The Small-Business Guide to Government Contracts: How to Comply with the Key Rules and Regulations . . . and Avoid Terminated Agreements, Fines, or Worse

INTRODUCTION

IMAGINE YOUR SMALL BUSINESS losing millions of dollars in lucrative contracts, paying heavy fines, or even being prohibited from selling to your largest customer—all for violating rules you didn’t know existed. It sounds like a nightmare, but when it comes to doing business with the federal government, it is a reality countless small business owners face.

If Uncle Sam is one of your small business’s customers, you’re not alone. The federal government spends $500 billion annually to buy goods and services from contractors, and thanks to special rules requiring agencies to award contracts to small businesses, nearly a quarter of those procurement dollars go to small companies. Contracting with the government can be lucrative—but if you don’t know the key rules and regulations, it can also be very risky.

When the government is your customer, you must learn a whole new rulebook, very different from the one you may be used to in the commercial marketplace. It’s a big rulebook—thousands of pages of dense text, spread out over a hodgepodge of federal statutes and regulations. And, as counterintuitive as it sounds, the rules are actually more complex for small businesses than for large companies. Not only does your small business have to follow most of the same government contracting regulations as big players such as Boeing, Lockheed, and IBM, but you must also obey a special set of regulations that apply only to small business contractors.

Of course, behemoths like Boeing have in-house legal departments to help them navigate their way through the regulatory maze. But chances are, your small business doesn’t have a single lawyer on staff, and you may not even know a lawyer who specializes in government contracts (especially the small business rules), much less have the budget to hire one to provide daily advice on compliance.

So what do you do?

If you’re like many small government contractors, you spend a little time reading pieces of the FAR, talk to others in the industry, and attend the occasional procurement conference or symposium. You try your best to learn the rules. If you do call a government contracts lawyer, it’s after something has gone wrong—you end up on the wrong end of a protest, or government investigators show up to audit your compliance with the small business rules or wage and hour regulations. By then, it may be too late.

What Are the Risks?

You may be wondering whether it’s really important to teach yourself all these government contracting rules. After all, if you act honestly and apologize if you happen to inadvertently violate a rule you didn’t know about, won’t that be good enough?

Probably not. Government contracting isn’t like being pulled over for speeding, when, if you have a good driving record and are very polite to the officer, there’s a chance you will get off with a warning. Don’t expect the same treatment when it comes to government contracting. Breaking the rules, even unintentionally, can have dire consequences for you and your business:

• Terminated contracts. Every year, the government terminates countless small business contracts as the result of competitors’ successful size or eligibility protests. Other contracts are terminated—or never awarded in the first place—because contractors violate ethical, conflict-of-interest, and other requirements.

• Suspensions and debarments. The government is increasingly suspending and debarring contractors, that is, prohibiting those contractors from selling anything to the government for a certain period of time—often six months for a suspension and three years for a debarment. Political pressure is mounting to further increase the frequency of suspensions and debarments and make debarments mandatory for certain violations (they are already mandatory for some).

• Fines and financial penalties. Breaking many of the government contracting rules can result in civil fines and other financial penalties. For small contractors, the risk is especially acute in the wake of a 2010 law providing that if a company incorrectly certifies itself as small for a federal contract, it can be forced to repay the government the total value of the contract, plus additional damages.

• Jail time. Egregious violations of the contracting rules can land a contractor’s owners or officers in the Big House, where you may get the chance to interact with another contractor’s employees—prison guards.

If you contract with the government, you owe it to yourself, your company, and your employees to know the government contracting rules. That’s what this book is all about.

Where Do All These Rules Come From?

For small contractors, learning the government contracting rules can be particularly challenging because there is no single source to find them. These rules are spread out among a variety of federal statutes and regulations, most notably:

• The Federal Acquisition Regulation, or FAR. The FAR is the largest single set of government contracting regulations, weighing in at around 2,000 densely packed pages in hard copy. You can find the FAR at https://www.acquisition.gov/far/.

• The U.S. Small Business Administration’s regulations. As a small government contractor, you will discover (if you haven’t already) that the SBA plays a big role in your government contracting business. Its regulations establish the framework for deciding what companies qualify as small businesses, as well as which companies are eligible for the SBA’s special contracting programs for disadvantaged small businesses.

• The Department of Labor’s regulations. The Department of Labor oversees the rules governing how much you must pay your workers, how much vacation time you must give them, and other rules covering your relationship with your employees.

• Federal criminal law. Breaking some of the government contracting rules (like the prohibition on bribery) results in criminal penalties. This is how some unscrupulous contractors have wound up in prison.

While these are the major sources of the rules we will discuss in this book, they’re not the only places the rules originate. Other laws applicable to your small business are peppered throughout the Code of Federal Regulations (CFR) and United States Code (USC). Some of the rules have not been codified at all, but instead have been developed by administrative bodies such as the Government Accountability Office (GAO) and the SBA’s Office of Hearings and Appeals (OHA). With so many pages of rules, coming from so many places, it’s little wonder that many small government contractors simply throw up their hands in frustration at the thought of trying to learn them.

