Bradken, Inc. Makes Public Statement Regarding Its Testing Fraud
It’s long been a tenet of this site that the reason to discuss the compliance failures of various government contractors is to learn what went wrong so as to aid in preventing similar problems at your company. There is a maxim that’s been attributed to many authors (most commonly Otto von Bismarck): “Only a fool learns from his own mistakes. The wise man learns from the mistakes of others.” An old Forbes article stated it this way (without attribution)—"In Russian there is an expression: The wise man learns from someone else’s mistakes, the smart man learns from his own, and the stupid one never learns.”
We post this article so that others can learn from the mistakes of Bradken, Inc.
We wrote about Bradken in a very recent article, in which we discussed the company’s resolution of a 30 year-long fraud (allegedly) perpetrated by a senior quality testing employee. (As noted in the original article, we use the term “allegedly” because, while the company has apparently resolved the civil and criminal complaints it was facing, as far as we know the (now former) employee still faces charges—and people are innocent until proven guilty in a court of law.)
Before you read any further, we suggest you follow the link in the paragraph above and familiarize youself with the story of the fraud and how Bradken resolved its legal woes. In that article, you’ll find additional links to Bradken’s civil False Claims Act settlement agreement and its criminal fraud deferred prosecution agreement. Those latter two documents are well worth reading.
Anyway, Bradken apparently resolved its legal problems; a part of the resolution was to publish a public statement regarding what happened and what Bradken learned from its problems, so that others could learn from Bradken’s mistakes. Here’s a link to that public statement. We strongly recommend you read it in full and even consider saving it for future reference.
Here are some quotes from Bradken’s public statement that caught our eye. We have italicized certain words for emphasis and removed some words for length (as indicated by use of ellipses), but otherwise have changed nothing.
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The impact of these startling admissions from a trusted employee would reverberate for years to come. Three years later, and after a process that encompassed a massive internal review, a full-blown Government investigation, and thousands of hours of time from employees and consultants, Bradken has come to understand that, between 1985 and 2017, the employee falsified hundreds of test results, resulting in the installation of substandard steel on numerous Navy submarines.
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Bradken failed to detect the senior metallurgist’s falsified test results for years because it lacked sufficient internal controls, and instead relied too heavily on the integrity of a single employee. For example, test results were typically handwritten on notecards and later entered into multiple databases. The senior metallurgist generally maintained the accurate results in one database, and recorded fraudulent, passing, results in a second database, which the senior metallurgist used in Bradken’s certifications to the customer. If these activities had been subject to oversight, or if Bradken had engaged in periodic internal audits of the various recordkeeping systems, it would have discovered the fraud many years earlier.
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Following its initial disclosures, Bradken commenced a records review to ferret out other instances of potentially discrepant test results. Bradken undertook a review of test result records covering the prior ten-year period and reported all data discrepancies it discovered. … unfortunately, Bradken’s review did not identify … all of the falsifications. Those falsifications were discovered only when the Government reinitiated and expanded its own investigation, analyzing records going back to the 1980s. The Government’s investigation detected many more instances of fraudulent alterations by the senior metallurgist that Bradken had previously failed to identify through its limited review. The government also discovered patterns in Bradken’s internal data … that demonstrated that the discrepancies were the result of deliberate fraud. Over the last 18 months, Bradken has cooperated with the Government’s investigation, making employee witnesses available for interviews, producing hundreds of thousands of pages of documents, responding to all requests for information, and hosting site visits and equipment demonstrations for Government investigators. … But Bradken has learned that true cooperation means more than just responding to requests as they are received. It also means independently seeking evidence of wrongdoing within the company, rather than making the Government find it for you. In other words, true cooperation means not just being reactive, but being proactive.
This is one of those situations where everybody in the compliance profession can learn something from the mistakes of others. This could have happened to any company who chose not to invest in internal control systems because risk analysis failed to properly evaluate risk, probability, and consequence. We cannot let our companies “pooh-pooh” compliance risks and therefore put themselves into a similar situation.
Only fools will fail to learn from Bradken’s mistakes.
Don’t let your company be foolish.
Employee Qualifications, Take Two
Less than a year ago we wrote an article discussing employee qualifications in which we asserted that, in T&M and cost-type contracts, only labor that meets qualification criteria is reimbursable labor. In other words, if you submit an invoice for labor that does not meet contractual qualifications, you should not expect to receive reimbursement for that labor.
In addition, your attempt to receive reimbursement for contractually unqualified labor may subject you and/or your company to allegations that you violated the False Claims Act. If that happens, the costs of supporting the government’s investigation and the costs of defending in the resulting litigation likely are going to dwarf the original labor costs you tried to bill.
