Office Report No. GAO-10-108 (October 23, 2009) (fraud and abuse in the SDVOSB program allowing ineligible firms to receive millions of dollars in SDVOSB contracts). http://www.gao.gov/new.items/d10108.pdf

    3These provisions in the final rule expressly apply to all categories of set-asides, i.e., Small Businesses, 8(a) and Small Disadvantaged Businesses, Woman-Owned Small Businesses, Service-Disabled Veteran-Owned Small Businesses and HUBZone Small Businesses, as well as contractor small business size status representations made in connection with subcontracts awarded by Large Business Prime Contractors.