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Welcome to Apogee Consulting, Inc.

Fighting Corruption

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How do you measure the [ethical] strength of [a] corporate culture?” – Eric Feldman

You can go back on this blog for more than 10 years now. As of this writing, there are 1,326 individual blog articles. Some are short and pithy; others long-winded. In any case, that’s a lot of words. Conservatively estimated, it’s more than a million words.

Did they matter? That’s not for us to say.

But if you look at all the articles on procurement fraud and bribery and product substitution and timekeeping fraud and small business misrepresentation, you might get the sense that there is a hell of a lot of corruption in this world of public procurement. It’s always puzzled us that there are so many people and so many companies that think they are going to get away with something; obviously, some do, but so many others do not.

If there is one theme that permeates all the fraud-related articles it is this: companies that invest in internal controls designed to detect and/or prevent employee wrong-doing are making smart investments that have quantifiable returns, in terms of reduced litigation expenses.

We were reminded of this theme once again as we wrapped-up our annual compliance and ethics training, courtesy of the Society of Corporate Compliance & Ethics (SCCE).

In that training we were exposed to the 2020 Report to the Nations, recently published by the Association of Certified Fraud Examiners. It covered more than 2,500 instances of occupational fraud reported globally in 2018 and 2019. The Report supported what we have been long saying.

  • Across the globe, corruption (which includes offenses such as bribery, conflicts of interest, and extortion) was the most common fraud scheme, other than asset misappropriation (theft)

  • 43% of fraud was detected via tip; 33% of fraud was reported via hotline email or telephone account

  • The presence of anti-fraud controls is associated with lower losses and quicker detection

  • Median fraud losses at companies that had did not have hotlines were nearly double the median losses at those companies that did

As was explained during the training, the conclusions from the AFCE report are clear:

  • Internal controls pay for themselves

  • Hotlines work

  • Use of hotlines is a sign of an ethically healthy company

We also learned that Artificial Intelligence (AI) has advanced to the point where anybody who is not using it in anti-fraud activities is really missing a cheap and effective means of detecting anomalies. At this point, one can use AI to “risk-score” every single accounting transaction in an entity. Every expense report and every Accounts Payable transaction can be risk scored. Employee addresses in a vendor master file can be detected; indeed, employee addresses adjacent to a vendor’s address can be identified. Vendors can be compared to one another: all suppliers of the same commodity can be compared to see if any stick out in terms of average payment size or frequency of payments. If a supplier sticks out, that supplier can be correlated with the buyer to see what’s going on. At this point, there is really no excuse for failing to deploy AI in anti-fraud activities.

This article is not the first time we’ve mentioned some of these ideas, but it’s the first time the return on investment of internal controls has been so clearly shown.

And it’s becoming more important than ever to be focused on detecting instances of corruption. The Association of Certified Fraud Examiners also recently published another benchmarking report: “Fraud in the Wake of COVID-19.” The ACFE received 1,851 survey responses. According to that report:

  • As of May, 2020, 68% of respondents “had already experienced or observed an increase in fraud levels, with one-quarter saying the observed increase had been significant.”

  • “Frauds perpetrated by vendors and sellers … are also a top risk … 86% of respondents expect to see more of this type of fraud over the coming year, and 68% have already seen an increase in these schemes.”

  • Ten percent of respondents “expected a reduction in their anti-fraud staffing over the next year” and eight percent “anticipate budget cuts to affect their anti-fraud programs and initiatives.”

It seems that one impact from the COVID-19 crisis is an increased in perceived fraud risk and a potential decrease in corporate resources used to detect/prevent fraud. That’s not good.

At a macro level, the U.S. Government is gearing up to fight COVID-19 related fraud. At a recent webinar presented by Ernst & Young, we learned that the CARES Act created three separate oversight bodies: (1) The Pandemic Response Accountability Committee (PRAC), (2) the Congressional Oversight Commission, and (3) The Special Inspector General for Pandemic Recovery (SIGPR). At least two of those three oversight bodies have both civil and criminal referral authority to the Department of Justice. According to EY, “SIGPR has entered into Memorandums of Understanding with the U.S. Attorney’s Offices of Massachusetts and Eastern Virginia to investigate and prosecute fraud related to CARES Act funds such as loans, loan guarantees and other investments.”

