The Federal Government’s Suspension of Contractor GTSI Holds Several Important Lessons for All Government Contractors Operating in Today’s Ever-Intensifying Enforcement Environment

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Most small businesses in the United States naturally aspire to become larger and more profitable businesses. But for small business government contractors who enjoy substantial success and expansion, the usually welcome development of escalating revenues and a growing workforce can create a dilemma: if my company’s success means it soon will no longer be a small business, how can I continue to benefit from generous small business set-aside programs in government contracts?

Federal contractor GTSI Corp., a Virginia-based software company, asked itself this question several years ago as its growth—occurring mainly as a result of increasingly lucrative contracts with the federal government via small business set-aside programs—began to skyrocket. GTSI started small in 1983, and then grew into a publicly-traded company with over 600 employees and nearly $400 million in federal government contracts in 2009 alone, making it one of the 50 largest federal contractors in the U.S. GTSI’s solution to its dilemma, according to a filing it made with the Securities and Exchange Commission (SEC), was to “mitigate any potential adverse effect … from the loss of our small business status” by developing a plan to enter into “strategic relationships with small businesses that benefit from the small business benefits.” On the surface, this seemed like a sensible course of action, especially for a company that relied on the federal government for approximately 90% of its sales. But the manner in which GTSI allegedly undertook its strategy—laid out for all to see in incriminating internal e-mails obtained and published by the Washington Post—led the U.S. Small Business Administration (SBA) last week to disqualify GTSI from participating in all federal contracts. The GTSI case yields important lessons for all government contractors, not just those benefitting from SBA programs.

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