In July of 2006, the ranking Democrat on the U.S. House Committee on Small Business sent out letters to 2,500 companies requesting that those companies contact federal ordering agencies in order to correct information in the agencies’ records that identified the company as a “small business.” The letter, which was largely identical for each company, indicated that the ordering agencies may have been “mistaken” in their coding of size representations, but the potential impact of the mass-mailing was not lost on the Hill:

Democrats on the committee called on the GAO to investigate whether or not these large businesses are intentionally certifying themselves as small. In addition, they are requesting that the Inspector Generals for the four agencies which had the most incidents of miscoding – Departments of Treasury, Transportation, State and Education – conduct investigations to determine if their contracting officers are utilizing miscoding to meet small business goals. The committee is also sending letters to each of the 2500 large businesses and ineligible entities that received small business awards, asking that they take responsibility and action to rectify the situation.

While the focus of the letter was to shine a spotlight on the effectiveness with which federal agencies were tracking and reporting their achievement of small business contracting goals, the risk arising from even an innocent misrepresentation sent medium-sized and Fortune 50 companies alike scrambling to ensure compliance. All government contractors make representations that affect their entitlement to an award, whether a representation is of business size, compliance with socio-economic or labor requirements, or of compliance with domestic preference regulations. Recent press releases on settlements of False Claims Act investigations highlight the need for vigilance.

Since sending the letter to the 2,500 large companies, the principal author is now the chair of the Committee on Small Business. Similarly, new congressional leadership has pledged hearings and increased oversight into all aspects of performance by the executive branch, not the least of which is likely to involve scrutiny of government contracts. Thus, the July letter might be viewed as a warning shot to the government contractor industry: get your ducks in a row, and do not assume that the agencies with whom you are contracting are properly administering your contract.

Size and Affiliation Under the SBA Regulations and the FAR

Congress has determined that a significant portion of federal government contracting expenditures should be distributed to small businesses in order to foster economic growth and innovation. Pursuant to statute, federal agencies must therefore demonstrate that a significant percentage of their contracting funds are ear marked for small businesses. Agencies achieve these goals largely in three ways: (1) mandating large businesses subcontract with small businesses; (2) setting aside certain contracts for competition only among small businesses (literally, set-asides); or (3) providing preferences or otherwise tracking purchases from small businesses. The U.S. Small Business Administration (“SBA”) is charged with regulating the definitions of “small business,” and implementing regulations to prevent large businesses from obtaining benefits intended for small businesses.

The SBA regulations regarding size appear in Title 13 of the Code of Federal Regulations in Part 121. One of the rules intended to prevent large businesses from obtaining the benefits of being a small business is the rule that requires a company and all of its “affiliates” to be considered the same concern for purposes of determining whether or not the business or “concern” is a “small” business. Affiliation is defined by the SBA, at the broadest level, as “when one controls or has the power to control the other, or a third party or parties controls or has the power to control both. It does not matter whether control is exercised, so long as the power to control exists.”

The Federal Acquisition Regulations (“FAR”) also contains relevant definitions of business size in Part 19, incorporating the standards promulgated by the SBA: “Small business concern” means a concern, including its affiliates, that is independently owned and operated, not dominant in the field of operation in which it is bidding on government contracts, and qualified as a small business under the criteria and size standards in 13 CFR Part 121 (see 19.102).

Size status of an entity is dictated, not as a general proposition, but in relation to specific codes, called the North American Industrial Classification System (“NAICS”) codes. In every government procurement, the contracting officer is required to identify one or more NAICS codes that must be tied to each product or service proposed to be offered. Depending largely upon whether the item is a product or a service, the standard is generally employee-based (products) or revenue-based (services).

For a particular contract, “[i]f a procurement calls for two or more specific end items or types of services with different size standards and the offeror may submit an offer on any or all end items or types of services, the offeror must meet the size standard for each end item or service item for which it submits an offer.” Pursuant to this regulation, and confirmed by SBA, an offeror could be small for some items in a multiple-item procurement and large for other items in the same procurement. Thus, a contractor must be vigilant to compare the company’s key characteristics – number of employees (calculated on a rolling average basis over the prior year) or gross revenue (averaged over the prior three fiscal years), each determined as of the date of self-certification – to the size standard dictated by each relevant NAICS code.

There are two broadly-utilized databases of self-reported contractor information. The Central Contractor Registry (“CCR”) is a centralized database of basic and general corporate information relied upon by contracting officers in every executive agency and department. For this reason, the system requires a formal certification of the accuracy of the information entered by the contractor. The CCR requires all contractors to enter relevant information for each separate Data Universal Numbering System (“DUNS”) number under which it performs work. Information relevant to size is included in the CCR in at least two places. In the corporate information section, a contractor is requested to generally identify its business type, and may represent itself as a “large” or “small” business. In the goods/services section, contractors are required to identify major NAICS codes under which they routinely perform work. Elsewhere in the form (although not apparent on the public face of the system because of the potentially proprietary nature of the information), contractors include their number of employees and annual gross revenue, as dictated by the applicable SBA size regulations. Then, in the Small Business Types section, the CCR automatically compares the size information inputted with each of the identified NAICS codes, and provides a determination of size, large or small, for each of those NAICS codes.

