More Procurement Fraud
After you’ve been in this business for a while, you learn that September is full of government spending, as each agency rushes to spend its precious budgetary dollars before the clock strikes midnight on September 30th and the budget vanishes, leaving perhaps only a single glass slipper behind. Each day in September, the DOD list of new contract awards grows longer, until early October, when it returns to the “normal” of new contract actions (except for those actions that didn’t make the cut-off for various bureaucratic reasons). It’s a normal, annual, phenomenon. You can count on it to happen every September.
This year we’ve noticed another interesting September phenomenon. It seems as if the number of procurement-related fraud press releases from the Department of Justice (and other enforcement agencies) has also spiked.
We could list each one that comes out, but that would be boring. Boring for you and boring for us. We only talk about the ones that have some aspect that catches our attention. But believe us, we could fill up many articles with hum-drum stories. For example, here are some September press release titles from DOJ and/or Department Labor:
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Pharmacist Pleads Guilty to Wire Fraud and Money Laundering
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Florida Contractor Pays $124,075 in Back Wages, Benefits After U.S. Department of Labor Finds Violations on Federal Construction Contract
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Louisiana Company Pleads Guilty to Conspiracy to Defraud the Government and Violate the Procurement Integrity Act
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Asphalt Contractor To Pay $4.25 Million To Settle Claims That It Misled The Government As To The Materials Used To Pave Road
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Quantadyn Corporation And Owner Settle False Claims Act Allegations of Bribery To Obtain Government Contracts For Simulators
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Former Business Executive Sentenced to Prison for $4 Million Bribery Scheme Involving DoD Contracts for Wounded Military Veterans
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Two Individuals Charged with Bribery Related to Iraq Contracts
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U.S. Department of Labor and Microsoft Corp. Enter Agreement to Resolve Alleged Hiring Discrimination Affecting 1,229 Applicants in Four States
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U.S. Department of Labor Reaches Agreement with Texas Electronics Company to Resolve Alleged Hiring Discrimination
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Operations Manager Indicted in Scheme to Sell Counterfeit Clothing to the U.S. Military
(That final headline was dated October 2, so maybe not all in September. But you see our point, right?)
We could probably write an article on just about any of the headlines in the above list. But instead, we are going to focus on another story that we didn’t list. It has the headline: “Wisconsin-Based Nonprofit To Pay $1.9 Million To Settle Allegations Of False Claims And Kickbacks On Federal Contracts For Blind Workers,” and you can find it here.
Now, it’s been a while, but we used to provide support to AbilityOne contractors. In fact, the very first client of Apogee Consulting, Inc. was an AbilityOne contractor. For a couple of years, we even traveled to Washington, D.C. in order to teach a class on audit support to AbilityOne contractors. It would be fair to say that, without the AbilityOne program, neither the consulting firm Apogee Consulting, Inc., nor this blog would exist. Thus, when we saw the headline, it piqued our interest and we wanted to know more.
What we learned is that “Industries for the Blind and Visually Impaired Inc. (IBI) has agreed to pay the United States $1,938,684.09 to resolve allegations that IBI violated the False Claims Act and the Anti-Kickback Act in connection with certain federal contracts set aside to employ blind workers.” Let’s be clear right up front: $1.9 million is a huge settlement payment for a not-for-profit entity to make.
IBI received contracts set-aside for AbilityOne contractors. Those contracts are not competed and prices are determined by a Washington, D.C.-based review board. This is not special treatment just for IBI; in fact, that is how the AbilityOne Program works. In return for receipt of specially designated set-aside contracts, AbilityOne contractors agree to give jobs to individuals with severe disabilities. (In this case, IBI dealt with people who were legally blind or had other visual impairments.) The purpose of the AbilityOne program is to give meaningful work to those individuals who would otherwise not be employable or would have significant challenges to finding work. It’s a great thing!
But in this case, apparently IBI made some mistakes.
According to the DOJ announcement, for nine years (between 2009 and 2018) IBI represented that its workforce would be 3:1 visually impaired to non-visually impaired personnel. It was awarded contracts on that basis. However, it was alleged that “IBI improperly subcontracted a set-aside contract for screen-printed clothing to an entity that did not generally use blind labor.” Not only that, but it was alleged that “furniture designers and sales representatives working for IBI took impermissible payments and gifts from manufacturers on certain contracts.”
