Fraudulent REAs and Claims
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.
Taking Partnership to the Next Level
From time to time we complain that the Federal government has, over the past two decades or so, moved away from a policy of “partnership” with its contractors, replacing it with a new policy of “arms-length” neutrality—or even (sometimes) treating contractors as adversaries. In this 2012 article we spent some time discussing the deteriorating relationship between Pentagon and its contractors. We predicted an increase in litigation as contractors disputed government policies and contracting officer decisions.
Now, with eight years of hindsight, it’s tough to tell if we were right or wrong. Certainly, there were some significant cases heard that resulted in contractor “wins.” (Thank you Raytheon, Lockheed Martin, and Sikorsky.) But was it a “tsunami” of litigation? It’s tough to tell—if only because some of the more egregious disputes were settled out of court without being heard on the merits.
Whether we were right or wrong eight years ago is left to the reader’s judgment. But we maintain that the issues we raised have persisted. We all know that contract outcomes are improved when customer and performer enter into a partnership; however, the Federal government (especially the DOD) seems (on the whole) reluctant to do so.
But sometimes – sometimes – a contracting officer and a contractor take the notion of partnership to the next level. Today, we will discuss a recent example of taking partnership to a problematic level. Our discussion comes courtesy of a recent Dept. of Justice press release. The press release announced the indictment of two individuals. An indictment is a formal charge; however, it is not a finding of guilt. All individuals are innocent until proven guilty in a court of law. Therefore, in what follows you must read “allegedly” into each statement.
Two individuals were arrested in July, 2020, and charged with conspiracy and theft of government funds. In addition, one of the individuals was charged with making false declarations before a grand jury.
One of those individuals (Bouchard) was a contracting officer in charge of the U.S. Army Natick Contracting Division. The other individual (Boyd) was an employee of a government contractor (Evolution Enterprise, Inc.) In that role, Boyd acted as Bouchard’s assistant.
“In 2014, Bouchard allegedly used his long-standing relationship with Evolution Enterprise, Inc. … to have Boyd hired for a “no show” job as an assistant that specifically supported Bouchard. Boyd’s position cost the Department of Defense more than $490,000 during her time at Evolution from 2014 to 2018, during which she performed little if any useful function.”
During that period –
Bouchard and Boyd took numerous government-funded trips, ranging in duration from two to 15 days, under the guise that they were work related. This included 31 trips to Orlando, Fla., among other locations such as Clearwater Beach, Fla., and Stafford, Va., during which Boyd performed little if any work. For many of the trips, Bouchard and Boyd stayed in the same hotel room and spent time at the pool and Disney parks – all during business hours. It is alleged that in order to conceal the personal nature of the trips, Bouchard altered and created false travel expenses for Boyd, which Bouchard approved to reimburse Boyd for out-of-pocket expenses.
The conspiracy charge provides a sentence of up to five years in prison and a fine of 250,000. Each charge of theft of government funds (and there were 10 charges) provides for a sentence of up to 10 years in prison and a fine of $250,000. The charge of lying to a grand jury provides a sentence of up to five years in prison and a fine of $250,000.
Partnership. It’s a good thing. But sometimes it can be taken too far, as these two individuals demonstrated.
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DCAA Addresses Lack of OFPP Action Through New Audit Guidance
Readers know that we often have issues with the dilatory performance of the Office of Federal Procurement Policy (OFPP). You’d think that a function focused on “procurement policy” might take its statutorily imposed duties seriously, but we think you’d be wrong if you did.
It’s fairly obvious that the OFPP doesn’t put priority on the areas that Congress says it should. Whether it’s moving the CAS Board agenda forward or fulfilling other duties and responsibilities imposed by public law, the OFPP is far behind where we think they should be.
Apparently, DCAA agrees with our opinion.
The Bipartisan Budget Act (BBA) of 2013 requires OFPP to publish an annual compensation ceiling amount, above which compensation (as calculated in accordance with FAR 31.205-6) is unallowable. (See 31.205-6(p)(4). We also discussed the situation in this article.) The key word being “annual” – the compensation ceiling is required by the BBA to be escalated annually, based on changes in the Employment Cost Index (ECI) for all workers as calculated by the Bureau of Labor Statistics (BLS). From the beginning, OFPP has been publishing the required ceiling only sporadically, on some arbitrary basis that defies logical analysis.
