Compliance and Enforcement Risk Areas for Government Contractors in 2020

Part 3: Self-Certification Issues Get Notice And Highlight Compliance Risks

In fiscal year 2018, the federal government awarded more than $20 billion in contracts to Service-Disabled Veteran-Owned Small Businesses (SDVOSBs) and another nearly $23 billion to Women-Owned Small Businesses (WOSBs), in line with its goal to support and promote entrepreneurs in these categories.  At the same time, oversight authorities have sounded the alarm that the government routinely has awarded set-aside contracts to businesses that are ineligible, relying heavily—if not exclusively, in many instances—on the companies’ erroneous self-certification that they qualify.

For Part 3 of this series (see Part 1 and Part 2), we examine recent activity about and within these self-certifying small business programs, and discuss how contractors both small and large can prepare for the compliance and enforcement activity that is likely to result.

 

What is an SDVOSB?

Broadly speaking, an SDVOSB is a small business that is majority-owned by, and whose management and operations are controlled by, service-disabled veterans.  SDVOSBs can qualify to compete for set-aside government contracts if they meet the regulatory requirements for SDVOSB status established by the Small Business Administration (SBA), and submit a certification via the System for Award Management (SAM; www.sam.gov).  Federal contracting officers as well as large business contractors trying to meet their small business subcontracting requirements look to SAM to confirm a company’s SDVOSB status.

SDVOSBs that are awarded direct government contracts generally must perform and/or incur the cost of at least 50 percent of the work; the remaining work under the contract may be performed by subcontractors, including large businesses.

SDVOSBs also can be valuable subcontractors to large businesses whose government contracts require them to develop and execute a small business subcontracting plan.

 

What is a WOSB?

A WOSB is a small business that is majority-owned and controlled by women, and that otherwise complies with the SBA’s regulatory requirements for that status.  As with SDVOSBs,  the government can set aside contracts for competition and award to qualified WOSBs.  In addition, the  National Defense Authorization Act (NDAA) for FY 2015 authorized federal agencies to award sole-source contracts—i.e., contracts given without any competition—to WOSBs.

 

What is the problem with self-certification?

Self-certification certainly has some advantages. Other contracting assistance programs, such as SBA’s 8(a) and HUBZone programs and the Department of Veterans Affairs’ (VA) Vets First Verification Program, require companies applying for the program to submit information and documents to the government agency, which then determines eligibility and grants certification.  The application process can require significant effort and it takes time.  Self-certification eliminates some of those burdens.

On the other hand, in the absence of rigorous processes to confirm an awardee’s status and to monitor its compliance with subcontracting limitations, the self-certification process can be exploited.  The gaps in the system range from contract awards mistakenly made to ineligible concerns to affirmatively false and fraudulent misrepresentations by companies seeking an unfair advantage, to criminal conspiracies.  Some recent studies have highlighted the extent of the problems and resulted in proposed changes to how these small business programs operate.

 

Audit Finds Errors in Defense Department SDVOSB Contract Awards and Oversight – With No Proposed Solution

On February 20, 2020, the DoD-OIG publicly released a report detailing its review of SDVOSB contract awards.  The audit found that DoD routinely awarded set-aside contracts to companies that did not meet the requirements for SDVOSB status.  The audit sample alone uncovered approximately $875 million in ineligible awards.

OIG auditors also observed that a number of SDVOSB contractors did not appear to comply with the limitations on subcontracting—i.e., these SDVOSBs subcontracted the bulk of the work and costs under their awards.

The report recommends that the Defense Department’s Office of Small Business Programs (OSBP) implement procedures for contracting officers to confirm and monitor the eligibility of self-certified SDVOSBs.  Auditors also proposed that OSBP create programs for tracking the percent of work being subcontracted on SDVOSB awards.

Interestingly, the Acting Director of OSBP disagreed with the DoD-OIG report and declined to respond to its recommendations.  OSBP claimed that it was not responsible for procurement policy and that other DoD components were better positioned to address the suggested oversight procedures.

Because of this dispute, DoD-OIG’s recommendations are “unresolved.”  DoD-OIG has urged OSBP to respond, but the next steps—if any—are not clear.

