Contracting Under Government Set Asides - Self-Certification As A Small Business Poses New Risks and Harsh Penalties

If you have a Federal contract or you have ever represented or registered your company with the U.S. Government as a small business, then read on.  Changes to how companies register will go into effect on August 27, 2013.  In a move to increase the penalties for mis-registering as a small business, the Federal Government has eased its burden of proof regarding misrepresentation to provide for a ‘Presumption of Loss Based on the Total Amount Expended’. These changes to the Code of Federal Regulations (CFR) are a game changer for many medium companies, who may not be aware of their immediate impact.

Changes to Federal Regulations.  Here’s what will happen. Changes to 13 CFR 121 et. seq. are due to take place on August 27, 2013 and will severely increase the penalties for misrepresenting the size of your business entity. If a company soliciting to or contracting with a component of the Federal Government represents itself as being a small business, but is in fact not a small business, the Government has the right to assert that it has been damaged by the total value of the contract.  Performance does not matter. Value does not matter. And the company cannot mitigate potential costs or damages by using other small businesses. In other words, the company was not entitled to have the contract in the first place, so the Government may want its money back!  In full.

Risk Mitigation

So how do you prevent this from happening to you?  While inadvertent misrepresentation may result from a range of errors, the following two mistakes tend to be prevalent.

Mistake #1 - Failure to ensure that company representations and registrations are current and accurate.  Ensure that you understand your entity status and where you have recorded it. What have you asserted in the past? Check online with the Online Representations and Certifications Application (ORCA) and System for Award Management (SAM). Verify that these representations are still accurate and update them if necessary. Also, ensure that your business development and contracting staff understand and adhere to this.  If in doubt, it is not difficult to determine if you qualify as being a small business.  That depends on your North American Industry Classification Systems (NAICS) code, how many employees you have, and whether you are owned in common with other companies.  However, and this is important, if you are owned or controlled in common with another company, then their employees may count towards your total headcount and so prevent you qualifying as a small business!

Mistake #2 - Willingly soliciting for work under a ‘set-aside’ to which you are not entitled.  Submitting “a bid, proposal, application or offer for a Federal grant, contract, subcontract, cooperative agreement, or cooperative research and development agreement reserved, set aside, or otherwise classified as intended for award to small business concerns” will be deemed a certification that your company is a small business! Additionally, if your bid, proposal, etc. encourages the Government to set a contract aside for small businesses that would otherwise be opened to all bidders, then you are deemed to have legally certified your small business status. And finally, if you register in any Federal database as a small business concern then you are deemed to have self-certified.

Only once you are certain that you comply with the definition of a small business should you consider offering your products and services to the Federal Government as a qualifying small business.

Ignorance of the law is no excuse.  Don’t get caught out with the new rules meant to protect small business concerns. If you have ever represented yourself as a small business, then it is time to review, ensure your business status, and update your representations. A misrepresentation will cost you substantially, including the contract, no matter how much or how well you have performed.

About the Authors

Robert Merting and Alec Mackenzie work for Defense Management Group (DMG), a government contracting consulting group with a focus on the defense industry. DMG personnel are well experienced in drafting proposals, negotiating contracts, and complying with the Federal Government through NAICS, ORCA, and SAM. If the above applies to you, and you would like help sorting through your requirements, please feel free to reach out to DMG.  

For information on other similar topics addressed by DMG, including NISPOM, FMF/FMS, FOCI, FCL and GSA please see our blogspot at http://defensemg.blogspot.com/

The Buy American Act and Other Not-So-Innocuous Clauses

When selling goods to the U.S. Government, a contractor must be aware of many contractual provisions that affect performance upon the contract. Buried within boilerplate language are clauses that alter what appears on the face of the contract. For instance, the request for certain goods may not state that country of origin is material, but within the boilerplate there will be included the Buy American Act (BAA).

Traditionally, the U.S. Government has preferred supplies originating in America through the BAA. In recent times this restriction has been relaxed by the Agreement on Governmental Procurement (GPA) and other trading agreements. BAA is largely inapplicable to supplies originating in countries that are signatories to the GPA.

What does this mean for the potential bidder? You must ensure that your products are sourced from the U.S. or countries who are signatories to the GPA. To offer goods from other countries would make you non-compliant and subject to contractual penalties.

However, if your non-U.S. country of origin appears on the GPA you are not yet in the clear. There are other requirements and amendments that place further restrictions on the origin of certain goods or classes of goods.

