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.”