SBA Audits and the Evolving Risk of Bonding Set-Aside Contractors

By Frank Tanzola, SVP, Surety Claims Legal

This article should not be used as legal advice. All parties should consult legal counsel of their choice and seek expert advice on legal and compliance issues.

The Small Business Administration (SBA) recently announced a sweeping audit of all contractors participating in federal programs set aside for small, socially, and economically disadvantaged businesses. Approximately 4,300 contractors will be required to provide financial records as the agency looks for potential fraud, waste, and abuse within these programs.¹

Why Is the SBA Auditing Set-Aside Contractors Now?

Set-aside programs play a critical role in expanding access to federal contracting opportunities. However, they have also been the subject of increased scrutiny due to concerns that some participants may not truly meet eligibility requirements. The SBA’s audit initiative signals a renewed enforcement posture—and with it, increased downstream exposure for other parties involved in federal set-aside projects, including sureties and agents.

What Is the Legal Risk to Sureties and Agents?

The potential exposure for sureties and agents became especially clear in Scollick v. Narula, a 2017 decision from the U.S. District Court for the District of Columbia. In that case, the court held that sureties and agents could be liable under the False Claims Act (FCA) if they issued bonds to set-aside contractors they knew or should have known did not meet program eligibility requirements.²

The stakes under the FCA are significant. In addition to civil penalties, the statute allows for treble damages, which in some scenarios could equal three times the total value of the bonded set-aside projects.

Have the Legal Standards Changed Since Scollick?

Yes—but not in a way that eliminates risk.

After years of litigation, the sureties and agent involved in Scollick v. Narula obtained summary judgment dismissing the FCA claims against them. The court found no evidence that they had actual or constructive knowledge of the contractor’s noncompliance, and further held that sureties do not have a general obligation to be experts in federal set-aside requirements.3

That said, this outcome should not be viewed as a green light for complacency. Two important points remain:

Actual knowledge still creates exposure. A surety that knowingly bonds a non-compliant set-aside contractor or acts with reckless disregard in bonding such a contractor would not be shielded by this ruling.
The law is still evolving. Plaintiffs’ counsel has indicated an intent to appeal the decision dismissing the claims against the sureties and agent, which would result in a federal appellate court decision that could expand liability.

How Do Recent Policy Changes Affect Set-Aside Risk?

Another important development is an executive order clarifying that minority status alone can no longer create a presumption of social or economic disadvantage.4 While this change reshapes eligibility determinations, it does not reduce the potential FCA exposure for sureties and agents that knowingly support ineligible contractors.

What Should Sureties and Agents Be Watching For?

It is important to be clear: surety underwriting is not intended to verify full compliance with every set-aside program requirement. However, given the magnitude of potential FCA exposure, awareness of common risk indicators is now an essential business practice.

Two core eligibility pillars underpin most federal set-aside programs:

Ownership – A qualifying individual must generally hold a majority ownership interest directly (not through another entity).
Control – One or more qualifying individuals must control day-to-day operations and long-term decision-making and hold the highest officer position.

Common Red Flags of Potential Non-Compliance

While no single factor is dispositive, the presence of multiple indicators should prompt further inquiry:

The qualifying individual lacks the experience or capacity to manage daily operations
Non-qualifying individuals appear to make key business or bidding decisions
Overlapping ownership, management, or employees with another contractor
Financial support, indemnity, or collateral provided by non-qualifying entities and/or individuals without a clear business rationale
Shared office space, licenses, or resources—especially with larger, non-qualifying contractors

Many fraudulent schemes involve “shell” companies that nominally qualify for set-aside work while control and profits are effectively diverted to non-qualifying parties, often through subcontracting arrangements or management fees.

Final Thoughts

The SBA’s audit initiative underscores a broader reality: set-aside contracting risk is dynamic, highly scrutinized, and legally consequential. While sureties and agents are not charged with policing federal eligibility programs, awareness of ownership, control, and structural red flags can help mitigate exposure under the False Claims Act.

Sources

Small Business Administration, SBA Orders All 8(a) Participants to Provide Financial Records, December 5, 2025, https://www.sba.gov/article/2025/12/05/sba-orders-all-8a-participants-provide-financial-records
Scollick v. Narula, 2017 WL 3268857 (D.D.C. July 2017).
Scollick v. Narula, 2022 WL 3020936 (D.D.C. July 2022)
BDO USA LLP, SBA Orders All 8(a) Participants to Provide Financial Records, Government Contracting Alert, December 2025, https://www.bdo.com/insights/industries/government-contracting/bdo-alert-sba-orders-all-8-a-participants-to-provide-financial-records