But even though OFPP is seemingly free to ignore the statute, contractors are still required to comply with the FAR cost principles. If they don’t comply with the requirements of FAR 31.205-6(p), they may be found by DCAA to have claimed unallowable compensation costs. Indeed, DCAA may assert that compensation amounts claimed in excess of (nonexistent) OFPP ceiling amounts are expressly unallowable—subjecting the contractor to assessment of penalties and interest.
It’s a gray area, to be sure. DCAA lists 31.205-6(p) as one of the cost principles that identifies expressly unallowable costs. (See MRD 19-PAC-002, dated May 14, 2019.) However, it’s unclear as to how anybody reasonably might determine the executive compensation ceiling, given the lack of OFPP publication. The ambiguity is further exacerbated because the DCAA Selected Areas of Cost Guidebook, Chapter 10 (Compensation for Personal Services) is “under construction” and has been in that state seemingly forever. Thus, we don’t really know what DCAA might make of a contractor who claims, through no fault of its own, compensation in excess of an unpublished ceiling.
All that being said—and as we’ve written before—smart contractors have been doing OFPP’s job themselves. They’ve been taking what info has been available, either from what OFPP has sporadically published or from the original BBA from seven years ago, and calculating their own executive compensation ceilings. They’re looking at the BLS employment cost index and calculating what the ceiling should be. They’re calculating the ceiling on their own because OFPP has failed to comply with the public law and they still need to make sure they don’t claim too much, lest they be subject to audit findings.
Smart contractors have been doing this on their own and, so far as we know, DCAA auditors have been accepting it. We have not heard of any auditor rejecting a contractor’s ceiling calculations, so long as the calculations comply with the BBA requirements. But it’s been an unofficial thing—at least until now.
On August 20, 2020, DCAA published MRD 20-PSP-004, entitled “Audit Alert on Update to the Bipartisan Budget Act of 2013 (BBA) Contractor Compensation Caps – Calendar Years (CY) 2019 and 2020.” The MRD started out by forthrightly admitting that OFFP has been derelict in its statutorily required duty to publish annually the executive compensation ceiling. In that regard, the MRD stated “OFPP is responsible for adjusting [the executive compensation] cap annually to reflect the change in the ECI for all workers as calculated by the BLS. [OFPP] has not published the CY 2019 and 2020 compensation cap amounts on its website.” (Emphasis in original.) The audit guidance then formalized what had up until then been an informal understanding between contractors and DCAA auditors. It stated—
… OFPP has published the formula for computing the cap amounts. This formula allows anyone to compute new cap amounts as soon as the Bureau of Labor Statistics (BLS) releases the applicable Employment Cost Index (ECI) table and prior to OFPP formally publishing the new cap amounts on its website.
It’s so simple anyone can do it!
Except, apparently, for the OFPP. It’s just too dang hard for those folks.
Helpfully, DCAA calculated the ceiling amounts that OFPP found too difficult to calculate, and published them in the MRD. They are as follows:
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Calendar Year 2019: $540,000
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Calendar Year 2020: $555,000
The MRD concludes with a notice that the DCAA Contract Audit Manual will not be updated until OFPP “formally publishes” the ceilings. Until then, this MRD serves as the only formal documentation regarding the values that DCAA auditors will accept from contractors.
DOD Publishes Updated CARES Section 3610 Guidance
It seems like a long time ago, but it was only March when President Trump signed into law the Coronavirus Aid, Relief, and Economic Security Act, also known as the CARES Act. Particularly relevant to government contractors was Section 3610, which threw “an immediate lifeline to qualifying firms whose workforce has been displaced by coronavirus COVID-19 shutdowns,” according to one legal summary. The statutory lifeline permits contracting officers to pay contractors to keep their workforces in a ready state by treating certain paid leave costs as allowable direct labor costs, even if the impacted contracts would not ordinarily permit direct reimbursement of those costs.
Since then, we have been reporting on issues and concerns and interesting tidbits associated Section 3610. Of special note has been the DOD’s struggles to figure out how to implement Congressional direction.
DOD has published several Class Deviations, FAQs, and other guidance intended to address the conundrum we discussed in this article—i.e., that “any [Section 3610] payments must come out of funds already appropriated for the contract’s SOW. In other words, the contracting officer has to decide which is more important: funding the work that was planned or funding the contractor employees’ stand-by time. It is fairly obvious that as the contractor employee’s stand-by time is funded, there is less money left to perform the work that was contracted-for.”
