superconference presentation - 2010

Session E06Session E06

G C iG C iGovernment Contracting Government Contracting ––Reality & Risks FacingReality & Risks FacingContractors in Today’sContractors in Today’s

Challenging EnvironmentChallenging Environmenta e gi g E i o ea e gi g E i o e

James G. Zack, Jr.James G. Zack, Jr.E DE D

Executive DirectorExecutive DirectorNavigant Construction Forum™Navigant Construction Forum™Session ModeratorSession Moderator

The PanelistsThe Panelists

• Donald E. Kinner– Assistant Director, U.S. Department of Justice, Civil Division, Commercial Litigation Branch

• W. Stephen Dale– Assistant General Counsel – Litigation, Parsons Brinckerhoff Americas, Inc.

• Kathleen O. Barnes– Senior Partner, Watt, Tieder, Hoffar & Fitzgerald®

• Scott D Gray• Scott D. Gray

– Managing Director, Navigant Consulting, Inc. 2

“New Realities” & “New Realities” & “New Risks”“New Risks”“New Risks”“New Risks”

Doing Business with the Doing Business with the GovernmentGovernment

Donald E. KinnerAssistant Director U.S. Department of JusticeCivil Division

Commercial Litigation BranchWashington, D.C.

Donald E KinnerDonald E. Kinner

Assistant Director, Commercial Litigation Branch, DOJ since 1998

Responsible for complex litigation matters• Government contracts• FraudBid P• Bid Protests

Previously DOJ Senior Trial Counsel & Trial attorneyattorney

Initially served in Navy’s Office of Counsel 4

What’s Really New?What s Really New?

Fraud is not new• Code of Hammurabi

• BibleBibleLeviticus

Proverbs

James

• Justinian Code

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New Federal StatutesNew Federal Statutes

American Recovery & Reinvestment Act of 2009

• Section 1515

• Amended FAR Clause 52.214‐26 – Audit & RecordsAmended FAR Clause 52.214 26 Audit & Records

• Interview any officer or employee regarding transactionstransactions

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ARRA ConditionsARRA Conditions

Quarterly reporting required• Subpart 4.1500 added to FAR to implement requirement

• Contractors must report information Amount of invoices

Supplies delivered & services performed

Completion status of work

Number of jobs created & savedNumber of jobs created & saved

Names & compensation of 5 highest paid officers

Specific information on first tier subcontractors

Applies to new & existing contracts7

Fraud Enforcement & Recovery Act

Section 4(a) –P h “k i l k f l d• Person who “knowingly makes … a false record or statement material to a false or fraudulent claim…”

• No longer requires “presentment” to Government• No longer requires presentment to Government

Arises from U S l T B b di C• U.S. ex rel. Totten v. Bombardier Corp.

• Allison Engine Co, Inc., et. Al. v. U.S. ex rel. Sanders

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U.S. ex rel. Totten v.Bombardier Corp.

Supreme Court interpreted former FCA t ti i t i 2005presentation requirement in 2005

• AMTRAK not Government entity so presentation of false claim is not presentation to governmentclaim is not presentation to government

• False claim presented to federal grantee not actionable under False Claim Actunder False Claim Act

• Contractor’s claim paid by AMTRAK not by Federal Government

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Allison Engine Co., Inc. et al. gv. U.S. ex rel. Sanders

Supreme Court interpreted phrase “to get” & di l d b k T tt fi didialed back Totten finding• Previously, defendant must have intended that Government pay the claim itselfGovernment pay the claim itself

• Defendant had to make false record/statement for the purpose of getting the Government to pay the claimpurpose of getting the Government to pay the claim

• Or, prove conspirators agreed the false claim would have a material effect on the Government’s decision to pay the p yclaim

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FERA Eliminates Presentment Requirement

Revises Section (a)(1)• Imposes liability on any person who presents false claim for

lapproval• Strikes phrase “…to an officer or employee of the U.S. Government or member of the Armed Forces…”

Still have to “present” but to whom has now changed• To an officer, employee or agent of the U.S.• To a contractor, grantee or recipient of Government moneymoney

