Common Small Business Mistakes in Government Contracting

Nov 29, 2018
Bidsync Industry Blog

We’ve talked extensively about the benefits of being a small business in government contracting. Between the set-aside contracts and the preferential treatment during proposal evaluations, small businesses can gain many competitive advantages. So many, in fact, that borderline small-medium-sized businesses (SMBs) – and even some large businesses – may attempt to veil their true size in order to obtain or maintain a small business certification. Alternatively, some small businesses may enter into risky business agreements with larger businesses that violate the terms of set-aside contracts, such as what occurred in this recent scenario.

Then there are situations in which a business qualifies as a small business in some jurisdictions and assumes that their status applies broadly across all government subsectors. The latter is typically an honest mistake that arises at the state and local levels for two reasons:

  1.  Small business certification is typically conducted via self-certification.
  2. Not all government agencies use the same employee or revenue parameters to define a small business. For example, Pennsylvania recently increased the revenue threshold used to define a small business in an attempt to boost its small business contract awards.

The federal government typically follows the Small Business Association’s (SBA) set-aside program guidelines, but even those pose some opportunities for missteps – or fraud – by small and large businesses alike. For example, the SBA says that “Two or more small businesses may pool their efforts by forming a joint venture to compete for a contract award. A joint venture of multiple small businesses still qualifies for small business set-aside contracts if its documentation meets SBA requirements.” 

What a small business cannot do is tap into a larger business to help them fulfill their contractual obligations as a small business. The federal government clearly articulates in its Federal Acquisition Regulations (FAR) that “for small business set-asides other than for construction or services…” any small business “proposing to furnish a product that it did not itself manufacture must furnish the product of a small business manufacturer unless the SBA has granted either a waiver or exception to the nonmanufacturer rule (see 19.102(f)). In industries where the SBA finds that there are no small business manufacturers, it may issue a waiver to the nonmanufacturer rule (see 19.102(f)(4) and (5)).”

In other words, your small business must leverage other small businesses if awarded a set-aside contract. Of course, there are some exceptions. Beyond the waiver scenarios described in FAR Subpart 19.5, the SBA indicates that small businesses can form a joint venture with a large business – and compete with that large business for small business set-aside contracts – if the two businesses have a mentor-protege relationship through the SBA’s All Small Mentor-Protege program. (And one of the businesses qualifies as a small business, which as we just discussed, may vary from agency to agency. The SBA “small business” definition is just a guideline, but not the end-all-be-all determinant for set-asides.)

A word of caution: Although the SBA mentor-protégé program technically allows a large business to participate in some solicitations reserved for small businesses, what you cannot do is scheme with a small business to exploit the set-aside program. The consequences could be dire, as Arena Americas and Military Training Solutions LLC realized in this high-profile case. As reports, “Arena Americas [a large international business] worked with Military Training Solutions LLC to obtain small business defense contracts that were represented as being performed by Military Training Solutions, but were actually performed by Arena Americas.” As a result, Arena Americas had to forfeit $7.8 million (and the contract). The investigation also revealed that the CEO of small business Military Training Solutions had received unlawful kickbacks in a similar scheme, which led him to enter a felony guilty plea. 

As evidenced in this situation and many other similar cases, the government has a checks and balances system in place to minimize fraud and abuse. Agencies will work with the SBA and other organizations to investigate and verify your small business status, as well as the status of your suppliers and partners. Don’t risk losing your “disadvantaged” advantage due to an honest oversight or assumption about your eligibility as a small business – or by “stretching the truth” about your size or financial status. As your business grows (which is the ultimate goal, right?), you may lose some of the competitive advantages you had early on and see increased competition on full and open solicitations. That’s okay. By this point, you’ll have a solid performance record, a reputation for value and strong relationships to increase your candidacy. There is no need to cheat the system. Plus, there are still other disadvantaged business entity (DBE) opportunities set aside for women, minority, veteran and locally-owned businesses – especially at the state and local government levels. 

How to Understand if You – Or Your Subcontractors/Suppliers/Partners – Are Really Eligible for Small Business Government Contracting Programs

  1. Understand and complete each agency’s unique small business certification process before preparing a bid or proposal. Once you are confident that you fully qualify for their small business contracting programs, then you can commit the necessary resources to pursuing business opportunities.
  2. Confirm whether or not the set-aside contract you are pursuing can be supported by a joint venture or non-small business in any capacity. Remember: "Small business contracts prohibit a small business from being affiliated with a large business and limit the amount of work that can be subcontracted." This is including the utilization of non-small-business suppliers, except as noted in the FAR or other state/local regulations and SBA mentor-protege programs.
  3. Pay attention to the changing definition of small businesses by both the SBA and individual agencies. At the federal government contracting level, your business’ size classification is determined solely by your NAICS code. And, the definition of “small business” varies from one NAICS code to another. State and local agencies have a little more freedom to adjust small business thresholds per their discretion. As we saw in Pennsylvania, these public sector entities may opt to loosen the parameters in order to give those borderline SMBs an expanded opportunity to compete for government contracts which, in turn, benefits the government, SMBs and the local economy.

Related Resources:

Blog: Secure a Certified “Disadvantaged” Advantage

Blog: Can Your Small Business Really Compete with “Big Businesses” for Government Business? Absolutely.

Blog: The Definition of Small Business is Changing for Some. Pt. 1 and Pt. 2