On June 28, 2013, the Small Business Administration (“SBA”) issued a Final Rule relating to the penalties involved when a contractor misrepresents its small business size status. While the current regulations provide that a contractor might suffer certain penalties for “knowingly misrepresenting” its small business status, they offer little guidance concerning what those penalties might be. Moreover, the current regulations fail to identify what type of conduct constitutes a “knowing misrepresentation.”  The Final Rule seeks to clarify these points, and both increases the severity of the penalties associated with a contractor’s misrepresentation of its small business status, and broadens the scope of conduct that might expose a contractor to penalties.

For example, under the new regulations, the very submission of a bid or proposal for any set-aside contract or subcontract will be deemed a “certification” of that concern’s small business status. Similarly, a contractor’s self-certification as a small business in any Federal database (i.e. SAM) will be considered a “certification” of that contractor’s small business status. In addition to these implied “certifications,” contractors will be required to provide an explicit statement, certifying the concern’s small business status and eligibility as part of any bid or proposal set-aside for such concerns. Any false certification will be considered a “knowing misrepresentation,” which will expose the contractor to the penalties identified in the Rule. The new regulations also seek to impose on contractors an additional requirement to annually update any self-certifications. Failure to change self-certifications to properly reflect one’s size status will be considered tantamount to making a “knowing misrepresentation,” and may result in the imposition of penalties.

The new regulations not only expand the type of conduct that might result in penalties, but they also broaden the type of penalties that might be imposed. The government may seek to impose civil penalties available under either the False Claims Act, or the Program Fraud Civil Remedies Act, which may result in suspension or debarment. Alternatively, the government might chose to enforce the criminal penalties available under the Small Business Act. Even more disturbing, individual officers of a concern who are, under the new rules, required to certify the company’s small business status as part of a set-aside bid or proposal, will be subject to individual liability if that certification proves inaccurate. Finally, where a contractor is found to have knowingly misrepresented its status, there will be a presumption of loss to the government (read: damages) equal to the total expenditure associated with that procurement, in other words, a knowing misrepresentation could open a contractor up to damages equal to the total contract amount associated with every contract bid while falsely certified. That’s not exactly a slap on the wrist.

The new regulations, which went into effect on August 27, 2013, have greatly increased the importance of understanding your small business status, and eligibility to compete for set-aside projects. Federal contractors and subcontractors should take proactive measures to mitigate risk in this area, by ensuring that they are properly identifying their status. If you have any doubt concerning your company’s small business eligibility, seek the advice of counsel.

Edward T. DeLisle is a Partner in the firm and a member of the Federal Contracting Practice Group.

Maria L. Panichelli is an Associate in the firm’s Federal Practice Group.