Change in effect as of June 7, 2008 11

Courts Permit Recovery yof Amounts Paid

U.S. ex rel. Longhi v. Lithium Power Technologies, Inc., 530 F. Supp. 2d 888, 893‐900Technologies, Inc., 530 F. Supp. 2d 888, 893 900 (S.D. Tex. 2008)• Qui Tam case – fraud involving SBA grantQui Tam case fraud involving SBA grantRepresentations in grant proposals knowingly false or fraudulent au u e

Statements material to Government’s payment decision

Amount of actual damages to Government trebled under FCA 12


U.S. v. Science Applications International Corp., 653 F Supp 2d 87 (D DC 2009)653 F. Supp.2d 87 (D. DC 2009)• Court found representations made critical to Go e e t de i io ayGovernment decision payDefendant liable under FCA

Jury not required to account for value of contractor’s work in calculating damages under FCA

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Daewoo Engineering & Construction Co., v. U S 557 F 3d 1332 (2009) cert denied U SU.S., 557 F.3d. 1332 (2009) cert. denied ‐‐‐ U.S. ‐‐‐, 130 S. Ct. 490 (U.S. 2009)Ba ele lai i a f audule t lai• Baseless claim is a fraudulent claim

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Two Kinds of Risk –Legal & Business

Business risk – Cost • This has changedThis has changed

Substantial reporting requirements

Failure to comply can be reflected in future performance ai u e o o p y a e e e e i u u e pe o a eassessments – Potentially restrict/limit future business

Other compliance costs created by mandatory disclosure rule

FAR Clause 52.203‐13 for all contracts over $5 million

FAR 1.003, 9.406‐2 & 9.407.2 added – Contractors & principals can be debarred or suspended for failure to disclose evidence ofbe debarred or suspended for failure to disclose evidence of fraud

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Two Kinds of Risk –Legal & Business

Legal risk – exposure to Government claim of fraudfraud• Courts will hold contractor to reasonable standard of honesty

• Certifications are taken seriously• Penalties applied to “casual certification” to Government “Ri k ” f l i i h ARRA & FERA “Risks” of complying with ARRA & FERA no greater than compliance with FAR MDRRi k f f d f t i h t f i tRisk of fraud far outweighs cost of appropriate conduct 16

Government Contracting: Government Contracting: The Reality & The RisksThe Reality & The RisksThe Reality & The RisksThe Reality & The Risks

W. Stephen DaleAssistant General Counsel for LitigationParsons Brinckerhoff Americas, Inc.

Herndon, Virginia

W Stephen DaleW. Stephen Dale

Assistant General Counsel – Litigation, Parsons Brinckerhoff Americas, Inc.

Former partner, Smith Pachter Former partner, Smith Pachter McWhorter, PLC – Vienna, Virginia• Specialized in construction & governmentSpecialized in construction & government contracts law

• Represented prime contractors in Federal & State courts

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Government Government Contracting: Contracting: ggReality & Risks Reality & Risks

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Reality & RisksReality & Risks

Topics to be covered

• Remnants of ARRA

FAR §52 203 13 “C t t C d f B i Ethi &• FAR §52.203-13 – “Contractor Code of Business Ethics & Conduct”

F l Cl i d l• False Claims developments

• Proposed “Business Systems” DFARS

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Remnants of the Recovery Act

Inspections & audits

Reporting requirements

Mandatory disclosure

Whistleblower protectionWhistleblower protection

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Expanded Access:pAudits & Interviews

Comptroller General authorized to:

• Examine any records of contractor or any of its subcontractors that directly pertaining to or involving transactions related to the contract or any subcontracty

• Interview any officer or employee of contractor or any subcontractors regarding such transactionssubcontractors regarding such transactions

Under ARRA, authority extends to state/local t i d i i t i t tgovernment agencies administering contract

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Inspector general authorized to:• Examine records of contractors or grantees any of its• Examine records of contractors or grantees, any of its subcontractors or subgrantees, or any State or local agency administering contract using ARRA funds, h i d i l i l i hthat pertain to and involve transactions relating to the contract, subcontract, grant, or subgrant;

• Interview officers & employees of contractors,Interview officers & employees of contractors, grantees, subgrantees, or agencies regarding such transactions.

