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False Claims Act: Pitfalls for the Small-Business Federal Contractor

BY JOSEPH L. HARDESTY AND ZACHARY D. JONES
STITES & HARBISON PLLC

The United States federal government is the world’s single largest purchaser of goods and services. Fortunately for small businesses, it makes a significant portion of its purchases exclusively from small and disadvantaged businesses through various programs. Businesses can qualify for one or more of these set-aside programs based on the company’s size, ownership, or geographic location. There are programs for a variety of small businesses, including those who can demonstrate economic and social disadvantage, are owned and controlled by a veteran, service-disabled veteran, or women, and small businesses located within historically underutilized geographical areas. In addition, programs such as the 8(a) Business Development Program offer qualifying small businesses additional opportunities to obtain government contracts without having to compete against larger contractors.

A company that qualifies as a small business can gain access to a lot of federal contracts that are not otherwise available to the general contracting public. In recent years, however, an increasing number of small businesses have run afoul of the False Claims Act for falsely certifying their status as a small business entity or by submitting inaccurate statements to the government in connection with one of the small business programs. Therefore, it is imperative that a small business thoroughly understand the requirements for these programs and that it ensures that it does not submit what may later be determined to be a false claim to the government.

To qualify a business must meet the size requirements. These, however, are not one size fits all. In fact, depending on the type of business the contractor typically engages in, its size may be based on the number of employees or annual receipts; the exact number of employees or annual revenue a business can have and still qualify as a small business varies widely. Importantly, small business status is not conferred or certified by the federal government. Instead, businesses must self-certify that they meet the applicable size standard. Accordingly, they must carefully determine what the applicable size standards are before certifying to the government that they are a “small business.”

Not all small business programs allow contractors to self-certify their status. Some, instead, require a formal certification or application process. For example, to be considered a HUBZone contractor, the business must be certified by the Small Business Administration (SBA). To obtain that certification, the contractor must state in its application to SBA that its principal office is located within a HUBZone, 35% of its employees or workers on the contract reside in the HUBZone, and that it is 51% owned and controlled by a U.S. citizen. Similarly, Veteran-owned and service-disabled veteran-owned small businesses must be certified through the Department of Veterans Affairs (VA). To obtain this certification, a contractor must state in its application to the VA that, among other things, it is owned and controlled by a veteran or service-disabled veteran who controls the daily operations of the business. The most difficult certification process is for the 8(a) Business Development Program. To become an 8(a) certified contractor ,a business is required to make a large number of representations, including that the business is majority-owned by a U.S. citizen who is socially and economically disadvantaged, that individual controls and manages the firm on a full-time basis, the business is small, has potential for success, and is of good character. Of course, each of these requirements must be demonstrated in the application.

Whether contractors can self-certify their status depends on which small business program the contractor is looking to obtain work under. Regardless of whether the contractor self-certifies or goes through a certification process, careful attention should be paid to any statement made to the government.

Both self-certifications and applications are potential landmines for contractors. While it is easy enough to state that a business meets the general requirements for a small business program, thousands of pages of statutes, rules, and administrative decisions have created nuances that must be understood before doing so. Seemingly harmless misunderstandings of any one of these laws, rules, or cases may result in a contractor inadvertently making false certifications or statements; that false certification or statement may not be caught during the application process. This could result in a contractor being certified by the SBA or VA despite the fact that the certification is in error. If this occurs, and the government relies on the certification to award a contract set aside for a qualified small business, the contractor could face potential liability when the contractor submits claims for payment to the government. The contractor’s claim for payment in a contract obtained with a false certification could be considered a violation of the False Claims Act (FCA).

There are many situations that can give rise to an FCA claim for small businesses. Examples of FCA violations include certifying that work or testing has been completed when it has not, submitting pay applications for work not performed, or making false representation—such as certifying that the bidder is a small business when it is not. Other potential violations may include overcharging for materials or man-hours on cost-reimbursement contracts, including information that the contractor knew was false on claims for equitable adjustments (e.g., a differing site condition claim), or even submitting a false progress report or schedule.

Affiliation issues may also give rise to an FCA violation. Affiliation is a term that refers to businesses that are connected through ownership, control, or other joint economic interests. Common affiliation problems occur when a small business and a large business combine assets or employees under certain situations, including joint venture relationships. Under certain situations, a small business can joint venture with a large contractor if the agreement comports with strict requirements. Most notably, an 8(a) contractor can enter into a mentor-protégé agreement without becoming affiliated with the large contractor. If, however, the two businesses do not strictly follow the mentor-protégé requirements, the businesses will be deemed affiliated and if the two combined exceed the size standards of the SBA, the joint venture is not a small business and any certification to the contrary may be determined to be a false claim.

Small business opportunities with the federal government can be rewarding and provide small contractors an avenue to grow their business. Small businesses, however, must ensure that they follow the rules. A failure to strictly adhere to the rules can result in serious civil fines, penalties, and even criminal prosecution under the False Claims Act.


Joe Hardesty is a member with Stites & Harbison, PLLC in its Louisville, Kentucky office. He handles complex litigation for clients with particular emphasis on representing clients in construction and business disputes. Zach Jones is an attorney in Stites & Harbison’s Louisville, Kentucky office. His practice is primarily devoted to serving the construction industry and companies who do business with municipalities, states, and the federal government.