Federal Government Reinforces Small Business Set-Aside Compliance Expectations 

On June 9, 2026, the U.S. Department of Justice (DOJ) announced a $21.3 million settlement involving allegations that federal contracts reserved for Service-Disabled Veteran-Owned Small Businesses (SDVOSBs) and other small businesses were improperly obtained through a pass-through arrangement.

Although the settlement does not constitute a determination of liability, it highlights the federal government's continuing focus on the integrity of small business contracting programs and compliance with SBA requirements. 

A pass-through arrangement occurs when a small or certified business wins a government contract but does not meaningfully perform or control the work required under the contract. Instead, most of the work is subcontracted to another entity—often a larger or ineligible company—that effectively manages performance, staffing, and delivery.

In these situations, the certified small business may function primarily as a “front” for contract eligibility while another company carries out the actual work and receives the majority of contract value.   

According to the DOL, “The civil settlement includes the resolution of claims brought under the qui tam provisions of the False Claims Act by two whistleblowers, a veteran of the United States Air Force and an executive with an SDVOSB firm.

The False Claims Act allows private individuals to file suit on behalf of the United States for false claims and share in any recovery. Under the settlement agreement, the relators will receive $3,674,250. The case is captioned United States ex rel. Welch, et al. v. American First Contracting Inc., et al., No. 3:23-cv-0525 (N.D.N.Y.).” 

Federal agencies rely on programs such as the 8(a) Business Development Program, HUBZone Program, Women-Owned Small Business (WOSB) Program, and Veteran Contracting Programs to help eligible small businesses compete for federal contracts.

These programs create significant opportunities for small businesses but also impose strict requirements regarding ownership, control, performance of work, and subcontracting. 

A common area of enforcement involves allegations that a certified small business serves primarily as a vehicle for a larger or otherwise ineligible company to obtain set-aside work.

Government investigators may review whether the certified firm truly controls contract performance, manages day-to-day operations, makes key business decisions, and performs the required percentage of contract work. Contractors should pay particular attention to: 

• Joint venture and mentor-protégé arrangements 

• Teaming agreements and subcontracting relationships 

• SBA size and certification requirements 

• Limitations on subcontracting rules 

• Documentation demonstrating operational control and management authority 

• Internal records supporting compliance with program eligibility requirements 

The SBA's limitations on subcontracting rules are designed to ensure that small businesses—not larger partners or subcontractors—perform the required share of work under set-aside contracts. These requirements vary depending on whether the contract is for services, supplies, general construction, or specialty construction and can have a significant impact on contract performance planning.

Contractors should ensure that project managers, contracts personnel, and business development teams understand these requirements before submitting proposals.  SBA guidance explains that limitations on subcontracting are intended to prevent ineligible businesses from using small businesses merely as vehicles to access set-aside contracts and outlines minimum performance requirements applicable to many set-aside awards. 

Potential consequences of noncompliance may include contract termination, suspension or debarment, loss of certification status, False Claims Act investigations, financial penalties, and repayment obligations. 

Recommended Employer Actions 

While no immediate action is required, government contractors participating in SBA programs should consider: 

• Reviewing ownership and management structures to confirm continued eligibility 

• Evaluating subcontracting and teaming arrangements for compliance risks 

• Confirming that key personnel and decision-making authority remain with the certified business 

• Reviewing contract performance to ensure compliance with subcontracting limitations 

• Maintaining documentation supporting certification eligibility and contract compliance 

• Providing periodic compliance training to contracts, program management, and business development personnel 

Category FY 2024 Awards 

According to SBA procurement data, Service-Disabled Veteran-Owned Small Businesses received a record $32.8 billion in federal prime contract awards during FY 2024, accounting for 5.15% of eligible federal contracting dollars and exceeding the federal government's 5% SDVOSB contracting goal. 

• Small Businesses (all categories) - $183.3 billion 

• Small Disadvantaged Businesses - $78.1 billion 

• Service-Disabled Veteran-Owned Small Businesses (SDVOSBs) - $32.8 billion 

• Women-Owned Small Businesses - $31.7 billion 

• HUBZone Small Businesses - $17.5 billion 

Helpful SBA Resources 

• Federal Contracting Overview: https://www.sba.gov/federal-contracting 

• Contracting Assistance Programs: https://www.sba.gov/federal-contracting/contracting-assistance-programs 

• Prime Contracting and Subcontracting Guidance: https://www.sba.gov/federal-contracting/contracting-guide/prime-subcontracting 

• Federal Contracting Rules and Responsibilities: https://www.sba.gov/federal-contracting/contracting-guide/governing-rules-responsibilities