Thursday, August 22, 2013

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

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