EY also reported that, at a June 2020 speech, the Principal Deputy Assistant U.S. Attorney General told the audience that—

  • The DOJ’s Civil Division will energetically use every enforcement tool available to prevent wrongdoers from exploiting the COVID-19 crisis.

  • The division will use the False Claims Act to prosecute fraud related to the Paycheck Protection Program (PPP), the Main Street Lending Program and other programs.

Let’s wrap this up: the corruption risk environment is increasing, anti-fraud resources may be at risk, and the U.S. Government is gearing up for intense scrutiny. We know that anti-fraud internal controls pay for themselves. In particular, we know that hotlines work, and that companies that have healthy avenues for employee referrals should expect to have reduced losses and reduced legal settlements.

Given all that, we have to ask you to reflect upon your company’s dedication to fighting corruption. Is it a priority? If not, should it be?


Reasonableness in Claims and REAs

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Recently Judge Dyk and the Court of Appeals, Federal Circuit, issued an opinion that resulted in another contractor loss. This is another Dyk ruling in a long string of questionable rulings against contractor appeals. There is temptation to categorize the Dyk rulings as the result of bias against contractors. But we’re not qualified to judge the quality of the rulings, as we are not attorneys, so thus will refrain from casting further stones at the Honorable Judge Dyk.

As we are not attorneys, you should perhaps rely on qualified legal advice to help you navigate the challenges created by the decision, which set a “new and undefined reasonableness standard” that contractors submitting claims and Requests for Equitable Adjustment (REAs) now apparently have to meet.

Short summary of the appeal: contractor Kellogg, Brown & Root (KBR) had a LOGCAP contract, under which it was awarded a CPFF Task Order to provide temporary housing trailers to soldiers and coalition forces at various locations in Iraq. (There was a war at the time. Some would argue there still is.) Under that Task Order, KBR issued a Firm, Fixed-Price subcontract for about 4,000 trailers to First Kuwaiti Company of Kuwait (“First Kuwaiti”). Those trailers were to be manufactured in Kuwait and then transported via convoy to a couple of Iraqi locations. Delays occurred because the US Government breached the contract by failing to provide adequate force protection to the convoys. (See Sec’y of the Army v. Kellogg Brown & Root Servs., Inc., 779 F. App’x 716, 718 (Fed. Cir. 2019). We wrote about the dispute here.)

Pursuant to the Changes clause in its subcontract, First Kuwaiti submitted an REA to KBR and the parties eventually negotiated an upward price adjustment of $48.7545 million to its FFP subcontract. KBR then paid First Kuwaiti and billed the FFP value through its prime contract Task Order (which was, remember, CPFF). The contracting officer disallowed all but $3.8 million of the additional costs. KBR appealed to the ASBCA, where the Board found against KBR on various bases, including (1) the government didn’t breach the contract, and (2) even if the government did breach the contract, KBR had failed to show that the REA settlement amount it had paid First Kuwaiti was reasonable.

In the words of the Federal Circuit—

The Board stated that KBR had failed to provide the actual costs incurred by Kuwaiti, as is typical in claims for equitable adjustments in other contracts. Instead, KBR’s claimed costs were based solely on Kuwaiti’s estimates. The Board found that the damages models were ‘unrealistic,’ ‘inconsistent,’ ‘flaw[ed],’ ‘unreasonable’ and assumed a ‘perfect world.’ The Board concluded that ‘KBR [was] not entitled to any recovery.’

The Federal Circuit affirmed the ASBCA’s decision, which upheld the contracting officer’s decision and cost KBR about $45 million.

In its opinion, the Federal Circuit did not agree with the ASBCA’s finding that KBR was required to have submitted to the contracting officer actual costs incurred by First Kuwaiti. Judge Dyk wrote “As the government conceded at oral argument, the amounts paid by KBR to Kuwaiti were ‘costs’ under the prime contract, and there is no provision in the prime contract that required KBR to submit the actual costs incurred by its subcontractor. KBR’s obligation was to show that the payments to Kuwaiti were ‘reasonable.’” So far, so good.

