U.S. Treasury Launches Departmentwide Review of Preference-Based Contracting Programs

On November 5, the U.S. Department of the Treasury (Treasury or Department) announced a sweeping review of its preference-based contracting programs, signaling an intensified focus on the Department's concerns regarding compliance, fraud prevention, and the integrity of small-business set-aside awards. The initiative follows Treasury’s termination of multiple task orders totaling more than $250 million with a government contractor accused of misusing the Small Business Administration (SBA) 8(a) Business Development Program. The Department has now ordered a departmentwide audit of approximately $9 billion in contract awards across its bureaus.

For large prime contractors that perform under, or in conjunction with, small-business preference programs, this development represents a significant escalation in oversight risk. While the immediate focus is on 8(a) participants themselves, the announcement makes clear that large contractors that have partnered with, subcontracted to, or formed joint ventures with 8(a) companies should expect scrutiny of those relationships — particularly for contracts awarded under what Treasury calls the “Biden administration’s equity in procurement initiative.” Treasury’s actions may also serve as a bellwether for how other federal agencies evaluate eligibility, subcontracting structures, and performance accountability in set-aside contracting.

Treasury’s Investigation and Enforcement Posture

According to Treasury’s announcement, the review will encompass every bureau and operating office within the Department and will focus on contracts and task orders awarded under the SBA 8(a) Program and other preference-based programs. Those programs include HUBZone, Service-Disabled Veteran-Owned Small Business, and Women-Owned Small Business initiatives, among others. The review is intended to identify misuse of set-aside awards, including so-called “pass-through” arrangements in which an eligible small business receives a federal award but delegates the bulk of contract performance to a large business partner.

Treasury has also directed its acquisition officials to increase scrutiny of contractor staffing, management, and subcontracting practices. Contracting officers are being instructed to require detailed staffing plans and monthly workforce reports for all service contracts. These measures are designed to verify that small-business awardees are performing the “primary and vital” portions of the work and to detect instances where large contractors exert de facto control.

Implications for Prime Contractors

The scope and tone of Treasury’s initiative should prompt immediate attention from prime contractors participating in, or supporting, small-business preference programs. Even where a large contractor’s involvement is fully compliant with existing Federal Acquisition Regulation (FAR) and SBA requirements, Treasury’s actions demonstrate a more aggressive enforcement environment. The Department appears poised to examine not only formal eligibility but also the substance of the performance relationship between small and large business participants.

For prime contractors, this means that oversight risk may not be confined to certification issues. Treasury’s auditors and contracting officers may evaluate how work is allocated, who directs personnel, and which entity exercises managerial control over key deliverables. Arrangements that have historically passed compliance review could be recharacterized as improper if small-business partners appear to function primarily as administrative intermediaries. The consequences could include contract termination, repayment demands, suspension or debarment, and significant reputational damage.

The government also possesses powerful civil enforcement tools under the False Claims Act (FCA), which allow it to seek recovery of funds obtained through false or misleading representations in connection with government contracts. The FCA’s qui tam provisions empower private whistleblowers — often competitors, subcontractors, or current or former employees — to file suits on the government’s behalf and share in any resulting recovery. For large contractors, this means that potential exposure extends not only to agency audits but also to private actions initiated by those with inside knowledge of contracting relationships. Successful FCA claims can result in treble damages, substantial civil penalties, and significant litigation costs, even where the underlying contract work was otherwise performed.

In more serious cases involving intentional misconduct, the Department of Justice may pursue criminal charges under statutes such as wire fraud or conspiracy. Prosecutors have recently taken the position that misrepresentations of size or eligibility status in connection with small-business set-aside programs amount to fraudulent inducement, and therefore to wire fraud.

Beyond Treasury, this review aligns with a broader trend across the federal government to ensure “authentic” small-business participation in set-aside programs. Other agencies — particularly the Departments of Defense, Energy, and Homeland Security — may soon adopt similar audit and reporting frameworks. For large contractors, the result will be expanded documentation requirements, greater visibility into subcontractor performance, and increased scrutiny of teaming and mentor-protégé arrangements.

Recommended Actions for Prime Contractors

Prime contractors should consider proactive steps now to mitigate risk and demonstrate good-faith compliance with program objectives. A first priority is to conduct a review of all active and recent Treasury or Treasury-funded contracts that involve small-business set-asides or subcontracting obligations under FAR 52.219-14, Limitations on Subcontracting. This review should assess whether small-business partners are performing meaningful portions of the contract and exercising the requisite managerial authority.

Contractors should also ensure that small-business partners’ SBA certifications remain current and that ownership, control, and management structures align with the representations made in proposals and teaming agreements. In light of Treasury’s new documentation requirements, prime contractors may wish to enhance their internal compliance protocols by implementing monthly workforce reporting and performance tracking mechanisms. These reports should clearly document the roles, responsibilities, and supervision of both small-business and large-business personnel.

Equally important is the need to evaluate the contractual architecture of teaming and subcontracting arrangements. Agreements should delineate clear lines of responsibility, allocate decision-making authority consistent with SBA regulations, and establish audit rights that enable both parties to verify compliance. Where existing arrangements rely heavily on a large-business subcontractor for execution, contractors should consider adjusting staffing or management structures to ensure that small-business partners meet performance thresholds.

Finally, prime contractors should prepare for the possibility of Treasury or Office of Inspector General inquiries. Establishing internal response protocols, designating a point of contact for government audits, and conducting a privileged internal review of high-value or high-risk contracts can help mitigate potential exposure. Taking these steps now could help demonstrate good-faith cooperation and reduce the likelihood of adverse findings should Treasury extend its review.

Looking Ahead

Although the immediate focus is on Treasury’s own portfolio, this action may soon influence governmentwide policy. The results of the audit could prompt revisions to the FAR and SBA regulations governing set-aside programs as well as increased data-reporting requirements for all federal contractors.

For large prime contractors, the message is clear: The government is not content with nominal compliance. Agencies are seeking assurance that small-business programs are achieving substantive participation by eligible firms. Proactive assessment of existing relationships, early remediation of potential deficiencies, and transparent engagement with agencies will be critical to maintaining eligibility and avoiding enforcement risk.