WASHINGTON : Federal enforcement agencies have intensified their scrutiny of the Service-Disabled Veteran-Owned Small Business (SDVOSB) program. This trend follows a record-breaking $21.3 million settlement involving fraudulent contracting practices.
The Department of Justice (DOJ) announced in mid-2025 that Broadway Electronic and Cornerstone Construction agreed to the multi-million dollar settlement. The firms were accused of improperly obtaining federal contracts reserved for service-disabled veterans.
Officials said the companies misrepresented their eligibility status for nearly eight years. The Department of Veterans Affairs (VA) Office of Inspector General (OIG) stated that it will not tolerate falsified documents to gain preferential access to government contracts.
As the 2026 fiscal year progresses, contractors must navigate stricter Small Business Administration (SBA) oversight. Understanding the following seven common mistakes is essential for maintaining SDVOSB compliance and avoiding federal prosecution.
1. Misrepresentation of SDVOSB Eligibility
The most common mistake involves firms claiming SDVOSB status when they do not meet the core legal requirements. Federal law requires that a service-disabled veteran must own at least 51% of the business.
Furthermore, the veteran must hold the highest officer position in the company. The SBA said that any bid or proposal submitted for a set-aside opportunity is a legal affirmation of this status.
The Broadway Electronic case highlighted how firms often fail to update their status after corporate changes. When ineligible firms obtain these contracts, they deprive legitimate veteran-owned businesses of essential opportunities.
The DOJ said that misrepresentation triggers the False Claims Act. This law allows the government to seek triple damages and significant penalties for each false claim submitted.
2. Utilizing "Rent-a-Vet" Ownership Structures
Investigators have identified a trend known as "rent-a-vet" schemes. In these arrangements, a service-disabled veteran is listed as the owner on paper only.
Non-veteran individuals or outside corporations often maintain actual control over daily operations and strategic decisions. The SBA VetCert program now requires proof that the veteran makes all major business choices.
Federal auditors examine whether the veteran has the technical expertise to manage the specific contract work. If the veteran appears to be a figurehead, the SBA may decertify the firm immediately.
VA OIG officials said that "ownership" is not enough to satisfy compliance requirements. The veteran must be the one who directs the company's long-term vision and financial health.
3. Violating Limitations on Subcontracting
Many SDVOSBs mistakenly act as pass-through entities for larger, ineligible corporations. This practice is a direct violation of the Limitations on Subcontracting (LOS) rules.
Under current SBA regulations, an SDVOSB must perform at least 50% of the cost of manufacturing or services. The firm cannot simply win a contract and then outsource 90% of the work to a non-SDVOSB partner.
The Treasury Department launched an audit initiative in early 2025 focusing on these pass-through structures. Auditors are now comparing staffing plans against actual payroll records to ensure compliance.
Violating these limits can lead to contract termination and suspension from future government contracts. Officials said that firms must track their labor hours and subcontractor payments monthly to ensure they stay within the 50% threshold.
4. Improper Joint Ventures and Teaming Agreements
Teaming with larger companies is a common growth strategy, but it often leads to compliance pitfalls. Mistakenly structured Joint Ventures (JVs) can inadvertently shift control away from the veteran.
SBA rules require the SDVOSB to be the managing partner of any joint venture. The veteran-owned firm must also receive at least 51% of the net profits earned by the JV.
Legal experts said that many firms use "canned" JV agreements that do not comply with specific SBA VetCert requirements. These generic documents often fail to name the veteran as the project manager.
The $21.3 million settlement involved several layers of complex corporate relationships that ultimately obscured the true control of the contracts. Transparency in all teaming arrangements is now a top priority for federal investigators.
5. Failure to Meet VetCert Transition Deadlines
The SBA recently completed the transition of SDVOSB certification from the VA to its own VetCert platform. This move eliminated the previous "self-certification" process for many agencies.
Effective late 2024 and through 2026, all firms must be certified through the SBA to count toward agency small business goals. Many contractors mistakenly believe their old VA status or self-certification still holds weight.
Failure to obtain or renew VetCert status can lead to the immediate loss of active contracts. The SBA said that firms must notify the agency within 30 days of any material changes in ownership or control.
Waiting until the last minute to re-certify is a high-risk mistake. The current backlog for VetCert applications can take several months to process, leaving firms in a "compliance limbo."
6. Submitting False Invoices and Certifications
Every time an SDVOSB submits an invoice for payment, it is certifying that it is in full compliance with the contract terms. This includes compliance with cybersecurity standards like NIST 800-171.
The DOJ said that "implied certification" is enough to trigger a fraud investigation. If a firm invoices the government while knowing it is out of compliance with SDVOSB rules, it is committing fraud.
The 2025-2026 enforcement climate has seen a rise in "whistleblower" lawsuits filed by former employees. These individuals often report discrepancies between what was promised in the bid and what was actually delivered.
Contractors should treat every invoice as a legal document. Officials said that a single false certification can lead to a lifetime ban from government contracts and GSA schedule participation.
7. Inadequate Documentation and Audit Readiness
The final mistake is failing to maintain rigorous internal records. In the event of a VA OIG or SBA audit, the burden of proof is on the contractor to show they are compliant.
Many firms lack formal operating agreements that specify the veteran's control. They may also fail to keep detailed records of work-share percentages between themselves and their subcontractors.
Auditors said that lack of documentation is often viewed as an attempt to hide non-compliance. Digital records of board meetings, financial statements, and payroll should be organized and accessible.
Implementing a compliance-first culture is the only way to survive the current landscape of government contracts. As the government continues to claw back billions in fraudulent awards, SDVOSBs must prioritize legal integrity over growth.
Navigating the Future of SDVOSB Compliance
The landscape of veterans affairs news is increasingly dominated by stories of enforcement and regulatory tightening. Staying informed is the first step toward long-term success in the federal marketplace.
The $21.3 million settlement serves as a warning for all small businesses. The federal government is using advanced data analytics to find patterns of fraud that were previously hidden.
Contractors should conduct regular internal audits and consult with legal counsel to review their corporate structures. Proactive compliance is significantly less expensive than the legal fees and fines associated with a federal investigation.
For more updates on GSA schedule changes and SDVOSB opportunities, visit the USGov.News articles page for daily reports on the political and economic factors shaping the industry.
