After a gut-wrenching loss on Monday Night Football several years ago, former Arizona Cardinals Head Coach Dennis Green, speaking about the victorious Chicago Bears, famously ranted:  “They are who we thought they were.  And we let them off the hook!”  Since the implementation of the SBA’s presumed loss rule last year, you should be applying the same sentiment to your subcontracts with small businesses.  Make sure your subcontractor is who you thought they were, and do not let them off the hook.

By way of a little background, the SBA’s presumed loss rule went into effect last August and greatly increased a contractor’s potential liability for misrepresentations of size and status.  In implementing provisions of the Small Business Jobs Act of 2010, the presumed loss rule established a presumption of loss to the Government from a size or status misrepresentation equal to the total amount expended on a contract obtained by misrepresentation.  As a result, the government can now go after a contractor for big bucks if the contractor obtains and performs a small business set-aside contract based on misrepresenting its size or status.  The larger dollar value of size and status misrepresentation cases is expected to boost prosecutions, which will serve Congress’ aim to prevent and deter fraud and misrepresentation in small business procurements.

The presumed loss rule applies to representations of size and status at the subcontract level.  Notably, both the subcontractor and its prime contract may be liable for the subcontractor’s misrepresentation.  This is a scary prospect for prime contractors, who may know relatively little about their subcontractor at the time of entering into a teaming or other similar agreement.

As a prime contractor, you can protect yourself against liability for your subcontractor’s misrepresentation by taking a few prudent measures:

  • First, require your subcontractor to provide you with a written representation of its size and/or status.  This representation could be included in your teaming agreement.  Under the presumed loss rule, prime contractors should not be liable for a subcontractor’s misrepresentation if the prime contractor had a good faith basis to rely on a written representation from the subcontractor.  To establish a good faith basis, you should independently verify the subcontractor’s size or status representation.  The subcontractor’s profile is a good place to start.  Print or save a copy of what you find and put it in a file along with the subcontractor’s written representation to you.
  • Next, make Coach Green proud and don’t let your subcontractor off the hook.  In other words, make sure your agreement with the subcontractor allows you to terminate the agreement and take other necessary steps if you discover a misrepresentation by your subcontractor.  In addition, it is a good idea to require your subcontractor to indemnify you for any losses or liability you may incur as a result of your subcontractor’s misrepresentation.  

In sum, the presumed loss rule is a whole new ballgame for size and status representations.  Make sure you are playing to win when it comes to dealing with representations from your subcontractors.

About the Author: Jon Williams is a partner with PilieroMazza and a member of the Government Contracts Group.  He may be reached at [email protected].