If we understand the situation correctly, the original qui tam relator (whistleblower) alleged that IBI did not maintain the required 3:1 personnel ratio; but when the government investigated the allegations, the FBI found the “impermissible payments and gifts,” which were not part of the original allegations. (Let’s mix a metaphor, just for fun.) It was at that point that the situation went pear-shaped and snowballed into a very expensive legal settlement.
In fairness, it is tough to maintain a 3:1 ratio when multiple contracts are being performed. We get that! But we are betting IBI wishes it had deployed better internal controls designed to detect or prevent wrong-doing by its furniture designers and sales representatives.
New CASB Staff Discussion Paper Asks Questions for Future Actions
In a shocking display of activity, the CAS Board recently published a new Staff Discussion Paper (SDP) addressing possible revisions to Standards 404 and 411. As has been the recent trend, CASB published the news on the Federal Register but forgot to actually, you know, publish the SDP. But a link to the SDP was included! The link took one to the OMB site on whitehouse.gov, where it turned out the SDP hadn’t actually been uploaded yet.
Yes, you read that correctly. The Federal Register notice contained a link that took you nowhere.
Nice.
But a couple of days later, the SDP appeared. Yay!
Now you might think a complaint about a couple of days of missing SDP is just nitpickery. But remember, there is only a 60-day comment period available. Even a loss of two or three days can be enough to impact the public’s ability to comment. Therefore, in our view it’s not nitpickery; it’s a legitimate complaint that the CASB’s decision to publish the SDP outside of the Federal Register is a decision to undermine the public’s right to provide comment. This is especially important when the entire purpose of the SDP is to solicit public input.
Indeed, after literally six months of no apparent CASB activity, the SDP promised by the previous (March 13, 2020) SDP finally showed up. Just in time for the CASB to claim credit for doing something in GFY 2020.
But the new SDP actually doesn’t do anything. It just asks questions about Cost Accounting Standards 404 and 411. The questions are seemingly intended to provide input to the CAS Board about whether GAAP is sufficient (standing alone) to protect the government’s contractor cost accounting interests, or whether the rigors of CAS are necessary. Remember, Congress already directed CASB to conform GAAP with CAS—it’s a public law requirement—but apparently the CASB wants to be really sure that Congress actually meant what it put into the law.
In fairness, the SDP is a required step in the CASB rule-making process. You know, the one required by yet another public law. Apparently, CASB is very focused on complying with that particular public law, even as it delays complying with the more current one.
This second SDP asks questions. If you are a CAS-covered contractor, or think you may become one someday, you should read the questions and respond. Your input is being solicited.
Be advised, however, that if recent history is any predictor of future history, it will be a long time before CASB actually does anything with your input. You need to know that going in. CASB rule-making is moving at the speed of molasses. Molasses being poured at the North Pole.
One reason the Board may be moving so slowly is that the industry representative has been missing in action since Ms. Schmidgall (Boeing) departed after expiration of her term. From what we’ve been able to gather, there has been absolutely no forward progress made in choosing her replacement. Again, this seems to be the new normal for the CAS Board. Indeed, many observers credit Ms. Schmidgall for most of the recent CASB activity; it’s of little surprise to see CASB stalled after her departure.
Anyway, CAS 404 and 411 Staff Discussion Paper. Asking questions. Which may lead to another SDP or perhaps to an Advance Notice of Rule-Making (ANPRM). Or not.
Depends on whether CASB feels like doing anything next year.
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DFARS Regulatory Revisions
Recently I took an opportunity to criticize the do-very-little CAS Board for doing so very little to implement Congressional direction (issued via public law) to do something. The CAS Board, of course, is not the only regulatory rule-making body to suffer from inertia, though it is a very prominent one.
In the September, 2020, issue of The Nash & Cibinic Report, George Washington School of Law Professor Emeritus, and the man credited for founding the academic discipline of government contracts law (along with the late John Cibinic), felt compelled to write about the current rule-making environment in comparison to the one under the pre-FAR/DFARS Armed Services Procurement Regulation (ASPR) system. Professor Nash wrote—
The members of the ASPR Committee were senior officials in their services—reflecting the idea that procurement regulations deserved the attention of highly competent and experienced people. Devoting significant amounts of such people’s time to the process yielded a far better regulation than the Federal Acquisition Regulation.
It is sad to compare the current system to that one. Today regulations wend their way through the process at a snail’s pace with many of them having to undergo significant alterations after the comments on a proposed regulation are received. Some linger in the system for years before they are abandoned (like the rewrite to the organizational conflict of interest regulation in FAR Subpart 9.5). In this part of the Government procurement process we have regressed rather than improved.
