SBA Tightens Rules on Misrepresentation of Status for Government Contracts

Contractors seeking to obtain or maintain small business status need to be aware of some upcoming changes to Small Business Administration regulations. As part of an SBA initiative to reduce instances of ineligible firms receiving contracts under small business set-asides or preferences, the SBA has released and will soon implement new rules designed to facilitate punishment of contractors that inaccurately certify themselves as small in order to obtain a contract.

In theory, penalties under the new rule are no harsher than the penalties have always been for SBA violations: A firm that misrepresents its status can be subject to suspension/debarment, fines, civil penalties, and criminal prosecution. What the new rules actually do is make it easier for the SBA to prove that a contractor willfully misrepresented itself as a small business. The agency accomplishes this through two major mechanisms that we expect will very quickly become familiar terms in the procurement industry.

The first new mechanism is the presumption of complete economic loss to the government. It states that when a contractor misrepresents its size or other certification status and wins a contract, the government can seek damages from the contractor, and these damages are presumed to equal the total value of the awarded contract. The theory is that every single dollar was awarded to the company on the basis of willful misrepresentation, so every dollar must be paid back. This is in addition to administrative discipline such as debarment, as well as possible criminal penalties. While this presumption is rebuttable, the burden of evidence will be squarely on the contractor. It will be fascinating to see whether contractors will have success in meeting this burden once these new regulations are put to the test in the Court of Federal Claims and other forums.

Another mechanism that will make it easier for the SBA to prove that a contractor has violated SBA rules is the broad scope of conduct that the SBA will deem to be “affirmative, willful and intentional certifications of small business size and status.” The full list of such activities is available here in the Final Rule and includes, among other things, registration on SAM as a small business (including annual renewals), and competing for any federal contract or grant that is set aside or “otherwise intended for award to small business concerns.”

It’s clear to us, then, that small businesses must positively confirm that they are eligible under SBA rules before taking any actions that might be deemed by the SBA to be a willful representation of size status under the new regulation.

The new rules go into effect on August 27, 2013, and we look forward to continuing to assist new and growing small businesses in navigating this ever-changing regulatory framework.

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