Forewarned is Forearmed: Avoiding Entanglement with the False Claims Act

The scenarios under which construction professionals and their companies may be threatened with violations of various statutory false claims acts are as broad as the industry itself. Whether a project involves transportation elements (e.g., road, bridge, highway, airport, seaport, rail station construction), housing elements (e.g., public housing, jails, college dormitories), or commercial elements (e.g., government offices, courthouses, park facilities), where public monies are involved the potential exists for any construction contractor to find itself on the wrong end of a false claim proceeding.

The federal False Claims Act (“FCA”) was originally enacted in 1863 as a reaction to rampant fraud and abuse of the procurement process by contractors supplying equipment and materiel to Union military forces. After a long period during which claims under the FCA were rare, in 1986 Congress passed sweeping amendments to the FCA which has led to an explosion in claims being brought and monies recovered. In its most usual form, a false claim proceeding results when an assertion is made that a contractor has knowingly presented (or caused to be presented) to the government a false claim or claims for payment. The FCA contains a “qui tam” provision that allows and encourages private citizens (in practice most often employees or former employees of the contractor) to initiate the false claim action in exchange for a bounty or share of any funds recovered. Under the current version of the FCA, the qui tam claimant (or “relator”) is entitled to receive between 15% – 30% of any recovery. For the contractor determined to have violated the FCA, penalties include treble damages, a penalty of up to $11,000 per violation, attorneys’ fees, possible debarment or exclusion from future government contracts, as well as other civil and criminal penalties.

The FCA encompasses any false claim made directly to the federal government on a federally funded project. In addition, though, the FCA also covers false claims managed or administered by state or local governments, governmental authorities, or even private entities. That is, any project, whether federal, state or local, which relies on federal funding implicates the FCA.

In addition to the federal FCA, at least seventeen states – California, Delaware, Florida, Hawaii, Illinois, Indiana, Massachusetts, Montana, Nevada, New Hampshire, New Jersey, New Mexico, New York, Oklahoma, Rhode Island, Tennessee, and Virginia – plus the District of Colombia, have enacted their own versions of the FCA for false claims made in conjunction with projects funded in whole or in part with state funds. Chicago and New York City are among the municipalities that have also enacted false claim ordinances. It is therefore possible for a contractor to be found liable under federal, state and municipal laws on the same project where funding is provided from each level of government.

In the context of construction related claims, contractors have been pursued for a wide variety of wrongful behavior including overbilling, falsifying of test certifications, bid-rigging, falsifying pricing data, misrepresentation of materials provided or services rendered, exaggerating the number of hours that equipment was used per day, exaggerating hours worked, billing a parent company for a “guarantee charge” not actually paid, billing equipment rates according to a higher manual rate when actual rates were lower, misrepresentations in monthly status reports, product or equipment substitutions in violation of contractual specifications, and failure to report construction defects.

Because extracting oneself from even an unwarranted false claim allegation is likely to be a difficult and expensive proposition, it is paramount for construction contractors to implement a strong compliance and review program to avoid false claim problems and, if necessary, defend against false claim allegations. The prudent construction contractor will include the following elements in any compliance and review program:

Follow the rules: The foundation of any plan is to follow the rules and deliver what you promise. Particularly in a stressful economic environment, the temptation to cut corners, and inflate hours, costs or time can be powerful. Don’t do it.

Develop and publicize a code of business ethics and conduct: Some governmental agencies require the promotion of a business culture that encourages ethical conduct and compliance with laws, rules and regulations. In order to do so, it is not enough to merely develop a code of conduct; the code must be circulated among employees, subcontractors, suppliers, etc. It should be made a part of any training processes and human resource evaluation / review. Responsible employees should have the necessary training to assure compliance with requirements.

Internal audit / review of compliance: Audit / review teams should involve more than one person and should include at least one person from outside the department or job position being audited. This will help ensure that “innocent mistakes” are uncovered and corrected, as well as protect the company from wrongful acts of any employee seeking to enrich themselves at the same time they are exposing the company to penalties.

Disciplinary action against violators: Violations of accepted procedures must be addressed, corrected and, where appropriate, sanctioned.

Encourage employee feedback: In many cases, the eventual qui tam relator is an employee or former employee whose warnings were ignored or not taken seriously. Encourage employees to be a part of the process and report perceived or suspected problems. Then take those comments seriously, share them with the internal audit / review teams, and allow them to follow up on the concerns. Communicate those efforts to the warning employee.

Keep contract administrators in the loop: Regular reports to the government’s contract administrator, including disclosure of possible problem issues, may inoculate the contractor against a charge that they sought to hide the truth.

Over the last twenty years the number of false claims proceedings and the amount of money recovered from contractors thereunder has accelerated. That trend is sure to continue. More and more states and municipalities are enacting their own false claims acts. More taxpayer money is being devoted to public works projects and demands for accountability are increasing. Qui tam relators, sometimes feeling ignored or (even worse) harassed by their employers, will continue to pursue these potentially lucrative claims. The prudent contractor will be proactive and take the necessary steps to lessen their exposure to potentially a devastating charge of having presented false claims to the government.

Article Concepts: false claims act, public monies, public projects, qui tam, relator, penalties, treble damages, debarment, overbilling, bid-rigging, falsifying price, exaggerated quotes, misrepresentations, failure to report defects, code of conducts, internal audit.

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© 2009, The Barthet Firm