A $21.3 million False Claims Act settlement involving an electrical contractor and its subsidiary signals aggressive U.S. Department of Justice enforcement against SBA set-aside program abuses.
The DOJ announced on June 9, 2026, that two government contractors and two of their executives agreed to pay the sum to resolve allegations of fraudulent use of federal set-aside contracts.
The settlement resolved a qui tam action, United States ex rel. Welch, et al. v. American First Contracting Inc., et al., filed in the Northern District of New York.
According to the settlement agreement, the contractors used purported service-disabled veteran-owned small businesses as pass-through entities to improperly obtain federal set-aside contracts.
The companies prepared and priced bids, controlled contract execution and finances, while the purported SDVOSBs served as prime contractors in name only, receiving a fixed percentage of contract value regardless of work performed.
The arrangements took the form of teaming agreements, joint ventures, and mentor-protege relationships, with neither company independently qualifying as a “small business concern” under SBA regulations.
Assistant Attorney General Brett A. Shumate stated the DOJ would “hold accountable those who fraudulently obtain, or assist others in fraudulently obtaining, these set-aside contracts.”
The two whistleblowers will receive approximately $3.67 million as their relators’ share, representing 17.25 percent of the total recovery under 31 U.S.C. Section 3730(d).
Individual liability of $4 million and $225,000 respectively was imposed on the two executives, underlining the DOJ’s willingness to pursue personal accountability in set-aside fraud cases.
At least one SDVOSB owner raised compliance concerns during the arrangements, but the defendants made no material changes in response, a fact likely to inform future enforcement actions.
The government intervened only against the larger entities in the case, which analysts suggest could signal intensified enforcement focus on companies at the top of pass-through arrangements.
Simultaneously, the SBA is overhauling eligibility standards for its 8(a) Business Development Program, moving away from race-based presumptions of social disadvantage toward a new discrimination-based eligibility test.
A proposed rule published in the Federal Register on June 11, 2026, would formally remove the rebuttable presumption of social disadvantage for members of certain racial and ethnic groups under 13 C.F.R. Section 124.103.
The new standard would require a showing that a governmental or private entity discriminated against the applicant’s group, causing “material harm” broadly defined as diminished opportunities related to economic advancement.
Notably, the proposed rule would treat unlawful DEI programs, affirmative action policies, and race-based quotas as qualifying evidence of social disadvantage, a significant shift in regulatory posture.
The SBA has not approved a new 8(a) application since August 2025, and the number of active firms has fallen below 3,000, amplifying the urgency for eligible businesses to track rulemaking developments.
The comment period on the proposed rule closed on July 13, 2026, with 132 comments submitted, suggesting significant industry interest in the outcome of the final rule.
Legal experts at Ogletree, Deakins, Nash, Smoak and Stewart warn that certifying eligibility based on outdated criteria may be viewed as a false statement to the government, triggering FCA liability.
Businesses are advised to audit ownership and control arrangements, monitor evolving eligibility standards, keep documentation current, and take internal whistleblower red flags seriously to reduce exposure.
The convergence of aggressive FCA enforcement and shifting SBA eligibility rules means the definition of who qualifies for set-aside programs is itself a continuously moving target for contractors.