Government Contracts Legal Forum : Government Contracts Lawyers & Attorneys for Litigation & Counseling

Guaranteed to create uncertainty, the Consolidated Appropriations Act of 2012 (Pub. L. 112-74), which President Obama signed into law on December 23, 2011 (the “Act”), included several little-noticed provisions generally excluding the use of federal funds for any corporation convicted of a felony within the past 24 months. All of these provisions establish a unique procedure whereby the statutory exclusion is only triggered when the awarding agency is “aware of the conviction” and the agency’s consideration of suspension and debarment provides the relief from the statutory exclusion for the contractor. 

And it gets even more curious. The Act is a consolidation of nine different appropriations bills (delineated as Divisions under the Act) appropriating funds for FY 2012. As set forth below, Congress has inexplicably included the exclusion provisions in only five of the nine divisions comprising the Act, and equally inexplicably used different standards in the exclusion provisions. The covered divisions of the Act and the specific language include:

 

DIVISION A—DEPARTMENT OF DEFENSE APPROPRIATIONS ACT, 2012

SEC. 8125. None of the funds made available by this Act may be used to enter into a contract, memorandum of understanding, or cooperative agreement with, make a grant to, or provide a loan or loan guarantee to, any corporation that was convicted of a felony criminal violation under any Federal law within the preceding 24 months, where the awarding agency is aware of the conviction, unless the agency has considered suspension or debarment of the corporation and made a determination that this further action is not necessary to protect the interests of the Government.

DIVISION B—ENERGY AND WATER DEVELOPMENT APPROPRIATIONS ACT, 2012

SEC. 504. None of the funds made available by this Act may be used to enter into a contract, memorandum of understanding, or cooperative agreement with, make a grant to, or provide a loan or loan guarantee to any corporation that was convicted (or had an officer or agent of such corporation acting on behalf of the corporation convicted) of a felony criminal violation under any Federal law within the preceding 24 months, where the awarding agency is aware of the conviction, unless the agency has considered suspension or debarment of the corporation, or such officer or agent, and made a determination that this further action is not necessary to protect the interests of the Government.

(emphasis added).
 

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It should come as no surprise to those involved in the federal procurement marketplace that, under the Obama administration, the Government has sought to strengthen accountability in government contracting, and, to that end, has resorted to a number of tools in the Government’s arsenal for combating fraud, waste, and abuse. The latest such effort is a new push to enhance the government’s existing suspension and debarment function.

In perhaps a telling sign of things to come, on November 15, 2011, the head of the Office of Management and Budget (“OMB”), Jacob Lew, issued a memorandum requiring the heads of executive departments and agencies to increase management attention on suspension and debarment, consistent with the policies and procedures in the FAR.  In particular, OMB directed departments and agencies to a appoint a senior accountable official, if one has not already been designated; assess the agency’s existing suspension and debarment resources; review internal suspension and debarment policies and procedures; and ensure that contractors on the Excluded Parties List System have not received, and do not receive, grants and contracts, and take corrective action if it is found that an award was improperly made to a suspended or debarred contractor. Further, OMB has directed agencies to increase participation on the Interagency Suspension and Debarment Committee (“ISDC”), which provides a support structure to assist departments and agencies in building and maintaining effective suspension and debarment programs.

On the heels of the OMB memorandum, the U.S. Senate’s Committee on Homeland Security and Governmental Affairs Congress convened hearings on November 16 on “Weeding Out Bad Contractors.” Among others, the witnesses for these hearings include Daniel Gordon, the Administrator for Federal Procurement Policy, and David Sims, the Chair of the ISDC, and Steven Shaw, the Air Force’s debarment and suspension official. The general message from this testimony is that, while some agencies have effective and robust suspension and debarment programs, many others have failed to adequately utilize the suspension and debarment tool. Although it does not appear that there are any new suspension and debarment rules on the horizon, contractors should take note and expect to see a rise in new suspension and debarment matters.
 

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The big news Friday afternoon and over the weekend was the Small Business Administration’s decision to suspend GTSI—a major government contractor – from receiving new government orders. While the notice of suspension is not yet publicly available, the Washington Post reported that the suspension stems from the government’s view that GTSI engaged in improper relationships with small business contractors. 