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Inspector General required to: • R i “ i d b bli b t ifi• Review “any concerns raised by public about specific investments” using ARRA funds

• Relay any findings not related to ongoing criminal proceeding to Department head for suspension & debarment proceedingsdebarment proceedings

• Post findings & audits on Inspector General’s website & link postings to Re overy ov

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& link postings to Recovery.gov


Can contractors limit access to employees to regular business hours & company premises?regular business hours & company premises?

Can contractors have company representative, including counsel, attend interview?g

What obligations may contractors have to employees in connection with IG/CG interviews, i l diincluding: • Provisions of labor & employment agreements.Co a y’ obli atio to di u ith e loyee the

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• Company’s obligation to discuss with employee the need for separate legal counsel

ARRA ReportingARRA Reporting

Total amount of ARRA funds receivedAmount of ARRA funds expended or obligated p gto projects or activities

Description of overall purpose & expected t f j toutcomes of project

Evaluation of completion status of projectDescription of employment impact of ARRA‐Description of employment impact of ARRA‐funded work

Information on subcontracts or subgrants

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gawarded by recipient

Employment ImpactEmployment Impact

• “Jobs created” and “jobs retained” must be expressed as “full‐time equivalent”expressed as full time equivalent

• “Job created” = New position created or existing unfilled position filled as a result of ARRA funding

• “Job retained” = Existing position that would not have continued to be filled without

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not have continued to be filled without Recovery Act funding

Executive CompensationExecutive Compensation

Reporting requirements of Federal Funding Accountability & Transparency Act of 2006 apply to y p y pp yARRA contractors, grantees, subcontractors, & subgrantees

Contractors grantees first tier subcontractors & Contractors, grantees, first‐tier subcontractors & subgrantees must include compensation information for 5 most highly compensated officers if…• 80% & $25M of revenues come from Federal awards; &Co a y ot e ui ed to o ide i fo atio to SEC

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• Company not required to provide information to SEC. Information is reported on USASpending

Mandatory Disclosure: OMBMandatory Disclosure: OMB

OMB imposes requirements of FAR Subpart 3.10 & Clause 52.203‐13 (not included ARRA)“[E]ach grantee or sub‐grantee awarded funds madeavailable under the Recovery Act shall promptly refer to ana o iate i e to e e al a y edible e ide e that aappropriate inspector general any credible evidence that aprincipal, employee, agent, contractor, sub‐grantee,subcontractor, or other person has submitted a false claimunder the False Claims Act or has committed a criminal orcivil violation of laws pertaining to fraud, conflict ofinterest, bribery, gratuity, or similar misconduct involving

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interest, bribery, gratuity, or similar misconduct involvingthose funds.”

ARRA Whistleblower Protection

Employers receiving ARRA funds prohibited from discharging, demoting, or discriminating against

l i i l f di l i d i f tiemployees in reprisal for disclosing covered information to person with supervisory authority over employee or government officials, including GAO or IGg g

Requires Inspector General to investigate unless complaint frivolous, does not relate to covered funds, or another Federal or State judicial or administrative proceeding hasFederal or State judicial or administrative proceeding has previously been invoked to resolve complaint

Includes provisions for remedies, agency enforcement, di t i il ti j di i l f t & d j di i l

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direct civil action, judicial enforcement, & de novo judicial review

Whistleblower Protection:Evidentiary Standards

Relatively low standard for establishing retaliatory conductretaliatory conduct Covered disclosure a contributing factor in reprisal

Employee may use circumstantial evidenceSuch as evidence that person who took retaliatory action knew of disclosure evidence that retaliation followed shortly after disclosurefollowed shortly after disclosure

Employers must present clear and convincing evidence that employer would have taken action

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in absence of disclosure

Proposed Business pSystems DFARS

Five new/amended contract clauses 75 F d R 2457 (J 15 2010)• 75 Fed. Reg. 2457 (January 15, 2010)

• “to implement compliance enforcement mechanisms …whichincludes payment withholding that allows administrativecontracting officers to withhold a percentage of payments, undercertain conditions, when a contractorʹs business system containsdeficiencies.”