However, the Judge also noted that “the failure to collect and submit Kuwaiti’s costs bears on the reasonableness of the payments” that KBR made to First Kuwaiti. That issue became the fatal flaw in KBR’s claim.

The methodology used by KBR and First Kuwaiti was based on quantification of the number of delay days times a fixed price per day. The problem with this methodology, according to the Federal Circuit, was that KBR made several unrealistic assumptions, chief of which was the assumption that any delays were caused solely by the lack of force protection. As Judge Dyk wrote:

Third, KBR’s spreadsheets calculating idle truck days, ‘without substantiating data or records,’ were insufficient to establish the reasonableness of its costs. KBR offered no fact or expert witnesses to support the reasonableness of its estimated number of idle truck days. Although Change 5 did not require KBR to provide actual costs to support its claim, the Board properly determined that KBR’s failure to provide any supporting data was fatal to its claim. Under KBR’s contract with Kuwaiti, Kuwaiti was obligated to ‘maintain books and records’ reflecting actual costs, and KBR had the right to ‘inspect and audit’ those records. As the Board found, it was simply not plausible that Kuwaiti did not record ‘how long trucks actually waited’ at the border … and KBR made no attempt to access or utilize these records. At bare minimum, KBR was required to support its estimates with representative data as to the number of trucks actually delayed. In fact, KBR supplied no representative data whatsoever. Without further evidence demonstrating the reliability of KBR’s estimates, the Board properly found that KBR’s claimed costs were not reasonable.

So KBR is out roughly $45 million, unless it decides to proceed further. But we’re not done yet. There was a dissent filed by Judge Newman that’s worth a bit of discussion.

Judge Newman concurred with the basic reasoning of the majority, but believed that the appeal should have been remanded back to ASBCA in order to determine whether or not the negotiated REA was reasonable. She wrote “My colleagues hold that the correct standard is ‘reasonableness,’ and while complaining about the absence of evidence and witnesses and argument on this standard, my colleagues make extensive findings on information that has not been presented, and decide the issue of reasonableness without participation of the parties.” She further wrote—

I also agree that the correct standard is ‘reasonableness.’ However, my colleagues do not remand for application by the ASBCA of this standard; they do not discuss whether the methodology used by KBR was reasonable, although this aspect was the subject of testimony at the ASBCA; and they do not consider whether any of the costs of delay were reasonable in the circumstances that existed. Instead, my colleagues extract isolated costs from un-briefed documents, and rule, with no briefing and no argument, that reasonableness was not shown. Although KBR requested remand to the ASBCA if this court agrees that the ASBCA’s decision should be reversed, remand is not provided. KBR has no opportunity to meet this court’s new standard. Instead, my colleagues scavenge among assorted materials that were provided in other contexts, and complain about the absence of evidence and expert testimony related to the court’s new standard.

Okay. So what have we learned here?

We have learned that it’s not simply enough to negotiate a subcontractor REA or claim and then submit the payment to the government for reimbursement. Instead, prime contractors (or, potentially, higher-tier subcontractors) need to thoroughly review the basis for the subcontractor’s REA or claim, including requesting and reviewing actual costs incurred. In this case, according to the Courts, even though Kuwaiti’s subcontract was FFP, it included language requiring Kuwaiti to maintain books and records reflecting actual costs incurred—and thus KBR should have looked at those books and records before choosing a quantification strategy that ignored them.

Now this is not the first time we’ve written about subcontractor cost reasonableness. Far from it. For example, in 2012 we devoted a three-part article to subcontractor cost reasonableness. That article (link to first post) discussed yet another KBR legal decision that cost the company roughly $30 million in subcontractor payments.

Are you getting the picture that subcontractor cost reasonableness is a big deal? Because if so, then we’re doing our job here.