About This Book

Written in layman’s terms (not legalese) and using easy-to-understand terms and examples, this book explains the most important rules your small business must follow to remain in Uncle Sam’s good graces. The book is intended for the busy small business owner who doesn’t have the resources to consult a lawyer on every government contracting decision or the time to master the thousands of pages of rules on his or her own.

In addition to clear and concise discussion, each chapter includes several features to help you understand and apply the rules:

• Examples. Key concepts are developed in examples, so that you can see how a rule might apply in the real world. Some examples are loosely based on real-life judicial and administrative decisions; others spring from the author’s fertile imagination.

• The Primary Rules: Where to Find Them. If you want to read the rules themselves, each chapter includes a section telling you where to look. Simply plug in the regulatory citation to your favorite Internet search engine and you should have no trouble finding the regulation.

• Risk Questionnaires. Chapters 2 and 3, which deal with the important question of whether your small business is considered affiliated with other companies, include end-of-chapter questionnaires allowing you to quickly assess whether your small business might have an affiliation problem.

• Compliance at a Glance. Chapters 4–15 conclude with a summary of the most important rules discussed in that chapter, each with a checkbox next to it so you can track your company’s compliance. You will sometimes see the notation (recommended) in Compliance-at-a-Glance, meaning that the action is strongly recommended but not required by law.

This book covers the key rules you should know in order to ensure that your company remains on the straight and narrow when it does business with the government. But with thousands of pages of rules to cover, it does not discuss everything. In particular, this book does not address:

• State and local rules. This book only covers contracting with the U.S. federal government. It does not address the myriad rules for contracting with state and local governments around the country.

• Agency-specific rules. Many federal agencies have adopted their own FAR supplements, which only apply to procurements conducted by that particular agency (unlike the FAR and the regulations of the SBA and Department of Labor, which apply to almost all federal agencies). We do not address agency-specific rules in this book, with one exception: in Chapter 12, we cover a special contracting program for service-disabled veterans run by the U.S. Department of Veterans Affairs.

• Accounting rules. As a government contractor, you need to ensure that your financial house is in order and your accounting system is up to snuff. We provide a brief overview in Chapter 10, but for space reasons, do not address accounting in-depth.

• How to win government contracts. This book is a compliance guide, not a how-to manual on winning government business. Of course, we’d like to think that gaining a reputation as a knowledgeable and compliant contractor will provide a competitive edge in and of itself.

Two Brief Disclaimers

Because this book is, in fact, written by a lawyer, and because we lawyers are a cautious bunch by nature, we want to pause here for two important disclaimers.

First, this book is intended for your educational use only. It does not constitute legal advice about any specific situation you may face. Reading it (even if you read it very carefully and dog-ear your favorite pages) does not create an attorney–client relationship between you and the author or his law firm.

Second, like most things in life, the government contracting rules sometimes change. This book reflects the rules as they were when it was written, and most of those rules are probably still the same as you’re reading it now. But keep an eye on trade publications and blogs and keep your ears open for news that a rule has changed. If you’re not sure whether a rule we discuss in this book has been amended, use the The Primary Rules: Where to Find Them citations to help you find out. In addition, bookmark the author’s blog, Small-GovCon (www.smallgovcon.com), for updates about the rules discussed in this book.

Let’s Get Started

All right, that’s enough disclaiming for one book, don’t you think? Kick off your shoes, lean back, and let’s discuss what you need to know to ensure that your small business plays by the rules.

CHAPTER 1

IS YOUR SMALL BUSINESS

REALLY SMALL?

TO BE ELIGIBLE for federal small business set-aside contracts, you must certify that your company is a small business. Get the certification wrong, and you could lose a contract to a size protest—or face much harsher penalties, like suspension or debarment.

But is your small business really small? It’s not a trick question. When it comes to government contracts, figuring out your own company’s size can be more difficult than it sounds.

Your small business’s size for purposes of a government contract turns on four factors:

1. The North American Industry Classification System (NAICS) code (a standard used by federal agencies in classifying businesses by industry for purposes of collecting, analyzing, and publishing statistical data about the U.S. economy), assigned to a particular solicitation you intend to bid upon

2. The date your business submits a proposal on the procurement (or, in relatively rare cases, another date later in the procurement process)

3. Either: (a) your business’s average annual revenues, or (b) your business’s average number of employees, depending upon the NAICS code

4. Whether your business has any affiliates

In this chapter, we will examine the first three factors. The final factor, affiliation, is the most complex and confusing. We will look at affiliation separately in the next two chapters.

NAICS Codes and Size Standards

Size-wise, the competitive playing field can vary enormously in different industries. For instance, in the dry cleaning business, where mom-and-pop operations are still commonplace, a company with $10 million in annual revenues might be a relative behemoth. At the same time, a construction company with $10 million in annual revenues might be something of a small fry.¹

The government understands that a small business in one industry is not necessarily small in another. For this reason, whether your business qualifies