Even Small Suspensions Can Have Big Costs: How Two Weeks Cost a Company 43% of Revenue

This post was written by Gunjan Talati.

In October 2010, the Small Business Administration suspended government contractor GTSI Corp. for alleged improper contracting relationships with small business contractors. The suspension lasted for two weeks and was only lifted when GTSI entered into an administrative agreement with the SBA. The damage, however, was done, and according to GTSI, the damage amounted to 43 percent of revenues.

Specifically, last week GTSI announced that its fourth quarter results for 2011 dropped 43 percent compared with the fourth quarter for 2010. GTSI’s CFO was quoted in a Law360 article explaining that “[t]he primary driver of the revenue decline is the adverse consequences of the SBA’s actions.”

While the damage has already been done to GTSI, there are some key takeaways for all government contractors:

1.  Be Proactive in Matters of Compliance. When the suspension was imposed on GTSI, GTSI said that it had no idea it was coming. Had GTSI been more proactive in managing its relationships, it would have noticed that, at the very least, its contracting arrangements gave the appearance of impropriety.

Remember, the government can suspend or debar companies if there is any reason to doubt the company’s present responsibility. It’s not just a criminal conviction that will lead to the suspension/debarring official’s doorstep. If you think there is any issue that weighs negatively on your company’s present responsibility, call the government before it calls you.

 2.  Large Companies Have to Take Particular Caution When Contracting with Small Companies. The government’s socioeconomic programs for small businesses are for the benefit of small businesses. Large companies that think they may have found a workaround to access small business dollars must tread very lightly. While subcontracting with small business prime contractors is okay, all parties have to realize that many regulations limit the scope of work that a large business can perform on certain types of contracts. Small businesses cannot just be “fronts” for large businesses, and companies that think otherwise may share a fate similar to GTSI.

3.  Have a Game Plan. GTSI was caught off-guard by the suspension, as are many other contractors when they are suspended or proposed for debarment. Do you know what you would do if you got such a notice? In such circumstances, time is not on your side. You will need to respond to the charges levied by the government in an effective manner to demonstrate your present responsibility. Thinking about who would work the problem internally, identifying outside counsel to help, and how you would communicate with customers in advance may soften what can be a debilitating blow.

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