New rule implements presumption of loss over small business misrepresentation

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Correction appended

A new rule that goes into effect Aug. 27 implementing a "presumption of loss" of the entire dollar value of any contract given to small businesses that misrepresent their status.

The rule (.pdf) makes the basis of damages for a civil lawsuit equal to the value of the full contract. 

The government will consider any misrepresentation to be intentional after a business registers itself as small in any federal database or submits a bid for a contract as a small business.

The rule, which implements provisions from the 2010 Small Business Jobs Act (.pdf), does limit liability in cases of unintentional error, technical malfunction, "or other similar situations." The Small Business Administration found 200 firms that misrepresented their size in 2010.

The rule is likely to be an incentive for the Justice Department or whistleblowers to file False Claim Act lawsuits, since the presumption of loss language in the rule will make the basis of False Claims Act damages the value of the entire contract, as opposed to just work performed as of the contract's termination. Under the False Claims Act, guilty companies must pay triple the basis of damages.

The rule also requires businesses to annually update their size or status in the System for Award Management database at least annually or the business will not be identified in the database as a small business until the representation is updated. A company official will also have to sign the small business certification page of any bid or proposal.

The rule does not impose a new information collection, recordkeeping or compliance requirement on small businesses. A firm's size is generally based on records that it already possesses, such as payroll records and annual tax return

Correction: An earlier version of this story misstated the official who will have to sign the small business certification page of any bid or proposal; it is an authorized company official who must do so. We regret the error; special thanks to a reader who pointed it out.

For more:

- download the rule

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