Small Business & Set-Aside Contract Fraud

Fighting fraud in minority-owned and veteran-owned small business contracts in public works and other areas.

Governments use their spending power to promote entrepreneurship and support small businesses, particularly those owned by people who have been cut out of the process in the past. One way to help these businesses is to set targets that ensure that companies owned by racial minorities, women, and veterans transitioning to civilian life get their fair share of government contracts. Unfortunately, some contractors seek to fraudulently take advantage of the government’s “set-aside” spending targets. This is called set-aside contract fraud.

These types of schemes often occur in public works infrastructure contracting due to the large amount of dollars spent by the federal and state government in this area, coupled with the fact that transportation-specific legislation has had its own provisions for set-asides. To combat this corrupt activity, the federal False Claims Act (FCA) potentially provides large financial incentives to whistleblowers who take appropriate legal action against contractors who engage in set-aside contract fraud.

What is a set-aside?

Congress passed the Small Business Act in 1953 to foster the “American economic system of private enterprise,” including “free markets, free entry into business, and opportunities for the expression and growth of personal initiative and individual judgment.” Federal regulations adopted by the government under the Act require certain federal projects to set dollar or percentage targets, known as set-asides, for contracts to be awarded to small businesses.

Set-asides are generally set for:

Small disadvantaged business enterprises (DBEs)
Small businesses that are majority-owned by women, historically disadvantaged racial minorities, veterans, and service-disabled veterans
Small businesses that are located in economically depressed geographic areas

To meet set-aside targets, a federal agency taking contract bids may consider the overall value of a bid, as well as other favorable aspects of the bid, such as the contractor’s plans to include those categories of small businesses as subcontractors. While several federal agencies have nationwide targets for set-asides, the set-aside target may vary from one contract to the next. Moreover, a state agency, such as the North Carolina Department of Transportation or the South Carolina Department of Transportation may specify a set-aside for one of the contracts it awards.

What constitutes set-aside contract fraud?

A contractor who knowingly or recklessly misreports how it applies federal funds violates the FCA if the misrepresentation may have influenced the government’s decision to award the contract. In most federal contracts, the contractor must provide the government with a wide array of information, including pricing terms, quality of the materials used, manner of performance, compliance with various federal statutes and regulations, and, typically, information about subcontractors.

Where a contract is awarded based partly on subcontractors’ small-business status, their owners’ identities, or the nature of the work they will perform, misrepresenting this information can violate the False Claims Act. A contractor may also commit an FCA violation in a contract with a state agency if the contract is paid, at least partly, with federal funds.

What are some examples of set-aside contract fraud?

Set-asides are designed to encourage true business activity by small businesses and/or by the various categories of entrepreneurs who own them, and not merely to send payments to certain businesses or people based on their identities. For that reason, a subcontractor who helps a contractor meet a set-aside target specified in the master contract must perform a “commercially useful function” on the contract.

Following are examples of various types of set-aside contract fraud. If you have observed actions similar to these, contact us. We can help you – confidentially and discreetly – report any wrongs.

Playing puppet master to access set-aside contracts fraudulently can be expensive

A whistleblower initiated the investigation into one of the largest set-aside contract cases, one which involved a $48.5 million settlement.³ Fox Unlimited Enterprises, LLP reported that foodservice and restaurant equipment supplier TriMark USA and two related entities worked with four economically-disadvantaged small businesses to obtain set-aside government contracts for which it was not otherwise eligible. TriMark and its two related businesses allegedly micro-managed the bidding process, performed over 90% of the contract work, and gave the small businesses a small percentage of the contract value. And Fox, the whistleblower who helped blow their cover, is entitled to $10.9 million of the settlement amount paid by TriMark.¹

Obtaining small business contracts via misrepresentation is illegal

One construction company allegedly created two smaller companies to obtain set-aside contracts for which it was ineligible, and then maintained operational and financial control over the smaller companies. A whistleblower filed a lawsuit about this misrepresentation under the whistleblower provision of the FCA and received more than $500,000 as part of the resolution.¹ The government will receive $2.8 million.³

Sub’s misrepresentation to the prime contractor can be set-aside fraud

In March 2021, a federal court allowed the United States government to proceed with an FCA lawsuit against a subcontractor which had allegedly misrepresented the DBE status of two sub-subcontractors to the prime contractor, which had passed along the false information to the Federal Highway Administration in connection with the prime contract.³

Set-asides cannot be fulfilled through musical chairs

In a ruse involving a contract with the Connecticut Department of Transportation, an electrical contractor agreed to pay $3.2 million in January 2021 to settle allegations that it subcontracted with a DBE and then terminated several of its own employees and set them up to work on the contract through the DBE.³

Set-aside fraud in military construction

In one FCA case, a construction company entered a $67.7 million contract to build barracks at Camp LeJeune, North Carolina between 2008 and 2012 and a $48.5 million contract for masonry work at Camp Pendleton, California.

The contractor who won the bids agreed to subcontract certain portions of the work to small businesses majority-owned by entrepreneurs eligible for contractual set-asides. The contractor allegedly reported that it had used those subcontractors even though the vast majority of that work had been completed by a second large business that was in on the scheme.

The contractor ended up paying $5.4 million to resolve the allegations of fraud, and the whistleblower received almost $1.5 million as a reward.¹,³ During a portion of this multi-year case, Carolina Whistleblower Attorney Gary Jackson was one of the attorneys who worked to strengthen the whistleblower’s and government’s allegations in the FCA lawsuit.⁴

Do you suspect set-aside contract fraud?

If you are aware of set-aside contract fraud, contact Carolina Whistleblower Attorneys at 1-888-292-8852 . We are here to listen and help you determine the best path forward. We understand that speaking out may feel risky, but there are laws that protect whistleblowers, and we will explain these to you. We will also spell out the process for exposing this type of fraud so that you can make a thoughtful decision about how to proceed. We are discreet, and we put our clients first.

When contractors scheme to divert government contracts, they are also denying business opportunities to smaller businesses that often do not have the same advantages. We admire whistleblowers who don’t sit back and let these types of violations occur. And we want to help you.

Contact the Carolina
Whistleblower Attorneys

If you’re wondering if it’s a good idea to speak with a whistleblower lawyer about what you know, let us set the record straight.

Corporate ethics hotlines can be risky and may lead to termination. If you’ve already done this, call us immediately.
Your coworkers could be aware of the fraud – or complicit in it – and you should not talk to them about it.
The first claim to be filed under the False Claims Act can proceed – if you’re not first, you’re at a serious disadvantage and may get nothing (another reason not to speak to your coworkers about it).
A confidential discussion costs you a few minutes, but could save you time, stress, and money.

1-888-292-8852

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