It’s not all negative, though. In that 2019 article, we tried to point out that focusing compliance resources on employee qualifications not only reduced FCA exposure, but also led to possible revenue and/or project margin upsides. We noted that a focus on employee qualifications would possibly create opportunities to move employees to a higher hourly labor rate category during contract performance if they met the criteria for the higher billing rates through gaining more years of experience, obtaining a degree, and the like. In our view, there was, and is, a strong argument for looking hard at employee qualifications during both the proposal and execution phases of the contract.
Flash forward to July, 2020, where iNovex Information Systems, Incorporated (iNovex), located in Annapolis, Maryland, is having a bad year. True—we are all having a bad year. But iNovex’s year included paying the United States government $962,747.42 “to resolve federal False Claims Act allegations that iNovex knowingly billed the National Security Agency (“NSA”) … for work performed by certain iNovex employees who did not meet all of the specialized qualifications required under their contract with NSA.”
The DoJ press release stated—
In March 2012, iNovex was awarded an NSA contract. Given the complexity of the work that was to be performed under the contract, the NSA specifically included as a term of the contract the requirement that iNovex provide personnel possessing the training, qualifications, and clearances to accomplish all tasks identified in the contract. To assure that iNovex understood the skills its employees were required to have to perform the services under the contract, NSA included an appendix to the contract that expressly referenced and attached a set of labor categories prescribing the experience, educational qualifications, and specialized certifications needed for the classes of personnel billed under the corresponding labor category, including the hourly rate that would be paid by the NSA.
According to the civil settlement agreement, the settlement resolves the allegation that between November 9, 2012 and April 14, 2016, iNovex knowingly billed the NSA, and the NSA paid, for work performed by iNovex employees who were identified by iNovex, on the invoices it presented to the NSA, as System Administrator-IV (“SA-IV”) and System Administrator-III (“SA-III”) positions, despite the fact that those employees did not timely obtain a specific certification required for payment of the rates corresponding to those two labor categories.
Thus, failure of certain contractor employees to hold a specific certification, which was called-out in the contract as a necessary qualification for two labor categories, led to allegations that iNovex violated the False Claims Act. Although the settlement amount was relatively small as these things go, we’re sure the company spent far more in attorney fees—all of which would be unallowable pursuant to the cost principle at FAR 31.205-47.
So that’s not the best 2020 iNovex could have had.
Before we move on, let’s note that we visited the iNovex website to see what the company had to say for itself. This is what we found:
We did not notice anything about behave in an ethical fashion, act with integrity, or comply with contract terms.
Just sayin’.
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Small Business Reporting Concerns
From time to time we discuss small business reporting issues. Also known as socioeconomic reporting, the requirements are implemented by FAR Part 19 and associated contract clauses, as well as by agency supplemental clauses. In many cases the contract language prescribes rules for how to calculate subcontract award percentages for the various socioeconomic strata the Federal government wants to see reported.
In general, the rules of what to report and how to calculate the metrics for reporting are complex and nuanced. The whole situation is counter-intuitive and the more cynical amongst us may be tempted to call it just a game. Nonetheless, it’s real and it’s important. Prime contractors willing to commit to tough socioeconomic subcontract award goals often receive a competitive advantage.
We recall one article we posted here three years ago, about a shipbuilder who lost more than $1 million in award/incentive fees because it made math errors in its socioeconomic reporting calculations and, when corrected, its true small business subcontract award percentages were below the contractually required levels. Oops!
In that same article, we wrote—
… small business plans need to be more than paper. … In order to successfully implement your plan, it needs to be ‘owned’ by somebody in your organization with authority to make it happen, and there needs to be policies and procedures that describe how it will work. Those policies and procedures must be cross-functional, in that everybody who makes a decision regarding which entities receive work must be aware of the overall organizational commitments.
Too often we have seen ‘paper’ plans with no ownership, with no accountability or responsibility or authority, and with little or no policies and procedures that describe their workings. When we encounter such situations, we can say, with a high degree of confidence, that those plans will never be successful.
We were reminded of that old article and our commentary when we read a recent Department of Energy Office of Inspector General report about errors in small business reporting by two Hanford site contractors, Mission Support Alliance, LLC (MSA) and CH2M HILL Plateau Remediation Company (CHPRC). In case you care, MSA is made up of Leidos and Centerra Group, plus ancillary team members, whereas CHPRC is a subsidiary of Jacobs (formerly Jacobs Engineering Group), who acquired CH2M at the end of 2017.