It’s important to show a contracting officer that you, as a prime contractor (or higher-tier subcontractor) approached evaluating and negotiating your subcontractors’ REAs and claims in a reasonable manner. The FAR defines “reasonableness” at 31.201-3. It’s not a “bright line” definition, because “what is reasonable depends upon a variety of considerations and circumstances ….” However, the concept of reasonableness generally is summed up as “A cost is reasonable if, in its nature and amount, it does not exceed that which would be incurred by a prudent person in the conduct of competitive business.” Thus, you have to show that your actions and course of dealing are those of a prudent businessperson. In this case, both the ASBCA and the Federal Circuit found that KBR’s actions and course of dealings did not meet that standard.

This concept is also important for contractors evaluating supplier and other subcontractor claims for COVID-19 related costs, such as CARES Act Section 3610 stand-by labor costs. In fact, there may be a good analogy between your subcontractor’s REA (or claim) for Section 3610 stand-by labor costs and the REA submitted by First Kuwaiti to KBR for the truck driver labor associated with delayed convoys. In the case of First Kuwaiti, the Courts expected KBR to thoroughly review First Kuwaiti’s books and records to evaluate whether the additional costs it was claiming were actually reflective of the costs it had incurred. If the analogy holds true, then we would expect prime contractors receiving Section 3610 REAs to make the subcontractors support those REAs with actual cost reports.

There are going to be subcontractors who either cannot or will not support their REAs. They may have inadequate accounting systems. Or they may assert that they will not provide cost information to a potential competitor. There are going to be challenges in reviewing subcontractor Section 3610 REAs under the standard established by the Federal Circuit in this recent KBR opinion. Prime contractors simply are going to have to overcome them.

As we’ve written before, we expect a number of Section 3610 REAs to become claims, which will ultimately be appealed. This Federal Circuit decision established the standard for how prime contractors’ handling of their subcontractors’ REAs will be judged.

You ignore it at your own peril.

Last Updated on Friday, 18 September 2020 11:08

GAO Asks Whether Agencies Need CARES Act Funding to Reimburse CARES Act Expenses

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If 2020 will be remembered for anything in the government contracting world, we bet it will be CARES Act Section 3610 reimbursements of contractor paid leave expenses. Actually, we should probably say 2021 not 2020, because that’s when we expect the majority of reimbursement requests to be submitted. Or maybe we should say 2022, because that’s when we expect the appeals of Contracting Officer Final Decisions denying reimbursement to be filed.

No matter. Let’s just say that CARES Act Section 3610 reimbursements are going to be a thing and we expect they will be a litigious thing. We’ve written quite a few blog articles about the topic already, and we expect to write a bunch more in the next couple of years.

Today’s article is about a recent Government Accountability Office (GAO) report (GAO-20-662) addressing “observations” on how Federal agencies have implemented CARES Act Section 3610. As one might expect, the GAO folks “observed” a mixed bag, with some agencies moving forward decisively and others (hi DOD!) moving forward via a different approach.

Importantly, the “intelligence community” implementation was not “observed,” because reasons.1 This is important because, as readers know, the intelligence community figured out Section 3610 early and gave clear implementation directions to contracting officers and contractors. Accordingly, the intelligence community was not “observed” because (we suspect) the story would have been positive. And GAO does not seem to have an appetite for reporting positive news to Congress.

The key observation in the GAO report is that “publicly reported obligations data may not capture full amount of paid leave reimbursements to date.” What this means is that, as of July 20, 2020, only three agencies (DOD, NASA, and DOE) had reported making any Section 3610 obligations—and the amount reported aggregated to a paltry $22 million on 39 contract actions. DOD accounted for $18.3 million (83%) of the total.

But GAO “observed” that the amounts reported in FPDS-NG were misleading. For example, “DOE reimbursed contractors for almost $550 million in paid leave costs—far more than its publicly reported new obligations for this purpose of $0.5 million.” The cause of this discrepancy was simple: DOE didn’t use earmarked CARES Act funding to make its contractor reimbursements. Instead, DOE used existing contract obligations and, therefore, “agency officials said they did not need to issue a contract modification to obligate additional funding and … these amounts would not be reported to FPDS-NG as section 3610 reimbursements.”

