Contract Set-Aside Fraud

Fraud in government contract preference and set-aside programs for small businesses and disadvantaged businesses can be reported by whistleblowers, who may be eligible to receive a reward

Contract set-aside fraud is an abuse of programs designed to help small businesses and disadvantaged businesses.  While the government generally requires “full and open competition” for contracts, regulations under the Small Business Act and other laws permit, or even require, some procurements to be set aside for small business bidders only.  The government’s various set-aside programs aim to level the playing field for small businesses and businesses owned and controlled by individuals from socially and economically disadvantaged groups. When fraudsters cheat these programs, including through the use of sham entities, undisclosed pass-through arrangements, and kickbacks, the government and taxpayers are damaged.

Government purchasers set goals for contract awards and subcontract participation by small businesses, small disadvantaged businesses (SDBs and DBEs), women-owned small businesses (WOSBs), veteran-owned and service-disabled-veteran-owned small businesses (VOSBs and SDVOSBs), and businesses in Historically Underutilized Business Zones (HUBZone small businesses), as well as entities meeting other criteria including those under the SBA’s 8(a) Program.  There are programs run by the federal Small Business Administration, the federal Department of Transportation, state contracting authorities, and other government entities.

To qualify for these set-asides and contracting preferences, small businesses must meet criteria set by the relevant programs.  The qualification process depends on the contracting program, and typically requires certification by the entity about its size, ownership, and management.  In many cases, the entities simply self-certify their eligibility.

Fraudsters, tempted by the ability to avoid competition, may falsely claim entitlement to contract set-asides and preferences that are intended to benefit small businesses.  Large businesses, in search of an edge for their bids, may falsely represent their work with small business and disadvantaged business subcontractors.

Small Business Fraud and Disadvantaged Business Fraud Violates the False Claims Act

Fraudsters cheat these contract set-aside and preference programs in a number of ways.

Misrepresenting Work Done by Small Business

Contractors may claim that a disadvantaged business is doing the work for the government when, in fact, the small business or DBE is no more than an intermediary.  Such “pass-through” fraud can occur in subcontracting and in joint ventures including those under the SBA’s 8(a) Mentor-Protégé program.  While the entities claim that a certain share of the work is done by the small or disadvantaged business, in fact the large business does the work – and reaps the benefits.

Misrepresenting Control of Business

Regulations require that owners of DBEs must have authority over the management and policies of the business as well as control of daily operations. If another entity actually manages the small business, claims that a disadvantaged individual controls the entity are false.

Misrepresenting Size and Ownership

Fraudsters may make false claims about their actual ownership or their size. Entities may claim to be owned by an eligible individual, but use complex and opaque ownership structures to conceal their true ownership.  Companies may misrepresent size by claiming to be independent when in fact they are part of a larger company.  Self-certification of ownership and revenue is particularly vulnerable to fraud.

Misrepresenting HUBZone eligibility

The Historically Under-Utilized Business Zone (HUBZone) Program is designed to help neighborhoods that have historically had low business investment. To be certified as a HUBZone business, a company must, among other criteria, have its main office in a HUBZone and employ a set number of individuals living in a HUBZone.  False statements about a business’s main office location, or its employees can be the basis for a fraud claim.

Misrepresenting Subcontractor Status and Work

Prime contractors can face liability for making knowingly false representations about their use of small businesses, SDBs, WOSBs, SDVOSBs and others as subcontractors.

False statements about small or disadvantaged business status fraudulently induce the government or prime contractor to award contracts to entities that are not eligible to receive those contracts.  Even if the work is actually performed for the government, the government is damaged by the underlying false representations.

Blowing the Whistle on Fraud in Government Contract Set-Aside and Preference Programs

Without insiders and whistleblowers exposing fraud in government contracts, most would go undetected. Anyone with information about fraud in government contract set-aside and preference programs can blow the whistle by bringing a claim under the False Claims Act, and may be eligible to receive a financial award. Employees of the purported small/disadvantaged business, and employees of involved non-preferred business are both sources of information about preference program fraud.  Just as important, businesses that have information about fraudulent conduct by their competitors can be whistleblowers.

If you would like more information or would like to speak to a member of the Constantine Cannon whistleblower lawyer team, please Contact us for a Confidential Consultation.