The DOE OIG looked at both MSA’s and CHPRC’s socioeconomic reporting, and did not like what it saw. We gave you a link in the paragraph above, but let’s summarize the findings.
Looking first at MSA, it seems that its prime contract defined both “self-performed” and “subcontracted” work. According to the IG, the contract limited the amount of work that MSA could self-perform to 60% of total contract value, and required MSA to subcontract at least 25% of total contract value. The IG found that, although MSA reported meeting those requirements, its calculations had errors; and when those errors were corrected, it did not it fact meet those requirements—"resulting in a potential breach of contract.”
As with many IG reports we see, there is a mix of facts and judgment that underlie the reported findings. Factually, MSA inaccurately excluded $574 million in large business subcontractor team members’ costs from its self-performed work scope calculations. Judgmentally, the IG did not give MSA credit for subcontracting $333 million to small businesses through a subsidiary because “we were not able to verify the amount of work scope subcontracted by the subsidiary.” While auditors must of course be professionally skeptical of assertions, we are not aware of any requirement that MSA obtain, retain, or provide verification of socioeconomic statistics reported by an affiliated entity.
Another area of judgment concerned $5 million in subcontract awards to a small business that became a large business during contract performance. Although the DOD OIG report provided no details – and it’s certainly possible that either the DEARS or the contract specified how this situation should be handled – normally the situation is governed by 13 CFR § 121.404. That section does not require a change in the socioeconomic business size unless the subcontractor recertifies, as it must in certain situations. Thus, we are left wondering whether the subcontractor was required to recertify and MSA failed to obtain the new certification, or if MSA obtained the new certification and failed to use it properly, or if MSA properly reported the stratum of the subcontractor because no recertification was required.
Finally, we need to talk about MSA’s small business subcontractors used to manage incumbent employees. The IG noted that—
MSA and CHPRC inherited responsibility for certain employees of the previous contractor and had to offer them first right of refusal to employment. These employees, referred to as incumbent employees, were eligible to continue participation in the Hanford Site Pension Plan and accrue Benefit Service, as defined in the Hanford Site Pension Plan. To provide employment for certain incumbent employees, MSA and CHPRC arranged employment through its subcontractors, many of which were small business entities.
The DOE IG refused to agree that MSA should receive $233 million of small businesses award credit when reporting awards to incumbent employee management subcontractors. This is another area of judgment that affected the audit report. The basis for the IG’s conclusion was that there was an employer-employee relationship between MSA and the employees, notwithstanding the fact that there was a subcontractor in the middle. The IG report stated that—
… MSA:
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Provided the employees;
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Assigned and supervised the work to be performed;
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Directed when, where, and how work was performed;
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Controlled training and development;
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Provided workers with necessary tools, equipment, and work facilities;
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Provided administrative support functions (i.e., payroll, human resources, etc.); and
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Controlled employee termination authority.
In contrast, the small business entities did not provide employer functions for the incumbent employees, as expected.
In other words, those small businesses didn’t seem to add any real value to the management of the incumbent employees, in the judgment of the DOD OIG auditors.
Importantly, MSA’s (and CHPRC’s) alleged use of “shell” subcontracts (our term, not the auditors') also led to allegations of unallocable contract costs. The audit report stated—
… the subcontractors with incumbent employees charged MSA for employer administrative functions, despite no apparent corresponding benefit. It appeared that MSA already provided most employer administrative functions but still charged the Department of Energy for the associated costs. When we asked MSA officials for justification to support the incumbent employee subcontractors charging indirect costs for employer administrative functions, they could not provide specific details of the subcontractors providing employer functions. Due to the scope of our audit, we did not determine an exact dollar amount of potentially unallowable costs. It is MSA’s responsibility to review these subcontractor indirect costs for allocability and the Contracting Officer’s responsibility to determine the extent to which they are unallowable. These indirect costs could be up to an estimated $31.6 million.
We’ve spent a lot of time on MSA’s issues. What about CHPRC? As with MSA, the DOE IG asserted that CHPRC excluded a large business subcontractor team member from its self-performed work scope. In addition, CHPRC has the same issues as MSA does with respect to subcontractors that managed its incumbent employees. However, the DOE OIG concluded that “when we adjusted CHPRC’s reported figures, it appeared that CHPRC may still be able to meet its self-performance and small business subcontracting contractual requirements, as of September 2018.” Thus, CHPRC’s issues do not seem as serious as the ones that MSA is facing.
Let’s conclude this by looking at causality. The DOE OIG audit report stated—
The issues we identified in this report occurred, in part, because of weaknesses in MSA’s and CHPRC’s prime contract oversight. Specifically:
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MSA did not have formal procedures for reviewing and validating its own small business subcontracting reports.