So look, it’s not just Apogee Consulting, Inc. It’s pretty much everybody, from consultants to contracting officers to the most esteemed legal minds. We are all saying that the system is broken, and one of the main areas in which it’s broken is in the regulatory rule-making process.
Nonetheless, from time to time some rule-making does escape from the clutches of the bureaucrats and gets issued. Sometimes we get CASB Staff Discussion Papers; other times we get FAR or DFARS proposed rules. Infrequently, we get final rules. (Often months if not years after the underlying statutes were revised.)
Recently, the Defense Federal Regulation Supplement (DFARS) were revised by issuance of seven final rules and one proposed rule. Among the seven final rules, two of them eliminated something. The remaining five rules implemented something.
We’re not going to discuss all five. But here are a couple of important ones for your information.
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DFARS Case 2019-D041 (Assessing Contractor Implementation of Cybersecurity Requirements) was issued as an interim rule. This means that the rule goes into effect without the benefit of public comments; however, the public may submit comments and the interim rule may be altered as a result. (See Professor Nash’s thoughts on that aspect of the rule-making process in his quote above.) The interim rule implements the new Cyber-Security Maturity Model Certification (CMMC) and assessment approach. As most defense contractors know by now, DOD is going to be looking for CMMC assessments and certifications. This is not new news; however, the interesting aspect is that the clauses are being implemented in solicitations and contracts before the CMMC Accreditation Board knows how it is going to assess contractors.
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DFARS Case 2019-D036 (Inflation Adjustment of Acquisition-Related Thresholds) was implemented as a final rule. As the title indicates, certain thresholds were increased to account for inflation. Follow the link if you want to know which ones were increased.
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DFARS Case 2019-D029 (Treatment of Certain Items as Commercial Items) was issued as a final rule. The final rule implements several public law revisions from the 2017 National Defense Authorization Act (NDAA). The 2017 NDAA was signed into law in December, 2016. Yes, that was four years ago. (Talk about a “snail’s pace”….) Anyway, this one is important because it (a) permits certain items valued at less than $10,000 to be treated as commercial items if purchased to inventory destined for multiple contracts, and (b) permits both goods and services acquired from non-traditional defense contractors (as that term is defined in DFARS) to be treated as commercial items. There is also something in the background that says “provide that a contract for an item using FAR part 12 procedures shall serve as a prior commercial item determination, unless the appropriate official determines in writing that the use of such procedures was improper or that it is no longer appropriate to acquire the item using commercial item acquisition procedures” but we could not see where the DFARS was revised to implement that Congressional direction, so we’re not claiming that’s what the DFARS now says.
As does Professor Nash, we lament the current Federal acquisition rule-making system; however, when some change does slip out, we try to bring it to our readers’ attention. So here you go.
Too Much Time on Their Hands
We had hardly finished typing the last article on timekeeping “challenges” and associated legal settlements when we learned that our old friend, the Department of Energy’s Hanford Site, had generated yet another legal settlement. The DoJ press release reported that—
Bechtel National Inc., Bechtel Corporation (Bechtel), AECOM Energy & Construction, Inc. (AECOM), and their subsidiary Waste Treatment Completion Company, LLC (WTCC), agreed to pay $57,750,000 to the U.S. Department of Justice (DOJ) to resolve claims that Bechtel and AECOM fraudulently overcharged the U.S. Department of Energy (DOE) in connection with its operation of the Hanford Waste Treatment Plant (WTP) project.
Yep, that was a nearly $58 million settlement.
The latest settlement is in addition to a 2016 settlement of $125 million, in which the DoJ reported—
Bechtel National Inc., Bechtel Corp., URS Corp. (predecessor in interest to AECOM Global II LLC) and URS Energy and Construction Inc. (now known as AECOM Energy and Construction Inc.) have agreed to pay $125 million to resolve allegations under the False Claims Act that they made false statements and claims to the Department of Energy (DOE) by charging DOE for deficient nuclear quality materials, services, and testing that was provided at the Waste Treatment Plant (WTP) at DOE’s Hanford Site near Richland, Washington. The settlement also resolves allegations that Bechtel National Inc. and Bechtel Corp. improperly used federal contract funds to pay for a comprehensive, multi-year lobbying campaign of Congress and other federal officials for continued funding at the WTP.