 

Similar Results in Studies of the WOSB Program Lead to (Belated) Reform in 2020

In addition to allowing sole-source awards to WOSBs, the NDAA of 2015 mandated that the SBA replace the self-certification process with either agency or third-party certification.  The SBA quickly rolled out the sole-source authority; however, the agency has not yet implemented changes to the certification process.

In 2018, the SBA-OIG examined whether sole-source WOSB contracts and the contractors who received them complied with the program’s requirements.  Of the 56 sole-source contracts audited, 50 were deemed non-compliant.  In most instances, the OIG determined that the awarding contracting officers, representing a number of different federal agencies, had failed to obtain documentation required to support the contractors’ self-certified WOSB status.  Accordingly, the OIG could not confirm that the contracts were awarded to eligible firms.  It sharply criticized the SBA for failing to develop a certification program and allowing self-certification to continue, thus “exposing the Program to unnecessary risks of fraud and abuse.”

This sentiment was echoed by the Government Accountability Office (GAO) in a March 2019 report to Congress.  The GAO report noted that SBA quickly implemented the sole source authority granted by the NDAA of 2015, but had failed to establish a certification program or to eliminate the self-certification option for WOSBs.  GAO observed that, while SBA has approved four third-party certifiers to work with WOSBs, the agency still does not conduct oversight of the program sufficient to ensure that the WOSBs and the certifiers are complying with program requirements.  GAO cited to audits of WOSB set-aside awards showing that 40% were given to ineligible businesses.

The SBA has announced that it will take action on these deficiencies by ending self-certification for WOSBs in the summer of 2020.  It plans to publish a rule by June 30, 2020 that will require WOSBs to be certified though the SBA or one of its designated third-party certifiers.  If the SBA can also increase its monitoring of the third-party certification program, it will further mitigate the risk of fraud and abuse.

 

What’s the Risk to Contractors? 

Contractors that have self-certified their status as an SDVOSB or WOSB should be aware that an erroneous certification could lead to substantial liability.

As agency contracting staff become aware of the repeated audit and review findings about these programs, they may scrutinize invoices from self-certifying businesses more closely.  The contracting staff can question or even disallow invoices from companies that they discover were ineligible to bid on or win a contract.

Companies that are suspected of falsely certifying their eligibility may also have their contract awards challenged through administrative status protests that are lodged with the SBA by interested parties, typically competitors.

Even more ominously, a company that falsely self-certifies its status in order to obtain a government contract can face legal liability under the civil False Claims Act. Under the 2010 revisions to the Small Business Act, that could lead to a claim for three times the entire amount paid under set-aside contracts, plus penalties.  False Claims Act cases can be brought by the United States through the Department of Justice; they can also be initiated by whistleblowers who file a civil lawsuit on behalf of the government.

Individuals responsible for false self-certifications may also face criminal exposure for major program fraud, wire fraud, and conspiracy.

Large companies that work with these small businesses can also come under scrutiny if the limitations on subcontracting are not observed.  In this context, one allegation that arises is that the SDVOSB or WOSB is merely a pass-through entity, a “front” that allows the large business subcontractor (or prime contractor using a small business subcontracting plan) to perform the bulk of the work.

 

How Can Companies Address These Risks?

SDVOSBs should carefully review the SBA’s program requirements and confirm that they are in fact eligible for this status before self-certifying.  Where appropriate, an SDVOSB might consider applying for the Veterans Administration’s (VA) Vets First Verification Program.  Companies that qualify under the Vets First program may compete for set-aside contracts from the VA; in addition, the verification can assure other agencies of the company’s status.

WOSBs that have self-certified their status are advised to consult the SBA website and begin to prepare themselves for the new certification regime this summer.  Be on the lookout for the new regulations coming at the end of June, and be aware of any re-certifications that might be needed in the near-term.

Small businesses must also be cautious about any arrangements they have with large businesses.  Both parties should monitor levels of effort and cost to ensure that either the subcontracting limitations (where the big business is a subcontractor to a small prime contractor) or requirements (where the small business is part of a small business subcontracting plan) are observed.

Any small business contractor that discovers, post-award, that it was not eligible to compete for a set-aside contract, should consult with an attorney to determine whether and how this issue must be reported, so as to minimize and mitigate any potential legal exposure.

March 30, 2020