DFARS 242.70X1• Requires “acceptable business systems”

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• Contemplates a process for auditing “acceptable business systems”


Example of issues raised:pDFARS 252.244‐7XXX – Adequate Purchasing Systemy• Apply consistent make/buy policy “that is in the best interest of the Government”D fi i “ f il i i l• Deficiency means “a failure to maintain any element of an acceptable purchasing system”

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DFARS 252.242‐7XXX – Withholding paymentsg p y• Immediate 10% withholding of each payment under a specific contract

• Contractor must submit “acceptable” corrective action plan within 45 days

• ACOmay reduce withholding to 5%ACO may reduce withholding to 5%

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DFARS 252.242‐7XXX – Withholding payments“Notwithstanding any other rights or remedies . . . ifthe ACO determines that there are one or more systemdeficiencies that are highly likely to lead to improperdeficiencies that are highly likely to lead to impropercontract payments being made, or represent anunacceptable risk of loss to the Government, then theACO ill ithh ld t h d d t fACO will withhold up to one hundred percent ofpayments until the ACO determines that theContractor has corrected the deficiencies”

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The Government The Government Contracting Minefield forContracting Minefield forContracting Minefield for Contracting Minefield for

the Unwarythe Unwary

Kathleen O. BarnesSenior PartnerWatt, Tieder, Hoffar & Fitzgerald, LLP®

McLean, Virginia

Kathleen O BarnesKathleen O. Barnes

Senior Partner, Watt, Tieder, Hoffar & Fitzgerald, LLP®

Significant experience litigating all manner of construction claims in Federal & State courts

Experienced litigator in Board of C t t A l & C t fContract Appeals & Court of Federal Claims

A ti e go ernment ontra t pra ti e Active government contract practice 37

The Government Contracting gMinefield for the Unwary

Minefield of regulation

Advice top Government contractors:

“Deliberate Awareness”

In today’s regulatory environment, contractors cannot afford to take compliance shortcuts

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The Government Contracting gMinefield

I. American Recovery & Reinvestment Act

II. Recent FAR Reporting Requirements

III. Fraud/False Claims

IV Compliance ProgramsIV. Compliance Programs

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I. American Recovery & yReinvestment Act

Government put a lot of money into the systemsystem• Wants to know where it wentM f i b k• May want some of it backCompliance

Penalties/Fines

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ARRA Contract Reporting Requirements

• Dollar amount of invoices

• Supplies delivered/services performed

• Assessment of completion status of workAssessment of completion status of work

• Estimate of jobs created & jobs retained

• Names & total compensation of five most highly• Names & total compensation of five most highly compensated officers for calendar year contract awarded

• Specific information on first‐ tied subcontractors41


Executive compensation• Salary, bonus, etc.y

• ExceptionCompanies must have:p

o 80% or more of annual gross revenue from Federal awards; and

o $25 million or more in annual gross revenue from Federal awards

Contractor dilemma• Commercially sensitive information vs.

• Potential penalties, negative notation on contractor’s performance record 42

II. Recent FAR Reporting p gRequirements

New Interim Rule passed July 2010• 52.204‐10 – “Reporting Executive Compensation & First‐Tier Subcontract Awards”

• Reporting RequirementsExecutive compensationExecutive compensationFirst‐Tier Subcontracts

• ImplicationspAll information will be made publicCautious approach especially warranted

o Interim Rule’s directive to contracting officers to exercise “appropriate contractual remedies” if a contractor fails to comply with reporting requirements 43


Executive compensation• “Executive” includes officers, managing partners, or any otherExecutive includes officers, managing partners, or any other employees in management positions

• “Total compensation” is defined broadly Includes Includes

o Salary & bonuso Awards of stock & stock options, etc.

Exception (same as ARRA)Exception (same as ARRA)Only report prime & first‐tier sub executive compensation if:

o 80% or more of annual gross revenue from Federal awards; ando $25 million or more in annual gross revenue from Federal awards

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First‐Tier Subcontract Awards• Subcontract awarded directly by contractor to furnish supplies or services (including construction) for performance of prime contract

• Excludes supplier agreements with vendorsExcludes supplier agreements with vendors• Exception: Prime or first‐tier sub had gross income in previous year under $300,000

• Phased in:Now to February 28, 2011 – if prime contract award was $20,000,000 or moreor more

Starting March 1, 2011 – if prime contract award was $25,000 or more 45

III Fraud/False ClaimsIII. Fraud/False Claims

Statutes of Concern• Criminal Liability

Making false statements, 18 U.S.C. § 1001 False Claims Act, 18 U.S.C. § 287Mail/Wire Fraud, 18 U.S.C. §§ 1341, 1343Conspiracy to Defraud Government, 18 U.S.C. § 286Major Fraud Act, 18 U.S.C. § 1031

