SBA Gives Dangerous Warning to Prime Contractors Naming Subcontractors In Bids Or Misrepresenting Their Small Business Status

Possible relief to named subcontractors in government bids who are later let go by the prime contractor: Under the new SBA regulations, there seems to be some relief to small businesses that are named as subcontractors and teaming partners but are never used on the contract after award.

This seems to be a common problem across the United States.  In previous approaches, the SBA or the Contracting Officer would have to give the bad news to the subcontractor that there is no privity of contract between the government and the subcontractor. However, the new rules seem to add teeth to the bidding process.

Prime contractors beware: The SBA seems to send a dangerous warning to prime contractors who submit named subcontractors in their bids and then do not use them during the performance phase.

The new SBA regulations show that the government can now create its “hook” under the proposal certification requirements instead of being precluded by the previous privity of contract bar. Under SBA regulations, 13 CFR 125.6 if a prime contractor identifies a small business by name as a subcontractor in a proposal, offer, bid or subcontracting plan it MUST notify those subcontractors in writing prior to identifying the concern in the proposal, bid, offer or small business subcontracting plan.

13 CFR 125.6 (g) Penalties. Whoever violates the requirements set forth in paragraph (a) of this section shall be subject to the penalties prescribed in 15 U.S.C. 645(d), except that the fine shall be treated as the greater of $500,000 or the dollar amount spent, in excess of permitted levels, by the entity on subcontractors. A party’s failure to comply with the spirit and intent of a subcontract with a similarly situated entity may be considered a basis for debarment on the grounds, including but not limited to, that the parties have violated the terms of a Government contract or subcontract pursuant to FAR 9.406-2(b)(1)(i) (48 CFR 9.406-2(b)(1)(i)).

Along with this requirement, prime contractors may also want to capture a commitment letter from the subcontracting entities. Any perceived violations of this rule can be costly to the prime contractor.

Apparently, no interested party requirement: 13 CFR 125.6 also creates legal standing to anyone having reason to believe that the prime contractor violates this rule to bring forth complaints to either the SBA IG or the contracting officer.

The language of the regulation suggests that:

Anyone who has a reasonable basis to believe that a prime contractor or a subcontractor may have made a false statement to an employee or representative of the Federal Government, or to an employee or representative of the prime contractor, with respect to subcontracting plans must report the matter to the SBA Office of Inspector General.

All other concerns as to whether a prime contractor or subcontractor has complied with SBA regulations or otherwise acted in bad faith may be reported to the Government Contracting Area Office where the firm is headquartered.

Tip for prime contractors: it appears that the new regulations only require written notice to proposed subcontractors. However, an issue still remains as to whether there was a legal commitment made by the subcontractor. Agencies may still require commitment letters in their solicitations. You must read the RFP language carefully.

Exposure to procurement fraud: Prime contractors can easily be exposed to adverse investigations or even procurement fraud. It is clear from the language of the new SBA regulations that subcontractors can now arguably become the intended beneficiaries for question bidding actions by the prime contractor.

It would also seem that named teaming partners or subcontractors should mitigate any damages by submitting a letter of commitment to the prime in response to the written notification.

Why? Because simply signing a teaming agreement may not be enforceable in court. You may need more to show that you truly fall under the purview of the new regulations. Any claims brought against the prime contractor must still show that you attempted to mitigate your damages.

What is the Presumed Loss Rule?

The “Presumed Loss Rule” in the Small Business Jobs Act of 2010 (“Jobs Act”) allows for criminal liability or civil sanctions for a prime contractor’s misrepresentation of its small business status. When submitting government contract bids, if a prime contractor incorrectly represents itself as a small business, it can be exposed to False Claims Act (“FCA”) exposure and be on the hook for three times its total contract proceeds, plus other damages, even if the government received value for the contract work and the contractor fully performed the contract to the satisfaction of the government.

If you are a large government contractor bidding on a federal contract with a small business, then both should understand the importance of meeting the SBA small business size standard. Failure to represent one’s small business status, can be subject to the Presumed Loss Rule or face criminal charges from the U.S. Department of Justice (“DOJ”) or Qui-Tam whistleblower litigation.

Impact of Misrepresenting Small Business Status on Large Businesses and Small Businesses

The Presumed Loss Rule has significant implications for large DOD contractors doing business with firms that certify themselves as small under the Small Business size standards. The severity and implications of being investigated for government contractor fraud is very high.

•   Large business government contractors who purchase small businesses must make sure that the purchased company met the small business size standard requirements at the time it submitted its bid. If not, the large business could very well inherit any procurement fraud and contractor fraud implications during a fraud investigation. 
• If the government attorneys find that a large business joint venture partner or a joint venture team member under a Mentor-Protégé agreement includes a small business firm that has misrepresented its small business status, both can face criminal liability if the small business partner or team member misrepresented its status in bidding a set-aside contract. Large businesses doing business with firms representing that they are eligible for small business status must be extra vigilant in verifying the small business contractor’s eligibility, and because of these new catastrophic financial consequences, it would be reckless to enter into a relationship without undertaking the requisite diligence.

Get Help. For help applying the new SBA subcontractor and teaming partner issues call Watson & Associates LLC government small business lawyers at 1-866-601- 5518.