Small and Small Disadvantaged Business Contract Fraud

Because of the important role small businesses play in the nation’s economy, the Government attempts to funnel business opportunities to them when the contract does not require the services of a large company. Companies that do not qualify for these opportunities have nevertheless sought to take advantage of them. The government cannot possibly verify every detail provided by these businesses so it relies on whistleblowers to inform them when a business is committing fraud.

Are you aware of an individual or business inappropriately claiming small or small disadvantaged business status in order to qualify for a contract?

Small Business Set Asides

Certain contracts are reserved for small businesses. The determination can be made unilaterally by the contracting officer or jointly by the contracting officer and the SBA procurement center representative.

Unscrupulous individuals have formed sham small businesses in order to circumvent these restrictions. Misrepresentations regarding ownership or its affiliates can be the basis for a lawsuit.

Joint Ventures

In general, joint ventures between large and small businesses cannot qualify for small or disadvantaged business status. However, small businesses participating in the SBA 8(a) Mentor-Protege Program are allowed to qualify for small and small disadvantaged business opportunities. Some work must actually be done by the small business, though. The large business is not permitted to hijack the contract and perform all of the work. If it does, as was alleged in the case against Okland Construction, it becomes liable. In that case, the small business itself served as the whistleblower, informing the government that its mentor had taken over the contract.

Disadvantaged Business Enterprise (DBE) Program Fraud

The DBE Program is run by the Department of Transportation. It provides opportunities to socially and economically disadvantaged individuals for transportation contracts.

Past actions involving this program have involved false certifications as to the ownership of the company and the failure of the disadvantaged business to

HUBZone Program

The Historically Under-utilized Business Zone (HUBZone) Program helps small businesses in economically distressed areas obtain federal contracts. Businesses can be HUBZone certified if they are small, their main office is in a HUBZone, 35% of its employees reside in a HUBZone and it is 51% owned by U.S. citizens. The federal government’s goal is to award 3% of the money it spends for prime contracts to qualifying small businesses under this program.

Allegations of HUBZone fraud have typically involved businesses falsely certifying that their principal office was located inside a HUBzone when in fact another location was actually used as their main office.

Small Business Subcontracting Plans

The Small Business Act (SBA) requires contracts in excess of a certain amount ($650,000 or $1,500,000 depending on the type of contract) to include a formal subcontracting plan with goals for the participation of small businesses and small disadvantaged businesses. All contractors, other than small businesses, must submit one.

All contracts in excess of $150,000 must provide “maximum practicable opportunity” for the participation of small and small disadvantaged businesses. The opportunities are provided to small business, small disadvantaged business, women owned small business (WOSB), veteran-owned small business (VOSB), service disabled veteran-owned small business (SD/VOSB) and Historically Underutilized Business zone small business concerns (HUBZone SB).

If the small business awarded the contract does not qualify as a small business under the SBA, misrepresentations can open up both the subcontractor and the prime contractor to liability.

Misrepresentations that have been pursued under the False Claims Act generally fall within one of two types:

Misrepresenting Qualifications / Sham Businesses

In order to qualify, these businesses make certain representations and/or certifications regarding their eligibility

In U.S. ex rel. Howard v. Harper Construction, et al., Case No. 7:12-CV-215-D (E.D.N.C.); and U.S. ex rel. Howard v. RQ Construction, LLC, et al., Case No. 7:13-CV-48-D (E.D.N.C.) the subcontractors were misrepresenting themselves as small disadvantaged businesses. They were actually “affiliates” of a large business.

Sham Contracts

At least one contractor has been accused of creating a system where the small business subcontractors were not actually performing the work they were contracted to do. Instead, the subcontractors contracted with another large business to do the work but make it appear as if the appropriate amount of business specified in the subcontracting plan was being performed by small businesses. Instead, they were merely a pass-through entity designed to evade the requirement.

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