• Civil LiabilityCivi iabi ity False Claims Act, 31 U.S.C. § 3929‐33Anti‐Kickback Act, 41 U.S.C. §§ 51 to 58 Forfeiture of Fraudulent Claims Act 28 U S C § 2514 Forfeiture of Fraudulent Claims Act, 28 U.S.C. § 2514Contract Disputes Act, 41 U.S.C. § 604

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III Fraud/False ClaimsIII. Fraud/False Claims

Penalties• Civil False Claims Act

Penalties & Fineso Fine between $5,000 and $10,000 for each false claim,o An amount equal to 3 times the amount of damages the false claim causedo An amount equal to 3 times the amount of damages the false claim caused the government to pay, and

o The cost of prosecution

• Forfeiture of Fraudulent Claims ActForfeiture of Fraudulent Claims ActAll claims by contractor forfeited, including those untainted by fraud

Penalties are coextensive with other civil & criminal penaltiesPenalties are coextensive with other civil & criminal penalties

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What is a compliance program?• Set of policies & procedures to ensure compliance with Federal procurement law

Why have a compliance program? Why have a compliance program?• Reduces the likelihood of serious criminal, civil or administrative missteps with the Government customera i i a i e i ep i e o e e u o e

• Government typically reduces penalties & fines for companies that have an effective corporate compliance

i lprogram in place48


Components of an Effective Compliance Program• Definition of responsibilities of ownership & managementW itt d f thi• Written code of ethics

• Ethics training• Employee communications & reporting

Hotline & Hotline Posters• Establishment of system of internal controls• Program monitoring• Program monitoring• Violation reporting & investigation• Disciplinary & corrective actions• Strong record keeping

STRONG INTERNAL CONTROLS 49

ConclusionConclusion

Government contracting is a “Minefield for the Unwary”Unwary• Requires deliberate and cautious approach

“Deliberate Awareness”

• Compliance with Reporting Requirements: Executive Compensation First‐Tier Subcontracts First‐Tier Subcontracts

• Potential of Fraud/False Clams Allegations• Importance of comprehensive & effective Compliance p p pPrograms

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Advice for ContractorsAdvice for Contractors“New” to the World of“New” to the World of“New” to the World of“New” to the World ofGovernment ContractingGovernment Contracting

Scott D. Gray Managing DirectorN i t C lti I

Navigant Consulting, Inc.Coral Gables, FL

[email protected]

Scott D GrayScott D. Gray

Managing Director, Navigant Consulting, Inc. –Miami, FL

27 years consulting experience analyzing costs & damages incurred on 250 government contracts

St ff lt t G C i iStaff consultant, Grace CommissionAnalyzed claims for government agencies, ontra tors sub ontra tors & supplierscontractors, subcontractors & suppliers

Expert testimony in Courts & Boards 52

Topics to be Addressedp

1 Selected Contract Administration Issues1. Selected Contract Administration Issues to Consider

2. Potential False Claims/Compliance Issues Unrelated to Pricing or Invoicing g g

Selected Contract AdministrationIssues to Consider

Written direction for changes

Compliance programs

Buy American

Flow down clauses Flow‐down clauses

Certified Payroll Reports

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Contract Administration Issues:Written Direction

FAR 52‐243‐1 Changes – Fixed‐Price:

“The Contracting Officer may at any time, by writtenorder, and without notice to the sureties, if any, makechanges within the general scope of this contract. . . .”(emphasis added)

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The “You scratch my back. . .” approach or “favors” performed informally will not be returned in kind

Only WRITTEN change directives issued by a Government official with appropriate pp pauthority will be honored

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If Government Inspector directs extra work or extra‐contractual activities, you will likely not be , y ycompensated

If end‐user (e g Judge in Federal court house) If end‐user (e.g., Judge in Federal court house) directs changes, you will likely not be compensatedp

If Owner’s Representative directs extra work or extra‐contractual activities you will likely not beextra contractual activities, you will likely not be compensated

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Contract Administration Issues: Compliance ProgramsCompliance Programs

