Contract Set Aside Fraud

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The federal government strives to award at least 23% of all federal contracting dollars to small businesses annually. To help small businesses compete for and win these contracts, the federal government sets aside certain contracts for small businesses with specific socioeconomic characteristics or those located in certain geographic locations.   These are called set-aside contracts. The U.S. Small Business Administration (SBA) provides contracting assistance programs to identify small businesses that meet the required criteria and assist them in competing for these set-aside contracts.

Common Types of Small Business Set-Aside Contracts

The government has established requirements through statutes, regulations, and guidance documents that businesses must follow when applying for, administering, and performing federal set-aside contracts. Companies must first meet the SBA’s size criteria to be considered a “small business.” Next, if they intend to compete for a specialized set-aside contract such as those categorized below, they must show evidence that they meet the additional socioeconomic criteria.  These requirements are intended to level the playing field for disadvantaged businesses who would otherwise be unable to win federal government contacts.

The most common categories of set-aside contracts are:

Small Disadvantaged Business

The federal government aims to award at least 10% of annual federal contract dollars to Small Disadvantaged Businesses. To qualify, a company must be 51% or more owned or controlled by socially or economically disadvantaged individual(s).

Women-Owned Small Business (WOSB)

Women-Owned Small Businesses receive approximately 5% of federal contract dollars. To qualify, the company must be 51% or more owned by women who are U.S. citizens. In addition, the day-to-day operations must be managed by a woman who also makes long-term decisions.

Economically Disadvantaged Women-Owned Small Business (EDWOSB)

To meet this additional criteria, the women who own and control the business: must each have a personal net worth of less than $850,000; each have $450,000 or less in adjusted gross income, averaged over the previous three years; and, each have $6.5 million or less in personal assets.

Veteran-Owned Small Business (VOSB)

Three percent of federal contract dollars are awarded to veteran-owned small businesses. To qualify, a business must be 51% or more owned and controlled by a U.S. military veteran.

Service-Disabled Veteran-Owned Small Business (SDVOSB)

The U.S. military veteran owner must be rated as service-disabled by the U.S. Veteran’s Administration. If the veteran is totally disabled and unable to manage the day-to-day operations, they may still qualify if their spouse or permanent caregiver assists in the management of the company.

HUBZone Small Business

The HUBZone program is intended to fuel growth in historically under-utilized business zones.  The federal government aims to award at least 3% of annual federal contract funds to HUBZone businesses.  To qualify for this program, the small business must be 51% or more owned and controlled by U.S. citizens, a community development corporation, an agricultural cooperative, a Native Alaska  organization, a Native Hawaiian organization, or a Native American tribe. In addition, it must have its principal location in a HUBZone and at least 35% of its employees must live in a HUBZone.

Common Contract Set-Aside Fraud Schemes

Given the billions of dollars that the government awards annually in set-aside contracts to small, disadvantaged businesses, fraud can and does occur. Common examples of fraud in this area include:

  • applications with false information about ownership and program eligibility.
  • false financial reporting.
  • overcharging the government for time or for materials.
  • spending contract funds on personal or other unauthorized expenses.

Successful Set-Aside False Claims Act Cases

A number of government contractors have been required to make significant repayments to the federal government for set-aside contract fraud.  Successful false claims act cases include:

  • Providing false financial information to qualify as a disadvantaged small business: HX5, LLC paid $7.8 million to settle allegations that it had submitted financial records containing falsified information and data. This whistleblower received an award of $1.3 million.
  • Using subsidiaries as pass-throughs to win set-aside contracts meant for service-disabled veterans: TriMark, USA, LLC, a large company by SBA standards, used its subsidiaries to fraudulently obtain contracts meant for service-disabled veterans.  TriMark and its subsidiaries paid $48,5 million to settle the false claims act case, a record breaking sum for an SBA set-aside contract fraud case.
  • Using “virtual office” to claim HUBZone location: Air Ideal, Inc. paid $250,000 to settle allegations that it made false statements to the SBA to qualify as a HUBZone business. In realty, the address it provided as its principal location was a virtual office without a single Air Ideal employee.
  • Creating an entity to shield the true owner: W. G. Mills, a Florida construction management company, created a shell company, Veterans Constructors Incorporated, to bid on and win contracts intended for Service-Disabled Veteran Owned Small Businesses. The contracts, however, were performed by W.G. Mills, a company that is neither owned nor operated by service-disabled veterans. W.G. Mills paid $1.1 million to settle the false claims act case.

How to Report Small Business Contract Set-Aside Fraud

These are just a few examples of the sorts of cases that can be brought under the False Claims Act. A wide variety of misconduct can constitute fraud in the area of government contractor fraud. If you believe you have information regarding fraud, please contact us for a free, confidential consultation.