And that hits home on the crux of the issue. DOD (and other agencies) keep harping on the notion that Section 3610 reimbursements are limited by funds available to make them, but the intelligence community (and now, apparently, DOE) feel otherwise. They are going forward and making contractor paid leave reimbursements out of current contract funds, which is a bold strategy that, at the same time, undercuts the planned reporting methodology.

Even DOD reported challenges in the reporting area. GAO observed that DOD “agency officials identified certain data reported to FPDS-NG as section 3610 obligations that differed from the actual amount obligated for that purpose. For example, officials from DOD’s Defense Pricing and Contracting office told us they review such FPDS-NG records to check that they are accurately coded and request corrections where necessary.” According to these officials, “these reviews identified instances in which obligations reported in FPDS-NG as uses of section 3610 authority actually reflected a combination of section 3610 and non-section 3610 obligations, such as for general services or test operations.”

Importantly, there’s absolutely nothing wrong with the situation. Contracting officers are working to make contractors whole, to implement the spirit of the public law, and the results of those decisions are, well, the results.

The GAO observed a “reluctance” among some agencies’ officials “to use funding from other priorities—such as DOD’s modernization and readiness efforts—for section 3610 reimbursements.” But those reluctant officials may not have a choice.

Now, we are not attorneys and you would do well to ignore our layperson’s interpretation of judicial decisions, but we want to talk about a 2005 decision of the Supreme Court of the United States entitled Cherokee Nation of Oklahoma v. Leavitt. (Link to decision here.) One summary of the decision stated—

The Supreme Court … sustained breach actions by several Indian tribes against the Department of Interior, which had tried to avoid its contractual obligations by saying that it didn't have enough appropriated funds to meet all of its various responsibilities. In so doing, the Court reaffirmed the long-established rule for procurement contracts that, if Congress has not earmarked funds specifically for a program and ‘if the amount of an unrestricted appropriation is sufficient to fund the contract, the contractor is entitled to payment even if the agency has allocated the funds to another purpose or assumes other obligations that exhaust the funds,’ even if the contract has language such as ‘subject to the availability of funds.’

Consequently, it is our completely unreliable opinion that DOD and other agencies must pay contractors’ Section 3610 reimbursement requests, regardless of whether or not they have sufficient funding earmarked for that purpose.

Obviously, we’ll see how this goes. But if we were advising contractors on this topic, we’d be telling them to put forward the most accurate and complete reimbursement request that they could as soon as possible. Then be prepared to negotiate from a position of strength.

Fun times ahead!

1 Okay. GAO said they didn’t look at IC agencies because one Inspector General (out of 17 agencies) “is conducting a separate evaluation of the National Reconnaissance Office’s implementation of section 3610 authorized by the CARES Act and will share its scope and methodology across the Intelligence Community Inspector General community.” As we said, reasons. And not good reasons, in our view.

Last Updated on Thursday, 10 September 2020 17:05

The Unconscious Bias

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NCRNo, this is not going to be a political polemic, unless you choose to see it that way. No mention of political parties shall be made, nor shall there be made mention of any shades of the spectrum of political beliefs. However, we will discuss a noticeable bias—a prejudice if you will—against the West Coast.

There is no question that, in the rather arcane world that is government contracting, the center of gravity is Washington, D.C. The National Capital Region—i.e., the District of Columbia and surrounding environs—is home to hundreds of defense contractors, ranging from General Dynamics to Lockheed Martin to Northrop Grumman, and including lots and lots of smaller names. Even companies that aren’t headquartered in the area have large offices there. “The Washington Office” is a familiar phrase for many government contractors, evoking images of “government relations” experts and martini-fed power lunches with Congressional staffers.

The top-ranked government contracting law firms all have offices in the Region, as does nearly every top-ranked government contracts consulting firm. There’s a reason many of those firms are called “Beltway Bandits.”

You can’t throw a rock in Arlington or Tyson’s Corner without hitting somebody who is involved in some aspect of government contracting.

