The Small Business Administration released on June 28, 2013, a Final Rule amending the SBA’s regulations to implement provisions of the Small Business Jobs Act of 2010 relating to the size and status integrity of small businesses. The new regulations, which go into effect on August 27, 2013, will be of great interest to government contractors—particularly those competing for small business set-asides.
The current SBA regulations merely provide general statements that the Small Business Act provides for severe penalties for knowingly misrepresenting a concern’s small business size/status. However, the specific penalties involved were unclear. The Final Rule addresses the issue, and clarifies the penalties for knowing misrepresentation. The Final Rule has added new regulations, as well as new provisions to existing regulations, that specify the penalties for a concern misrepresenting itself as a small business in the pursuit and award of small business set-asides. The highlights of the amendments to the regulations are as follows:
- Any time a contractor seeks and obtains a federal contract or subcontract through willful misrepresentation of its small business size/status, there is a presumption of loss to the government equal to the value of that contract or subcontract;
- The new regulations clarify the penalties for individuals and businesses misrepresenting small business size/status, including suspension and debarment, as well as civil and criminal penalties;
- An offer for a federal contract set aside for small businesses will in certain circumstances be deemed a certification of small business size/status;
- An authorized official of the offeror must sign a certification of small business size/status included with every offer on procurements set aside for small businesses; and
- Small business concerns must annually update their size/status in the applicable database (SAM), and concerns failing to do so will not be identified as small (or disadvantaged) until updated.
The Final Rule amends the sections of the SBA regulations pertaining to small businesses (13 CFR § 121.108), the Small Business Subcontracting Program (13 CFR § 121.411), the 8(a) Small Disadvantaged Business program (13 CFR § 124.521), the Small Disadvantaged Business program (13 CFR § 124.1015), the Service-Disabled Veteran-Owned Small Business program (13 CFR § 125.29), the HUBZone Program (13 CFR § 126.900), and the Women-Owned Small Business Federal Contract Program (13 CFR § 127.700). While each small business program’s individual regulations were modified separately, the changes are generally uniform throughout.
Misrepresentation as a Small Business
The new regulations establish and clarify the consequences of a contractor willfully misrepresenting its small business size/status. The first consequence outlined by the new regulations is the establishment of a presumption of loss to the government. Where it is revealed that a contractor willfully sought and obtained award through misrepresentation of its small business size/status, the presumption of loss will be equal to the total amount expended on the contract or subcontract. This presumption of loss can be utilized by the government in civil and criminal proceedings in Federal court.
The new regulations also state that individuals or concerns that are found to have misrepresented small business size/status are subject to severe civil penalties under the False Claims Act and Program Fraud Civil Remedies Act, severe criminal penalties pursuant to the Small Business Act, as well as possible suspension and debarment. These penalties apply to both misrepresentations of small business size/status, as well as failure to correct “continuing representations” that are no longer true. (Note: Only the amendment to the 8(a) program regulations did not include a section on Penalties for Misrepresentation. Such penalties are currently covered by existing 8(a) regulations—13 CFR § 124.501(i)).
In order to avoid unfair penalties for simple and innocent mistakes, the new regulations include limitation of liability provisions. The consequences discussed above are not meant to apply to situations involving unintentional errors or similar situations in which a misrepresentation was not affirmative, intentional or willful. Also, the new regulations do not penalize a prime contractor for good faith acceptance of the representations made by its subcontractors.
Certifications of Small Business Size/Status
Under the new regulations, certain actions taken by contractors will be deemed to be a certification of small business size/status. These actions include submitting a bid or proposal on any contract or subcontract that is either set aside for one of the various small business programs, or where the procuring agency is in any way encouraged to count the award as one to a concern in one of the various small business programs. In addition, a concern’s registration in any Federal database for the purpose of being considered for an award of a set-aside contract will be deemed a certification of small business size/status.
In addition to the deemed certification simply by virtue of submitting a bid or proposal on a set-aside procurement, the new regulations also require an authorized official of the offeror to submit a signed certification of small business size/status with the bid or proposal. This requirement opens the door for individual liability for misrepresentation of small business size/status.
Annual Updates of Small Business Size/Status
The new regulations have added a requirement of an annual update for those small business programs that allow for self-certifications, i.e., small business, SDB, SDVOSB, and Woman-Owned. The certification requirements of the 8(a) Small Disadvantaged Business program and the HUBZone Program are currently covered by the existing SBA regulations (Part 124 and Part 126, respectively), and thus were not amended by the Final Rule.
For those programs allowing self-certification, the new regulations do not allow a concern to self-certify in a Federal database (such as SAM) unless it updates its certification on an annual basis as relates to the applicable eligibility requirements. A concern that fails to perform the annual certification will not be listed as the applicable small business type in Federal databases until the concern recertifies its status.
Practical Counsel for Small Business Government Contractors
These new regulations have significantly increased the importance for small business government contractors to ensure their certifications and representations are true and accurate. The penalties outlined above apply not only to new certifications and representations, but also to companies and individuals failing to correct certifications and representations that for whatever reason are no longer correct. It would be a wise course of action for small business government contractors to engage legal counsel familiar with these regulations to ensure compliance and avoid costly penalties.