The Berry Amendment and other DoD specific restrictions limit foreign purchases of certain items to protect America’s ability to respond to national emergencies. These restrictions, applicable to most defense oriented goods, are designed to ensure that the U.S. can mobilize its armed forces without depending upon the supply of goods from potentially hostile countries or across contested shipping channels. Some goods from close allies, such as Canada, are allowed as substitutes, but each specific situation requires careful analysis with all current and applicable regulations.

Before Submitting Your Bid

Before bidding on a contract for the supply of goods, you must understand the source requirements for the goods and know whether your offered solution will be compliant with the requirements. This is doubly important in defense contracting where the restrictions are tighter. Ignorance is not an excuse, and even
where the U.S. ‘forgets’ to include a standard term required by Congress, the contractor is charged with knowing the term should be included. If you are at all uncertain of the proposed contract or your bid, reach out to a professional consultant who can answer these questions and ensure you and your company don't wind up non-compliant.

US Security Cooperation through FMF & FMS

U.S. Security Cooperation (SC)

The United States policy of Security Cooperation is based upon cooperation between the U.S. and other sovereign nations in order to meet common regional stability goals and enable friends and allies to improve their defense capabilities and needs. It consists of a group of programs authorized by the U.S. Foreign Assistance Act of 1961 (FAA), the Arms Export Control Act (AECA), and related statutes, under which the Department of Defense (DoD) or commercial contractor(s) provide defense articles and services in support of U.S. national policies and objectives. Each year the Administration submits requests to Congress for the Security Assistance budget. Congress reviews the request and appropriates funds under the Foreign Operations Appropriations Act (FOAA) for various international assistance programs, including Foreign Military Financing (FMF) and International Military Education and Training (IMET). The State Department’s Bureau of Political-Military Affairs sets policy for the FMF program, while the Defense Security Cooperation Agency (DSCA), within the DoD, manages it on a day-to-day basis. Security Assistance Organizations (SAOs) operating from U.S. embassies overseas play a key role in managing FMF within recipient countries.

Foreign Military Financing (FMF)

FMF is the U.S. Government program of grants and loans for financing the acquisition of U.S. military articles, services, and training. FMF helps promote U.S. national security interests by strengthening coalitions, cementing cooperative bilateral military relationships and enhancing interoperability with U.S. forces. Because FMF monies are used to purchase U.S. military equipment and training, FMF also contributes to a strong U.S. defense industrial base. FMF purchases are made through the Foreign Military Sales (FMS) program, which manages government-to-government sales. On a much less frequent basis, FMF also funds purchases made through the Direct Commercial Sales (DCS) program, which oversees sales between foreign governments and private U.S. companies. (For more information on DCS, please see the relevant DMG blog).

Foreign Military Sales (FMS) 

FMS is managed and operated by DoD on a no-profit and no-loss basis. As part of the DoD, the Defense Security Cooperation Agency (DSCA) coordinates the transfer of defense material, training and services to allies, as well as promotes military-to-military contacts. Foreign Military Sales division is the core activity of DSCA and annual sales range between US$30 and US$40 billion. Countries and international organizations participating in the program pay for defense articles and services at prices that recoup the actual costs incurred by the U.S. Th is normally includes a fee (currently 3.8% of what the defense articles and/or services cost) to cover the cost of administering the program. Procurement activity is conducted by DoD acquisition staff compliant to FAR and DFARS. Due to U.S. interest in encouraging standardization and interoperability among U.S. and SC countries, FMS normally involves the transfer of those items which have been fielded with U.S. forces. While available through FMS, nonstandard articles or services are normally acquired commercially under DCS.

Procedure Followed

Generally, when a foreign country requires U.S. defense articles or services a Letter of Request (LOR) will be submitted through diplomatic channels to the appropriate DoD Military Department or Defense Agency and copied to the Department of State (DoS) Bureau of Politico-Military Affairs and the DSCA. If the request is approved, the DoD will respond either with Price and Availability (P&A) information or a Letter of Offer and Acceptance (LOA). The LOA is a formal offer which, when accepted, forms the basis for the U.S. to provide the material and services offered.(For more information on LOA and P&A, please see the relevant DMG blog).

Preparing to do Business

There are significant opportunities present for U.S. and international suppliers of defense material and services to participate in and benefit from FMF and FMS. However, it is necessary to understand the requirement specification and acquisition process, as well as ensure that your offering will be compliant to regulations and eligible for consideration. If you find yourself needing help with the above, please reach out to us.