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MSA and CHPRC did not adequately evaluate the appropriateness of incumbent employee subcontract arrangements.
MSA lacked formal procedures for reviewing and validating its small business subcontracting reports, which included self-performance figures, prior to submission to the Richland Operations Office. According to MSA, not including team member costs as self-performed work scope was an inadvertent mistake because the MSA personnel involved did not appreciate that the self-performed work limitation in its contract applied to subcontract costs awarded to large business subcontractor team members. If MSA had detailed procedures for reviewing and validating small business subcontracting reports, MSA likely would have identified these discrepancies on its own.
Now go back and read the quote from one of our previous articles on small business reporting. The one where we asserted that “there needs to be policies and procedures that describe how it will work.” Yeah. That.
As noted, there is a mix of both factual and judgmental findings in the DOE Office of Inspector General audit report. One might reasonably take issue with some of the more judgmental aspects of the report; however, it seems inescapable that a prime contractor must have robust policies and procedures, to include appropriate internal controls, on its socioeconomic reporting. This is especially true where there is contract language that makes certain metrics that are otherwise just goals into mandatory requirements.
OMB Opines on Section 3610
Governor Ritchie: Now, he's going to throw a big word at you: ‘unfunded mandate.’ If Washington lets the states do it, it's an unfunded mandate. But what he doesn't like is the federal government losing power. But I call it the ingenuity of the American people.
President Bartlet: Well, first of all, let’s clear up a couple of things. ‘Unfunded mandate’ is two words, not one big word.
An unfunded mandate is a statute or regulation that requires an entity to perform certain actions, with no money provided for fulfilling the requirements. Examples include the Clean Air Act, the Americans with Disabilities Act, and the No Child Left Behind Act. Each of those statutes requires action at the state or local level, without providing funding to support those actions.
And it looks like the CARES Act needs to be added to the list.
How can that be? Wasn’t the CARES Act supported by more than $340 billion in public funds?
Yes. Yes, it was.
The problem is that no appropriations were set aside for implementation of Section 3610 of the CARES Act, the section that authorizes the Federal government to reimburse contractors for “stand-by” or other paid leave time when employees cannot perform planned work. We’ve written about Section 3610 before. We expect we will again.
If you’re not hip to Section 3610, you may want to follow the link in the above paragraph, or perhaps find another article to bring you up to speed. We’re going to assume you’ve got the basics.
Since you’ve got the basics, you understand that contractors can submit invoices to receive reimbursement of their Section 3610 costs—but that contracting officers have discretion as to whether or not to pay those invoices. One important aspect of contracting officer decision-making involves funding. At the moment, any 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.
Which is kind of a tough decision, isn’t it?
Until and unless Congress appropriates funding expressly earmarked for Section 3610 reimbursements, every contracting officer is going to have to wrestle with that choice. And—as we’ve written before—at the moment guidance from DoD and DCMA in particular is woefully short.
Meanwhile, on July 14, the Office of Management and Budget issued guidance in the form of Frequently Asked Questions (FAQs) to help agencies deal with some of the issues. Section 3610 issues are discussed on pages 10 through 17. There are 18 FAQs addressing aspects of contractor reimbursements under Section 3610. We are not going to repeat the relevant FAQs and associated answers here. You should go read it for yourself. However, here are some interesting quotes, for your information.
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It is important to secure fully supported documentation from contractors regarding claimed reimbursement, including relief claimed and received, along with the financial and other documentation necessary to support their requests for reimbursement under Section 3610. … Agencies should secure the contractor's agreement to segregate and report the actual costs of the leave payments for each employee (i.e., actual cost for each employee's paid leave, including names of employees and number of leave hours). The agency should further advise that the government may audit the billed costs in order to ensure the accuracy and compliance with the law. Contractors are responsible for supporting their requests for reimbursement.
But for many contractors, it’s all speculation at this point. Their contracts are likely to have insufficient funding available for Section 3610 reimbursement and, even if they do have funds, as noted above the contracting officers are going to have to wrestle with some tough decisions regarding whether to pay contractors for doing the contracted work or paying contractors for not working.
Meanwhile, the Department of Defense is pressuring Congress for the necessary appropriations. And defense contractor executives are doing the same thing, according to reports. However, those same reports state that Republicans are “skeptical” about providing additional relief funding on top of the funding already provided.
We’ll have to wait and see where this goes. And while we wait, we’ll see what government contracting officers—and DCMA contracting officers in particular—decide to do when they start to receive contractor requests for reimbursement of Section 3610 costs.
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