Why is that? Well, obviously it’s because that’s where the seat of the Federal government is. That’s where Congress is. That’s where most Cabinet-level agencies are found. That’s where the Pentagon is. The coalescence of government contracting power in the National Capital Region is extraordinary.

There is no question that Washington, D.C., and its surrounding counties is the center of gravity. However, those within that sphere of influence seem to forget there’s a whole country outside The Beltway. Whether they are aware of it or not, they are biased against those outside The Beltway—especially those of us on the West Coast.

Now, government contracting on the West Coast today is but a shadow of it once was. In the sixties and seventies, Los Angeles was the center of gravity for government contractors, home to corporate headquarters for Northrop, Lockheed, Hughes Aircraft, TRW, and others. The Los Angeles Air Force Base was huge. And it wasn’t just Los Angeles: before there was Silicon Valley there was the Lockheed Missiles and Space Company, located in Sunnyvale, CA. Aerojet was located in Sacramento. Down in San Diego, there was General Dynamics’ Convair Division (home of the Atlas-Centaur rocket) and Ryan Aeronautical (later Teledyne Ryan, and home of early unmanned aerial vehicles that subsequently evolved into the Global Hawk). Looking further north, Seattle was famously the home of The Boeing Aircraft Company.

Those were the days. But now most of the leadership has moved east. Hughes Aircraft was split up. TRW was acquired. Northrop and Lockheed moved to within spitting distance of the Pentagon. Even Boeing moved to Chicago. The addition of innovators such as SpaceX has not significantly reversed the trend. The West Coast just isn’t the same, with respect to government contracting.

But West Coast government contracting is not dead.

Headquarters may have moved, but the programs and the people who work them didn’t. Thousands and thousands of government contractor employees still work in Los Angeles and San Diego and Sunnyvale and Seattle. And with them are thousands of government employees, from contracting officers to program managers to auditors. It’s surely not the same, but it ain’t over either.

But you wouldn’t know that from the way certain organizations are acting.

Recently, I’ve participated–or tried to participate–in several association meetings and prominent training seminars. Many of them—perhaps most of them—act as if nobody from the West Coast will want to participate. Many have starting times that are ridiculously early for those who set their clocks on Pacific Time.

Let me provide you with some recent examples:

  • The recent American Conference Institute’s Advance Forum on DCAA & DCMA Costs, Pricing, Compliance and Audits started at 9 AM Eastern. As speaker, I had to be ready (and online) by NLT 5:30 AM Pacific Time.

  • The upcoming National Defense Industrial Association’s October Procurement Committee Meeting starts at 9 AM Eastern.

  • A recent all-day national educational seminar started at 7 AM Central.

And those are just a few examples of the curious phenomenon where people putting on those meetings and seminars seem completely unaware that anybody from the West Coast might want to participate.

In fairness, perhaps there just aren’t that many potential participants from the West Coast. It’s certainly possible that if the meeting time was moved, then it might not impact overall attendance. For example, starting at 11 AM Eastern instead of 9 AM Eastern might inconvenience some local members without noticeably attracting West Coast folks. That’s certainly a possibility.

Another possibility is that the times were set before COVID-19 made in-person participation unlikely. It may be that the times were set and it was too much trouble to change them just because the meeting or seminar went virtual. That’s certainly another possibility.

But we know this to be true. The most certain way of ensuring that the National Capital Region maintains its center of gravity, the most certain way of continuing to erode the government contracting expertise on the West Coast, is to continue to make it inconvenient to join in continuing professional education and networking opportunities that are seemingly taken for granted by those in Washington, D.C.

There is no longer any valid reason for starting at 9 AM Eastern, assuming there ever was. It’s time to make a change. (Pun intended.)

As we move towards a virtual training environment where people might conceivably log-in from anywhere, does it still make sense to maintain this biased attitude that believes nobody outside of The Beltway matters?

We think not.

Last Updated on Tuesday, 15 September 2020 17:05

Fraudulent REAs and Claims

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A claim against the US shall be forfeited to the US by any person who corruptly practices or attempts to practice fraud against the United States in the proof, statement, establishment, or allowance thereof. (28 U.S.C. § 2514.)

