On April 13, 2010, the Department of Justice (DOJ) announced that Kevin Davis, of Springdale, Maryland, had pled guilty to three counts of accepting gratuities from a contractor during his deployment in Iraq.  Davis is a retired U.S. Army Colonel and former Contracting Officer’s Technical Representative (COTR).  The DOJ press release provided the following details—

Col. Davis served in 2004 as the senior member of the source selection board responsible for the award of a contract valued at nearly $12 million to build and operate several Department of Defense warehouses around Iraq. In the period during and after the solicitation of the warehouse contract, Davis accepted two airplane tickets and $50,000 in cash from the contractor who submitted the successful bid for the contract. Davis admitted that he accepted the airplane tickets and money with the understanding and belief that they were for or because of his assistance to the contractor who received the warehouse contract.

The DOJ press release reported that “Davis faces up to two years in prison and a fine of $250,000 per charged count. In addition, Davis agreed to pay $62,500 in restitution to the United States. A sentencing date has not yet been scheduled by the court.”  Clearly, this officer was no gentleman.  Moreover, as a COTR and member of a source selection board, he had received special, focused, training regarding procurement integrity.  We would have thought this man would have been much smarter than his actions make him out to be.

We have previously noted that fraud seems to be everywhere.  We’ve also noted that the press gives a lot of play to stories of alleged contractor fraud, but seemingly does not give similar play to stories of bribery and fraud on the part of government officials.  This website aims to present a more balanced approach, reporting bribery, fraud, and other similar wrongdoing in the public procurement process wherever it is found.  We report on these items so that government contractors can learn from them, and tighten controls and increase scrutiny into the actions of their employees, so as to prevent similar occurrences.

Much to our frustration, the message does not seem to be received.  Consequently, we expect many future stories of government/contractor corruption.

The Department of Justice reported on April 7, 2010 that Learning Tree International, Inc. had agreed to pay $4.5 million to settle allegations of violations of the False Claims Act.  Now as FCA settlements go, $4.5 million isn’t particularly large.  In September 2009, Pfizer paid the U.S. Government $1 billion as part of an FCA settlement.  In April 2009, Network Appliance (NetApp) paid $128 million as part of its FCA settlement.  (For those interested, the Top 100 FCA settlements are listed here.)  The point is, a settlement of $4.5 million indicates either a weak or a complex case.

But what interested us was the nature of Learning Tree’s alleged FCA violation.  According to the DOJ announcement, Learning Tree had a contract with the General Services Administration (GSA) to provide information technology training to Federal government employees.  Learning Tree sold its courses in multiple-course packages known as “vouchers” or “passports,” according to the DOJ.  Normally, one purchases a passport that entitles one to attend several courses over a period of time.  Obviously Learning Tree receives the passport price up-front and if one doesn’t use all the courses one has purchased before the expiration date, then too bad.

But according to the DOJ, the GSA negotiated different payment terms in order to “prevent the United States from paying for training services that are not actually rendered.” The contract reportedly required that Learning Tree invoice the Government only for courses that were actually taken—or, as the DOJ phrased it, “as services are provided.” Learning Tree was accused of “knowingly invoic[ing] federal agencies in advance for multi-course training packages before employees of the purchasing agencies had attended the full number of courses available under each.” In addition, the company allegedly retained the fees it had billed in advance after the passport period had expired and it had become clear that the federal employees would not be able to take the courses for which the Federal government had been billed.  It never offered its Federal customers a refund or credit for funds it had billed in advance, for services never provided—i.e., for money to which it was not contractually entitled.

We take away two lessons from this story.  The first lesson is that commercial business practices don’t often work well in the world of Federal government contracting.  What determines acceptable business practices is determined by the contract terms and conditions, not what makes “common sense.” In particular, contractors must clearly identify their Federal contracts and make sure their accounting and billing departments treat them differently than their other commercial contracts.  Billing terms and conditions must be communicated to the accounting and billing departments to avoid problems.  When all else fails, read the contract and do what it says.

The second lesson concerns failure to promptly disclose to one’s Federal customers that they are due a refund or credit.  This most commonly happens when final indirect cost rates are less than contractual billing rates on cost-plus and/or T&M contract types.  Many companies see no reason to let their customers know they’ve been overbilled, even though contract clause 52.216-7 (“Allowable Cost and Payment”) clearly states that they must do so.  This situation is also found when a company receives a year-end volume rebate or retroactive discount from a commercial vendor—and they do not record that transaction as a credit to the original debit (expense) they included as either a direct or indirect cost billed to the Federal government (in violation of the cost principle at FAR 31.201-5 (“Credits”).  In either situation, companies are holding on to funds that don’t belong to them—also known as receipt of “overpayments”.

The Federal government takes a dim view of contractors that don’t promptly notify customers of overpayments that they’ve received.  Learn the lesson from Learning Tree and don’t bill Federal customers in violation of contract terms, and promptly notify customers when overpayments are received.  Don’t be accused of violations of the False Claims Act.