Small businesses are the lifeblood of the U.S. economy: they create two-thirds of net new jobs and drive U.S. innovation and competitiveness while accounting for 44 percent of U.S. economic activity. Congress has recognized that the federal government—which spends hundreds of billions of dollars in contracts each year—can play an important role in supporting and sustaining small businesses.
Therefore, the federal government sets a goal of awarding 23 percent of contracts to small businesses each year, and often offers monetary incentives for large businesses to enter into subcontracts with small businesses.
Congressional support for small businesses transcends party divisions. For instance, the recent infrastructure bill passed by a bipartisan group of Senators directs that at least 10 percent of funds appropriated for highway and public transit infrastructure be allocated to small businesses owned and controlled by socially and economically disadvantaged individuals. If the bill becomes law, these small businesses will have the opportunity to earn tens of billions of dollars in government contracts.
The Small Business Administration (SBA) recognizes many types of small business, including women-owned small businesses (WOSBs), veteran-owned small businesses (VOSBs), service-disabled veteran-owned small businesses (SDVOSBs), and more.
However, these small-business designations largely rely on the honor system, with individual businesses self-certifying that they meet the eligibility criteria. This creates opportunities for unscrupulous contractors to cheat the system. Several recent settlements demonstrate how these schemes work in practice
- In 2015, a company paid more than $20 million to resolve allegations that it lied about being a WOSB in order to secure lucrative defense subcontracts with government contractors.
- In 2017, a company paid $16 million to resolve allegations that it fraudulently induced the government to award certain it small business set-aside contracts even though it was affiliated with several other businesses and should not have been considered small.
- In 2020, several companies and individuals paid nearly $4.5 million to resolve allegations that they worked together to win contracts set aside for SDVOSBs, even though the company in question was not actually controlled by a service-disabled veteran.
These settlements likely represent the tip of the iceberg when it comes to small business fraud. Unfortunately, programs intended to benefit small businesses are plagued by fraud, almost certainly amounting to billions of dollars in misspent funds each year. For instance, an audit by the Department of Veterans Affairs (VA) found that the VA alone awarded $500 million annually to ineligible VOSBs and SDVOSBs in a single year.
An audit by the Department of Defense of just 29 contractors found that the agency wrongfully awarded $827.8 million to ineligible SDVOSBs. Likewise, a recent SBA audit found that 90 percent of the contracts set aside for WOSBs were awarded to potentially ineligible businesses.
When these funds are awarded to ineligible businesses, it defeats the purpose of the small business programs established by Congress. Therefore, when funds intended for a small business go instead to an ineligible contractor, Congress and the SBA have established that the government is presumed to suffer damages equal to 100 percent of the contract amount—regardless of whether the government received any benefit under the contract.
The Department of Justice has consistently advocated for this position, as well. Although defense attorneys have devised creative arguments against the so-called “presumed loss rule,” the qui tam bar and the DOJ have won several important victories, convincing several courts to hold fraudsters accountable to the fullest extent of the law in both civil and criminal proceedings.
Written by Noah Rich of Baron & Budd, P.C.
 15 U.S.C. § 644(g)(1)(A)(i).
 Infrastructure Investment & Jobs Act, H.R. 3684, 117th Cong. § 11101(e)(3) (as passed by Senate, Aug. 10, 2021).
15 U.S.C. § 632(w)(1); 13 C.F.R. § 121.108(a).
 See, e.g., United States’s Resp. to Def.’s Mot. for Partial Summ. J. 17-19, ECF No. 343, United States ex rel. Savage v. Wash. Closure Hanford LLC, No. 2:10-cv-5051 (July 13, 2017); Gov’t’s Reply Mem. in Support of Sentencing 2-3, ECF No. 16, United States v. Crummy, No. 1:16-cr-133 (D.D.C. Dec. 20, 2016).
 See, e.g., United States ex rel. Savage v. Wash. Closure Hanford LLC, No. 2:10-CV-05051-SMJ, 2017 WL 3667709, at *4 (E.D. Wash. Aug. 24, 2017); United States v. Singh, 195 F. Supp. 3d 25, 30-31 (D.D.C. 2015).