We’ve written about this special government defense before. See this article, which was a two-parter. In that article, we discussed Daewoo Engineering and Construction Co., Ltd. v. USA, a rather infamous case at the U.S. Court of Federal Claims. (Apparently, that is the only legal forum at which the US Government may assert that special defense.) We quoted many parts of the Court’s opinion regarding Daewoo’s claim; however, the following seems to sum it up nicely:

The Contract Disputes Act requires that an authorized corporate official certify that the contractor’s claims are ‘made in good faith.’ See 41 U.S.C. § 605(c)(1). ‘The supporting data must be accurate and complete to the best of [the official’s] knowledge and belief, [and] the amount requested [must] accurately reflect[] the contract adjustment for which the contractor believes the government is liable. . . .’ Id.

Congress provided that claims against the United States must be certified by an authorized corporate official, to ‘discourag[e] the submission of unwarranted contractor claims.’ … Plaintiff’s Project Manager, Mr. Kim, certified Daewoo’s claim. He testified repeatedly that the claim totaled $64 million. He expected the Government to pay the entire amount. …

Daewoo’s experts could have performed an important service by checking plaintiff’s books and records concerning operating costs and acquisition costs of equipment. They could have found the duplicated and scrapped equipment in the claim …. See United States v. TDC Mgmt Corp., 24 F.3d at 292, 298 (D.C. Cir. 1994) (‘[E]very party filing a claim before the contracting officer and this court has a duty to examine its records to determine what amounts the Government already has paid or whether payments are actually owed to subcontractors or vendors. . . . [A] failure to make a minimal examination of records constitutes deliberate ignorance or reckless disregard, and a contractor that deliberately ignored false information submitted as part of a claim is liable under the False Claims Act.’).

As we wrote at the time, Daewoo forfeited its claim because the Court found it to be fraudulent. The Judge noted that “The forfeiture counterclaim carries no monetary penalties other than the forfeiture itself.” However – and this is critical – the Government had other remedies available and Daewoo found itself facing (1) $50 million in civil penalties for filing a false claim under the Contract Disputes Act, and (2) one count of filing a false claim under the False Claims Act. So, not a great outcome for Daewoo. (The decision was affirmed on appeal.)

With all that in mind, let’s discuss a recent Department of Justice press release, in which it was announced that Islands Mechanical Contractor, Inc. (IMC) had agreed to pay the U.S. $1.1 million to settle allegations that IMC “improperly submitted claims for standby or delay costs associated with construction contracts at Naval Station Guantanamo Bay.”

According to the DoJ press release—

IMC agreed to construct a facility at Guantanamo Bay, but delays occurred. IMC submitted requests for equitable adjustment for additional stand-by and delay costs, but the United States alleges that IMC’s claims for equipment and labor costs were inflated and based on misrepresented, incomplete, and insufficient data

What was wrong with IMC’s REAs?

The Defense Contract Audit Agency (DCAA) determined that the claimed equipment was not needed for the relevant project, the actual age of the equipment did not match the claimed equipment age, and that the equipment was diverted to other projects instead of being placed on stand-by. Similarly, the DCAA found that the workers claimed to be on stand-by were reallocated to other projects, and the payroll records supporting their standby status were falsified.

The moral of the story here is that when one submits a Request for Equitable Adjustment or a claim to a contracting officer, the cost and other data underlying the REA/claim must be as accurate as possible. Treat the REA or claim as if it were a sole-source proposal; and, like most sole-source proposals, expect it to be thoroughly audited. If the audit turns up problems with the data, you should not expect your REA or claim to fare well with the contracting officer.

In extreme cases, you may find yourself negotiating a settlement and paying money when you expected the government to pay you money.

Last Updated on Monday, 31 August 2020 17:21

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Effective January 1, 2019, Nick Sanders has been named as Editor of two reference books published by LexisNexis. The first book is Matthew Bender’s Accounting for Government Contracts: The Federal Acquisition Regulation. The second book is Matthew Bender’s Accounting for Government Contracts: The Cost Accounting Standards. Nick replaces Darrell Oyer, who has edited those books for many years.