The Department of Defense Office of Inspector General (“OIG”) recently announced that it was initiating an audit to determine whether agencies within DoD awarded Service-Disabled Veteran-Owned Small Business (“SDVOSB”) set-aside and sole-source contracts to eligible companies. The audit is set to begin this month, and likely will evaluate the number and value of contracts awarded to SDVOSBs under set-asides and sole-source procurements, as well as whether and how agencies confirm that awardees qualify as SDVOSBs at the time of award. The audit, which comes six years after the OIG previously determined that DoD did not have adequate controls in place to ensure the integrity of the SDVOSB set-aside program, signals that SDVOSB eligibility issues are likely to become a greater point of emphasis in future enforcement proceedings.

The audit announcement follows recent changes (effective October 1) to Small Business Administration (“SBA”) regulations governing SDVOSB eligibility requirements. Among other things, those changes standardized ownership and control requirements between the SBA and the Department of Veterans Affairs (“VA”). The OIG’s audit presumably will be retrospective, assessing whether awardees were eligible to self-certify as SDVOSBs under the prior rules, but this is a point that warrants clarification.

Although the audit likely will focus on DoD processes to determine eligibility for SDVOSB awards, companies found to be ineligible could face a range of serious consequences. Immediate possibilities include Contracting Officer-initiated size protests, suspension of work, adverse performance evaluations, and contract termination. Longer-term consequences include suspension, debarment, and legal action under the False Claims Act, if it appears that the company fraudulently represented its SDVOSB status.

SDVOSB contractors holding DoD contracts should expect inquiries from OIG officials. These inquiries may range from requests for interviews and voluntary submissions of information relevant to the audit, to requests for proof that the contractor is an eligible SDVOSB. To establish proof, OIG officials may request to visit SDVOSB facilities to determine whether a service-disabled veteran actually owns or controls the company and manages its daily business operations. Similarly, SDVOSB joint ventures could be asked to demonstrate that the SDVOSB is the managing venture, employs the project manager, receives at least 51% of the profits, and will retain the final contract records.

Although the scope and effect of the OIG’s audit will become more clear over the coming weeks and months, SDVOSB contractors should prepare themselves for scrutiny of their eligibility status. All SDVOSB contractors would be wise to review their eligibility status—particularly under the newly effective SBA rules—and, if necessary, take steps to address and clarify any issues that could arise during an eligibility review. And SDVOSBs receiving direct inquiries from the OIG regarding their eligibility for DoD awards should ensure that they fully understand the posture of any government review, the standards being applied, and how responsive information would be used. Even if the current round of audits ostensibly focuses on DoD procedures, there is good reason to be cautious whenever OIG auditors come calling.

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Photo of Michael Wagner Michael Wagner

Mike Wagner represents companies and individuals in complex compliance and enforcement matters arising in the public procurement context. Combining deep regulatory expertise and extensive investigations experience, Mike helps government contractors navigate detailed procurement rules and achieve the efficient resolution of government investigations and…

Mike Wagner represents companies and individuals in complex compliance and enforcement matters arising in the public procurement context. Combining deep regulatory expertise and extensive investigations experience, Mike helps government contractors navigate detailed procurement rules and achieve the efficient resolution of government investigations and enforcement actions.

Mike regularly represents contractors in federal and state compliance and enforcement matters relating to a range of procurement laws and regulations. He has particular experience handling investigations and litigation brought under the civil False Claims Act, and he routinely counsels government contractors on mandatory and voluntary disclosure considerations under the FAR, DFARS, and related regulatory regimes. He also represents contractors in high-stakes suspension and debarment matters at the federal and state levels, and he has served as Co-Chair of the ABA Suspension & Debarment Committee and is principal editor of the American Bar Association’s Practitioner’s Guide to Suspension & Debarment (4th ed.) (2018).

Mike also has extensive experience representing companies pursuing and negotiating grants, cooperative agreements, and Other Transaction Authority agreements (OTAs). In this regard, he has particular familiarity with the semiconductor and clean energy industries, and he has devoted substantial time in recent years to advising clients on strategic considerations for pursuing opportunities under the CHIPS Act, Inflation Reduction Act, and Bipartisan Infrastructure Law.

In his counseling practice, Mike regularly advises government contractors and suppliers on best practices for managing the rapidly-evolving array of cybersecurity and supply chain security rules and requirements. In particular, he helps companies assess and navigate domestic preference and country-of-origin requirements under the Buy American Act (BAA), Trade Agreements Act (TAA), Berry Amendment, and DOD Specialty Metals regulation. He also assists clients in managing product and information security considerations related to overseas manufacture and development of Information and Communication Technologies & Services (ICTS).

Mike serves on Covington’s Hiring Committee and is Co-Chair of the firm’s Summer Associate Program. He is a frequent writer and speaker on issues relating to procurement fraud and contractor responsibility, and he has served as an adjunct professor at the George Washington University Law School.

Photo of Brooke Stanley Brooke Stanley

Brooke Stanley helps companies of all sizes navigate the complex issues that arise from doing business with federal, state, and local governments. She routinely advises on a broad range of issues, including compliance with procurement and financial assistance regulations, contract negotiation and formation…

Brooke Stanley helps companies of all sizes navigate the complex issues that arise from doing business with federal, state, and local governments. She routinely advises on a broad range of issues, including compliance with procurement and financial assistance regulations, contract negotiation and formation, organizational conflicts of interest, flow-down requirements, equitable adjustments, claims and disputes, and small business issues. Brooke leverages her prior experience soliciting, negotiating, and administering government contracts for the United States Navy in crafting creative yet practical solutions for clients.

Brooke regularly assists clients in negotiating both procurement contracts and non-traditional agreements, such as other transaction agreements and cooperative research and development agreements. She has particular expertise assisting clients in protecting their intellectual property and confidential or proprietary information when negotiating with the government, including with respect to intellectual property rights and Freedom of Information Act issues.

In addition, Brooke frequently advises both government contractors and private equity firms in transactional matters, from preparing for sale or purchase to due diligence, negotiating transaction documents, and navigating pre- and post-closing activities. Her expertise in nuanced government contracting compliance issues helps clients understand, mitigate and manage material risks in such transactions.

Prior to entering private practice, Brooke clerked for the Honorable Susan G. Braden of the United States Court of Federal Claims.