SBA identified two reasons for the notice of suspension: (1) adequate evidence of the commission of fraud or a criminal offense in connection with obtaining, attempting to obtain or performing a public contract or subcontract; and (2) adequate evidence indicating a lack of business integrity or business honesty impacting the present responsibility of GTSI. Supporting its decision to suspend GTSI, the SBA explained that:

• “There is evidence that GTSI’s prime contractors had little to no involvement in the performance of contracts, in direct contravention of all applicable laws and regulations regarding the award of small business contracts.”
• “The evidence shows that GTSI was an active participant in a scheme that resulted in contracts set-aside for small businesses being awarded to ineligible contractors.”
• “GTSI actively engaged in conduct concealing the extent of its involvement as a subcontractor.”

Stated differently, the SBA apparently was concerned that GTSI was using small businesses as “fronts” to access federal programs and contracts for which it was not otherwise eligible.

There is a fine line between improper and perfectly legitimate relationships between large and small businesses. Large contractors have been coming up with ways to access small business dollars for some time. There is nothing inherently wrong with this, as there are many different ways an other than small business concern can work with a small business, such as through the SBA’s 8(a) Mentor-Protégé Program.  

However, some companies are not aware of where the lines are drawn, while others have knowingly abused these programs and ignored SBA’s regulations outright, sometimes using small businesses as mere pass-throughs. In these cases, the large business would do the work and receive the revenues, giving the small business a “fee” for the use of its small business status. Obviously, this is not the goal of small business programs. Yet, these abuses have largely gone unchecked because of the SBA’s spotty oversight. Indeed, in March of this year, GAO released a report to the House of Representatives Committee on Small Business explaining that 14 ineligible businesses received $325M in 8(a) sole-source and set-aside contracts. Some of these ineligible firms used certified firms as pass-throughs to perform small business contracts. 

The SBA’s decision to suspend GTSI may be the start of a new, vigilant enforcement regime at the SBA. Accordingly, it may be a good time for both small and big businesses alike to examine the law and their relationships and contracts. Small businesses should be sure that they are making appropriate representations about their status and size, particularly if the company has grown or changed since its last certification. In conducting this review, small businesses should be attuned to various size and affiliation factors, including the ostensible subcontractor rule, which provides that the parties to a teaming arrangement may be affiliated if the subcontractor has too large of a role in contract performance. 

Large businesses should review the subcontracting relationships they have with small businesses. They should ensure that they are not taking any actions that are contrary to the SBA’s regulations, such as using small businesses as pass-throughs. 

If this is the beginning of a new enforcement trend, being proactive is the best course of action, as you may not get a warning shot across the bow. In fact, in a public statement released on Friday, GTSI explained that the SBA suspended it “without prior discussion or notice to GTSI.”

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This post was written by Richard Arnholt and Christopher Gagne.

Contractors, regardless of size and no matter how "indispensable" they think they are to their Government customers, should be prepared for a possible up tick in suspension and debarment (S/D) activity in the next year. Congress has taken an increased interest in S/D, requiring in the FY 2009 DoD Authorization Act that the Interagency Committee on Debarment and Suspension submit an annual report to Congress on each agency's "activities and accomplishments in the Government wide debarment system." And the House Committee on Oversight and Government Reform recently took three agencies to task for the slow pace and low number of S/D actions (the Department of Homeland Security has had only ten debarment cases in four years).

In addition, an attorney from the Army Procurement Fraud Branch stated publicly at a recent ABA conference that no company is "too big to fail," echoing the sentiment of the Commission on Wartime Contracting during a hearing a few weeks ago. The Commission rejected a suggestion by Special Inspector General for Iraq Reconstruction that the Government's dependence on a small number of large prime contractors in Iraq and Afghanistan is a legitimate consideration that might counsel against debarment in some cases for practical reasons. As Commissioner Dov Zackheim put it:

"Well, let me just point out that too-big-to-fail practically wrecked this economy of ours, and I think if we worry about too big to fail, particularly as there are more than one contractor always bidding, we worry about too big to fail, we're going to fail anyway."

The Commissioners made it abundantly clear that they wanted to see more suspensions and debarments all around, including for "willful bad performance." And they want to see primes suspended or debarred for the malfeasance of their subs.

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