DOD keeps publishing its documents and we keep criticizing those documents, saying that they are either superfluous or else don’t address the real issues. This article will not be an exception.
Thus, when DOD published a new (undated) Class Deviation (No.2020-O0021) addressing Section 3610 contractor reimbursement requests, and when DOD revised a previous Class Deviation, and when DOD updated its FAQ, readers should not be surprised that we were unimpressed.
First, the new (undated) Class Deviation.
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Stated that the earliest date for reimbursable Section 3610 costs is March 27, 2020, despite earlier guidance that said the earliest date was the date of the National Emergency
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Stated that the final date for reimbursable Section 3610 costs is September 30, 2020
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Established three tracks for reimbursement:
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Abbreviated: individual contract reimbursement less than $2 million
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Multipurpose: individual contract reimbursement greater than $2 million, or multiple contract reimbursements aggregated into one request
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Global: business unit or business segment aggregation of all contracts
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Stated that prime contractors are responsible for analyzing and including all subcontractor claims for reimbursement in their prime contract Section 3610 reimbursement request
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Had additional requirements and certifications for the contractor seeking reimbursement to execute
Second, the revised Class Deviation.
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Revised the earliest date for reimbursement of Section 3610 costs to March 27, 2020, despite the language in the prior version of the Class Deviation
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Added a new paragraph to the DFARS cost principle associated with Section 3610 reimbursements (252.231-79). The new paragraph (b)(7) “clarifies” that “the allowable [Section 3610] amount is limited to the amount of funds specifically obligated on a separate line item that cites the purpose of the funds is for reimbursement under section 3610 of the CARES Act.”
Finally, the updated/revised FAQ. Basically, all changes conform the FAQs with the new and revised Class Deviations. That’s not to say that’s all there is – because there is more – but there is not much of interest to us.
Now, the criticism.
Let’s start with the new DFARS cost principle, 252.231-79. How, exactly, is that cost principle to be applied? Let’s be clear: any contract that was impacted by COVID-19 almost certainly was awarded before the National Emergency was declared. If that’s the case, then the contract was awarded with the cost principles in effect at that time—i.e., there was no 252.231-79 cost principle at the time the contract was awarded. The Allowable Cost and Payment clause requires that “The Government will make payments to the Contractor when requested as work progresses … in amounts determined to be allowable by the Contracting Officer in accordance with Federal Acquisition Regulation (FAR) subpart 31.2 in effect on the date of this contract and the terms of this contract.” (Emphasis added.)
In other words, that’s a nice shiny new DFARS cost principle, but it’s very likely that contractors with Section 3610 reimbursement payments will not have to comply with it.
The next issue we raise is with respect to the new cost principle paragraph (b)(7). It states “the allowable [Section 3610] amount is limited to the amount of funds specifically obligated on a separate line item that cites the purpose of the funds is for reimbursement under section 3610 of the CARES Act.” Now if that were a contract term, it might make some sense. As in “allowable Section 3610 amounts to be reimbursed under this contract are limited to …” Okay. That would be saying that the contractor can seek reimbursement only for the amounts funded. That would work.
But to put that in a cost principle seems to imply that the costs are unallowable unless they are funded. That simply does not work. We don’t use funding to determine cost allowability; at least, that’s not how any of the other cost principles work. A cost is allowable or it is not. Allowable costs may be reimbursed up to, but not in amounts exceeding, the funding provided. That’s how it works. The new language sets a standard not found in the FAR cost principles and, indeed, seems to conflict with the language of FAR 31.201-2 (Determining Allowability), which establishes five criteria for determining allowable costs. None of the five criteria mention funding.
And although the new cost principle was issued via Class Deviation (which permits an agency to conflict or be inconsistent with FAR cost principles), the new cost principle was not published in the Federal Register and no public comment was solicited. This appears to violate the requirements of FAR 1.301(b) and the requirements of 41 U.S.C. §1707. Since there was no finding that the public comment requirements needed to be waived because of urgent and compelling circumstances, some might argue that the cost principle is unenforceable.
So whether you say the cost principle was promulgated illegally and is therefore unenforceable, or that the cost principle cannot apply to contracts issued prior to its creation, the DOD would seem to have a problem on its hands.
Meanwhile, contractors—including defense contractors—are getting ready to start submitting their Section 3610 reimbursement requests.
We hope the DOD and its DCMA contracting officers are ready.
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