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 False Claims Act contains a 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 share of any funds recovered, as much as 15%-30%. For the contractor found to have violated the FCA, penalties include treble damages, a fine 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.
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.
Therefore having a strong compliance and review program to avoid false claim problems and, if necessary, defend against false claim allegations, is mandatory. 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 of penalties.
- Disciplinary action against violators: Violations of accepted procedures must be addressed, corrected and, where appropriate, sanctioned. Encourage employee feedback. In many cases, the person bringing the complaint 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 it sought to hide the truth.
Over the last twenty years the number of false claims proceedings and the amount of money recovered from contractors has accelerated. That trend is sure to continue. Be proactive and take the necessary steps to lessen your exposure to a potentially devastating charge of violating the false claims act.