The Online Representations and Certifications Application (“ORCA”) system is an online database through which government contractors annually execute the standard certifications and representations for commercial sales to the government, including certifications related to size. In ORCA, among other required certifications, a contractor self-reports numbers of employees and revenue, drawn now directly from CCR, and identifies particular NAICS codes under which it performs a significant portion of its work. Thus, for each NAICS code, the contractor effectively self-reports and self-certifies whether it is large or small. Since the document is a standing form, valid for one year and accessible to all contracting officers, a contractor need not execute a new form every time it submits an offer or bid or executes a government contract. With respect to size, the form is clear that the contracting officer may rely on the representation for the codes specifically identified, and for different codes, the contractor must execute a separate certification.

In addition to these two databases, the Federal Procurement Data System – Next Generation (“FPDS-NG”), is the database run by the General Services Administration that is required to capture approximately 30 data fields on each contract action. Most of the data fields are benign: contractor and agency name and address, amount, date of action, contract number, and the like. However, the procuring agency is also required to input information about the manner in which the contract was competed (either sole source, set-aside, or full-and-open competition), the NAICS code of the procurement, and the business size of the contractor. Unlike ORCA and CCR, contractors cannot change the information in FPDS-NG, and, unfortunately, FPDS-NG is often incorrect in the data fields that pose risk to contractors: business size and the extent to which a procurement was competed. FPDS-NG is available for public search and review.

Errors in ORCA, CCR and FPDS are Avoidable

Errors in CCR and ORCA are not unusual. The common errors typically are the reporting, in CCR, of an amount of revenue (or number of employees) attributable to the office or division of the contractor tied to the specific DUNS number, rather than the contractor and its affiliates as a whole. This error is understandable, because the government generally requires that each office of a contractor possess a different DUNS number, which generates a mistaken assumption that the number of employees or amount of revenue should be limited to that particular office. The result is that a very large company could mistakenly report a number of employees that does not exceed one of the common size standards (such as 1,000 for many types of manufacturing). Since contractors are required to identify a NAICS code in CCR or ORCA for its most common lines of business, and since both ORCA and CCR automatically calculate whether a company is large or small based upon the information reported elsewhere, it is not unusual that an otherwise large company will mistakenly appear to be representing itself as a small business in ORCA or CCR.

Adding to the mix is FPDS. As noted above, FPDS contains information only reported by the procuring agency, and the record is typically not available for public searches for over 60 days from the date of the action. One of the most common errors in FPDS is the reported business size of the contractor. Sometimes, the record is simply wrong, and there is nothing in the contract, ORCA, CCR or in the public domain that would suggest to the procuring agency that the contractor is a small business. Other times, however, the error is preventable by the contractor: the agency has identified a NAICS code that, when combined with the information automatically imported from the contractor’s CCR record, triggers an automatic reporting of the contractor as a small business. It might be that the contractor never sees a single piece of paper from the agency suggesting that the agency considers the contractor to be a small business. Nevertheless, the implication of the record in FPDS is that the agency took credit toward its small business goals in the purchase from the contractor.

The agency and the contractor may never know of the mistake; or, congressional committee staff running searches of all businesses receiving awards in a fiscal year identifying the company as a small business could include the contractor on the list of companies receiving letters from the Hill calling on the Government Accountability Office or agency inspectors general “to investigate whether or not these large businesses are intentionally certifying themselves as small.

Potential Risk Under the False Claims Act

The False Claims Act (“FCA”) provides, in relevant part, that any person who “knowingly presents, or causes to be presented, to an officer or employee of the United States Government … a false or fraudulent claim for payment or approval; [or] knowingly makes, uses or causes to be made or used, a false record or statement to get a false or fraudulent claim paid or approved by the Government … is liable to the United States Government for a civil penalty of not less than $5,000 and not more than $10,000, plus three times the amount of damages which the Government sustains because of the act of that person.

To state a claim under the FCA, the government must prove the following elements: (1) the defendant made a false statement or engaged in a fraudulent course of conduct; (2) the statement was made or carried out with “knowledge” of its falsity or with “reckless disregard” to its falsity; (3) the statement or conduct was material; and (4) the statement or conduct caused the government to pay out money or to forfeit money due.

An actionable false claim only exists for orders where the alleged misrepresentation was material to the “payment” or “approval” by the United States government. Accordingly, an immaterial representation cannot serve as the grounds for a FCA claim. Moreover, the fact that a statement is literally false is insufficient to state a claim under the FCA; the defendant must have a requisite knowledge of the falsity of that statement, or act in reckless disregard to its truthfulness. The reckless disregard standard contained within the FCA seeks to penalize defendants who have acted in deliberate ignorance to the falsity of their representation. Reckless disregard is an extreme version of ordinary negligence, lying somewhere on the continuum between gross negligence and intentional harm. Damages are inappropriate where the government has not been harmed by the alleged misrepresentation and the government would have paid the same amount had it known the true facts.

Conclusion

Simple steps can be taken to ensure that the most easily-avoided mistakes do not turn into investigations and claims under the False Claims Act.

1 . Review the two central databases of federal government contractor information, the Central Contractor Registry (www.ccr.gov) and Online Representations and Certifications Application (orca.bpn.gov) and confirm, that the reported size information and other certifications are accurate.

2. Sample contracts and orders available in the Federal Procurement Data System (www.fpds.gov) to ensure the accuracy of information in those orders, including the method in which the contract was obtained and the company’s size representation.

3. Centralize monitoring and administration of ORCA and CCR with the compliance department or officer, under the guidance of corporate counsel.

4. Instruct all sales staff, relevant managers, and order entry personnel to vigilantly review solicitations, contracts, and orders for certifications or other representations.

Taking these simple steps will ensure that your company can avoid the embarrassment of a $100 billion company with 50,000 employees confirming to a House committee that it is, indeed, not a small business.