So $58 + $125 = $183 million in WTP-related legal settlements, and that figure excludes such additional costs as unallowable legal fees and the time and expense of internal resources being focused on non-value-added activities such as defending themselves. That’s obviously a lot of money, and where does it come from? It comes from the corporate shareholders, of course. And at the same time, the Bechtel team received $5 million in award fees associated with its 2019 performance—“the best performance evaluation in three years,” according to this news article. We suspect that big award fee payout didn't make up for the costs of the legal challenges.
Anyway, back to the current settlement. This one is a bit harder to understand; it’s not black and white as most timekeeping “challenges” are. In this case, the government alleged that “Bechtel and AECOM management were aware of and failed to prevent inflated labor hours being charged to DOE, and for falsely billing DOE for work not actually performed.” But when you dig a bit deeper, those “inflated labor hours” and the “work not actually performed” were related to craft employees’ “idle time.”
Idle time is time spent not working. Often, it’s for legitimate reasons, such as waiting for paint to dry or for a weld to cure. Maybe somebody is waiting for an inspector to show up before moving on to the next operation. Most construction contractors (including shipbuilders) have some amount of idle time. It’s a known and accepted thing. Obviously, from a schedule management perspective it should be minimized, but there is really no way to get it to zero.
In this case, the government alleged that—
Between 2009 and 2019, Bechtel and AECOM admitted to overcharging DOE for unreasonable and unallowable idle time experienced by craft personnel. Bechtel and AECOM further admitted to failing to schedule and carry out adequate work to keep craft personnel sufficiently occupied and productive, resulting in excessive idle time. Bechtel and AECOM also admitted that Bechtel and AECOM management knew that craft personnel were experiencing idle time due to management’s failure to assign sufficient work, and that this idle time could, at times, last ‘several hours.’ Finally, Bechtel and AECOM admitted that they improperly billed DOE labor costs for the unreasonable idle time and continued doing so for years, even after Bechtel and AECOM knew they were under investigation for the improper billing practices.
Based on the foregoing, we can see that the basis of the allegations was that the cost of idle time was “unreasonable.” Costs that are unreasonable are unallowable. The concept of “reasonableness” is discussed in the FAR at 31.201-3. It’s a bit long-winded and nuanced; but it has to be, because it’s inherently a subjective standard. Despite the subjective nature of the evaluation, the FAR states that “no presumption of reasonableness shall be attached to the incurrence of costs by a contractor. If an initial review of the facts results in a challenge of a specific cost by the contracting officer or the contracting officer’s representative, the burden of proof shall be upon the contractor to establish that such cost is reasonable.”
Thus, when challenged, the burden was on the Bechtel team to show why the incurrence (and amount) of idle time was reasonable and normal for the type of project. Apparently, the Bechtel team couldn’t make a case for the idle time or else couldn’t show that they were actively trying to minimize it. Because the team couldn’t meet their burden of proof, the “unreasonable” idle time costs became unallowable labor costs, and the team was then on the hook for having invoiced unallowable costs to DOE, which led to the allegations that the False Claims Act was violated.
A critical point was that (allegedly) the Bechtel WTP team was on notice that the DOE considered the idle time costs to be unreasonable and unallowable, but kept billing the idle time anyway. The DoJ announcement quoted the DOE Inspector General as saying “[the Bechtel team] engaged in a massive scheme to submit tens of millions of dollars of false claims to the U.S. Government for unallowable and unjustified costs over a period of years – a pattern of conduct that continued even after U.S. authorities notified the defendants that these costs were unallowable.” There is a way to continue to claim disputed costs but, apparently, the Bechtel team didn’t follow it. (See FAR 31.201-6(b).)
In addition to the $58 million settlement, the DoJ reported that—
Bechtel and AECOM also entered into a 3-year independent corporate monitor agreement, which requires Bechtel and AECOM to pay for a full-time independent monitor and assistant monitor selected by the USAO. These monitors will enjoy broad access to Bechtel’s and AECOM’s systems, meetings, personnel, and other information pertaining to labor charging. The monitors will also report directly to the United States. Bechtel and AECOM face additional liquidated damages of up to $10 million if they violate the terms of the monitoring agreement, provide false information, or fail to immediately correct any identified DOE contract issues.
As with many False Claims Act settlements, this one started with qui tam relators filing suit on behalf of the U.S. Government. In this particular matter, the four relators will split $13,750,000—which is about 23 percent of the total amount of the Bechtel team’s settlement.
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