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 requirements between the SBA and the Department of Veterans Affairs (“VA”) and eliminated the self-certification framework previously used for non-VA procurements. 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.