Government Contractor Pays $21.3 Million to Resolve Alleged Small Business Contracting Fraud

by Mark Xiao and Michaela Buckley

The U.S. Department of Justice (DOJ) announced their recent settlement with defendants Broadway Electric Inc., Cornerstone Contracting Inc., and two of their executives in June 2026, where the defendants agreed to pay $21.3 million to resolve False Claims Act (FCA) allegations that they improperly obtained federal contracts set aside for service-disabled veteran-owned small businesses.  In the alleged scheme, Broadway Electric Inc. (Broadway) and Cornerstone Contracting Inc. (Cornerstone) used qualifying small businesses as conduits to receive federal funds designated for service-disabled veterans, even though the executives themselves were not service-disabled veterans and their organizations were ineligible for the federal program’s contracts.

Federal Contracts for Service-Disabled Veteran-Owned Small Businesses

To be considered a service-disabled veteran, an individual must receive a certification from the Department of Veteran Affairs that establishes a disability from a disease or injury that was incurred or aggravated by active military service.  The Department of Veteran Affairs, the Department of Defense, and the Small Business Administration (SBA) have created the Service-Disabled Veteran-Owned Small Business (SDVOSBs) Program to support the companies of service-disabled veterans with federal contracts.

To qualify for the program, a business must be classified by SDVOSBs as a small business according to SBA’s standards.  The business must also be, at minimum, 51 percent-owned and controlled by at least one service-disabled veteran, and the day-to-day operations and large-scale decision-making must be conducted by no fewer than one service-disabled veteran.  However, if a veteran is classified as permanently disabled and is unable to control the daily operations of their business, then their organization may still qualify for the SDVOSB Program if their appointed proxy functions as the acting manager.

The SDVOSB Program is designed to encourage veteran entrepreneurship and support the economic success of disabled veterans.  By aiming to award five percent  of federal contracting dollars to service-disabled veteran-owned small businesses, these companies can compete for federal contracts in programs created for service-disabled veterans and receive counseling and technical support from the federal government.  SDVOSBs are eligible for sole-source and set-aside federal contracts across the entire federal government, and they can also compete for contracts through programs by the Department of Veteran Affairs.

Fraud vs. Partnership: When do partnership arrangements cross the line into potential fraud?

The Office of Inspector General (OIG) for the U.S. Department of Veteran Affairs (VA) determines fraud to be the improper acquisition, performance, or financial gain from VA contracts designated for veteran entrepreneurs who became disabled in service of their country.  The VA OIG has found that one of the most common forms of SDVOSB fraud occurs when a company utilizes the classification of an SDVOSB to “pass through” contract performance to an entity not owned, operated, or controlled by a veteran disabled by military service.

For example, it is improper to use an SDVOSB as a pass-through for a larger or non-veteran-owned entity to obtain federal contracts.  The SDVOSB Program requires that a business be 51 percent owned, operated, and controlled by at least one veteran disabled by active-duty military service.  If a company uses an SDVOSB to obtain federal contracts but the procurement, administration, and performance monitoring of the contracts were not controlled by a service-disabled veteran, then it could constitute fraud because the individuals and company charged with the day-to-day management of the contracts were ineligible for the program.

In essence, subcontracting can cross the line into potential fraud when a service-disabled veteran is appointed as the owner and primary manager of SDVOSB contracts but has no meaningful, majority control over the day-to-day operations of the contract.  The performance of SDVOSB contracts is intended to be controlled by a capable, veteran-owned small business. When partnership arrangements or subcontractors shift the burden of responsibility over the management and administration of federal contracts from SDVOSBs to partner entities, they can be rendered ineligible and considered fraudulent.

How can companies ensure they comply with federal small business contracting requirements?

The SBA has a contracting guide that outlines the steps a company must take to ensure they meet the requirements for SBA contracts, some of which include qualifying for size standards, registering for the federal government’s System for Award Management, and complying with federal contracting laws, such as 13 CFR 125.  For example, 13 CFR 125.3 provides that the company that wins a federal contract bid, known as the prime contractor, must maintain control of the contract services and provide transparent reports to the federal government as it pertains to performance and the involvement of subcontractors.

Additionally, all contractors must comply with the Federal Acquisition Regulation, which contains procedures, contract performance standards, and terms that provide a roadmap for companies to maintain federal contract compliance.

The Role of Whistleblowers

The DOJ’s $21.3 million settlement with Broadway Electric Inc. and the other defendants was the result of a qui tam action brought by two relators on behalf of the federal government, once again demonstrating the importance of whistleblowers, or relators, in exposing fraud against the federal government.  Whistleblowers are the first line of defense against fraud, corruption, and the misuse of government funds, and they play an integral role in bringing such wrongdoing to light, prompting investigations, and recovering damages incurred by these offenses.

Relators who expose fraud may be entitled to a portion of the damages.  In this case, the relators received $3,674,250 for their role in combating deception and misappropriation of government funds.

This settlement demonstrates the importance of transparency and eligibility in federal contracts, and highlights the integral role that contractors play in meeting compliance standards.  Contractors who may abuse federal programs, such as using SDVOSBs as pass-throughs for the benefit of larger entities, can be held liable for such fraud.

Individuals with information about potential fraud may consider consulting counsel.  Attorneys at Miller Shah LLP are experts in FCA litigation.