& Monitoring

It is not enough to be “clean” & play by the rules

A contractor with a contract in excess of $5 million must prepare a Compliance Programmillion must prepare a Compliance Program that addresses compliance with relevant Government regulations & requirements & g qmonitors performance against program

Lack of effective Compliance Program increasesLack of effective Compliance Program increases exposure to allegations of “reckless disregard”

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Contract Administration Issues:“Buy American”

FAR Subpart 25.2 – Buy American Act

FAR 25 201 P li E t P id d i 25 202• FAR 25.201 Policy: Except as Provided in 25.202 use only domestic construction materials in construction contracts performed in the US

• FAR 25.202 Exceptions:

(1) Impractical or inconsistent with public interest(1) Impractical or inconsistent with public interest

(2) Nonavailability

(3) U bl t(3) Unreasonable cost

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Contract Administration Issues:Flow‐Down Clauses

It is important to include flow‐down clauses in subcontracts & purchase orders to ensure psubcontractors & suppliers comply with regulations & protect the contractor

• Some provisions have to be flowed down per Government regulationsp g

• Some provisions should be flowed down so contractor has the same “protections” as thecontractor has the same protections as the Government

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Contract Administration Issues:Certified Payroll Reports

• Federal requirements more often incorporated into State/municipal contracts

• FAR 52.222‐8 Payrolls and Basic Records“Payrolls and basic records relating thereto shall be maintained by theContractor during the course of the work and preserved for a period ofContractor during the course of the work and preserved for a period of3 years thereafter for all laborers and mechanics working at the site ofthe work. Such records shall contain the name, address, and socialsecurity number of each such worker his or her correct classificationsecurity number of each such worker, his or her correct classification,hourly rates of wages paid (including rates of contributions or costsanticipated for bona fide fringe benefits or cash equivalents thereof ofthe types described in section 1(b)(2)(B) of the Davis Bacon Act), dailyyp ( )( )( ) ), yand weekly number of hours worked, deductions made, and actualwages paid.” 61


Also require that –“Contractor shall maintain records which show that the commitment toContractor shall maintain records which show that the commitment toprovide such [Davis Bacon] benefits is enforceable, that the plan orprogram is financially responsible, and that the plan or program has beencommunicated in writing to the laborers or mechanics affected andcommunicated in writing to the laborers or mechanics affected, andrecords which show the costs anticipated or the actual cost incurred inproviding such benefits.”

“Contractor shall submit weekly for each week in which any contractwork is performed a copy of all payrolls to the Contracting Officer. . . .This information may be submitted in any form desired. Optional FormWH 347 i il bl f thi ”WH‐347 . . . is available for this purpose.”

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Also requires that “Each payroll submitted shall be accompanied by a ‘Statement ofC li ’ i d b th C t t d h ll tifCompliance,’ signed by the Contractor . . . and shall certify –

(i) That the payroll for the period contains the informationrequired under . . . this clause;

(ii) That each laborer or mechanic . . . employed on the contractduring the payroll period has been paid the full weekly wagesearned . . . and that no deductions have been made . . . otherth i ibl d d ti t f th i th R l tithan permissible deductions as set forth in the Regulations. . .;and

(iii) That each laborer or mechanic has been paid not less than theli bl d f i b fi f happlicable wage rates and fringe benefits . . . for the

classification of work performed, as specified in the applicablewage determination. . .” 63

Contract Administration Issues:How to Address Them

HIRE PERSONNEL DEDICATED TO FEDERAL GOVERNMENT CONTRACT ISSUESGOVERNMENT CONTRACT ISSUES

•At home office/division level, hire experienced Compliance Officer & Contract AdministrationCompliance Officer & Contract Administration personnel

•Make sure internal audit department has personnel a e su e i e a au i epa e as pe so eexperienced in Government contracts

•At project level add additional contract administration p j& document control personnel

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Potential False Claims/CompliancepIssues Unrelated to Pricing/Invoicing

Substitution of cheaper materialsMisrepresenting small business statusMisrepresenting small business statusMisrepresentation of DBE StatusEnvironmental non‐complianceEnvironmental non‐complianceMisstated progress reportingDeficient work certified as compliantDeficient work certified as compliant False disclosures of accounting practices Inappropriate credit for deleted work Inappropriate credit for deleted work

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superconference presentation - 2010

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