Beware of Federal False Claim Act on State and local projects

Most contractors with experience on federal construction projects are familiar with the federal False Claim Act (“FCA”) which provides for civil and administrative penalties for anyone who knowingly submits or causes the submission of a false or fraudulent claim to the United States. The civil penalties range from $5,500 to $11,000 for each false claim submitted to the federal government, plus three times the amount of damages sustained by the government. The administrative remedies include suspension or debarment from work on future federal projects.

The FCA has evolved since it was introduced in 1863 to reflect a growing concern about fraud against the federal government. It was amended in 1986 to encourage private citizens known as whistleblowers to bring lawsuits against alleged violators of the FCA on behalf of the United States. In addition to providing financial incentives to whistleblowers, the FCA protects these individuals from retaliation if they bring a lawsuit against their employer. Recoveries under these lawsuits have dramatically increased over the years from less than $400,000 in 1986 to approximately $3,000,000,000 in 2010. The trend is a result of increased education to potential whistleblowers and the expanding scope of the FCA provided by the courts and statutory amendments.

Many states, including Montana, Nevada and California, have false claim statutes that address claims made to state governments based on the FCA model. Contractors should determine whether these statutes exist and what potential liabilities they provide when performing state and local government work in other states.

Although Idaho has not enacted a state false claims statute, a recent revision to the FCA has expanded its applicability to contractors performing state and local government work in Idaho. The number of contractors performing government work in Idaho has also increased due to the economic downtown over the last several years. Many contractors who previously bid primarily private construction projects are now bidding government projects. Contractors must be more mindful than ever of FCA and its reach.

The FCA was significantly expanded in 2009 to cover all projects funded at least in part by federal funds. A large number of state and local projects in Idaho are at least partially funded by federal money. These projects now fall within the scope of the FCA even without federal agency involvement.

Another expansion of the FCA impacts subcontractors and suppliers. Federal courts were historically divided on whether subcontractors, sub-tier contractors, and sub-tier suppliers were subject to FCA liability. In a 2008 decision, the Supreme Court found that the FCA applied to a subcontractor who makes a false statement to the prime contractor intending that it be passed through to the federal government. The Court rejected the notion that the FCA extended liability to any entity receiving federal funds directly or indirectly. In response to the decision, the 2009 revision expands the scope of the FCA to cover subcontractors and suppliers at all tiers.

FCA liability can arise in a number of situations at every stage of the project. Although each phase of a project presents different potential false claims, several bases for FCA liability are worth noting.

False statements in bids or negotiations often result in FCA liability. These statements can include everything from knowingly identifying an unavailable employee as the project manager or superintendant to identifying a sham disadvantaged business enterprise subcontractor for the project.

Certifications of payment and compliance with laws and regulations are also common bases for liability. Contractors must be vigilant to ensure that subcontractors comply with environmental regulations, the Davis-Bacon Act, and Buy America Act. Certification can also lead to FCA liability when a prime contractor withholds funds from a subcontractor or supplier due to an alleged breach of contract. A contractor should notify the government agency in writing anytime it requests payment that it does not intend to pass through to the party performing the work or supplying the material or equipment. Similarly, a prime contractor should never hold retention from a subcontractor when it has received full payment from the government.

Probably the most recognized act giving rise to FCA liability is false or inflated pricing which typically arises during the change order process. Contractors should avoid using the word “cost” when submitting pricing to perform extra work on government projects. If the contract requires that change order requests are based on cost estimates, contractors should carefully analyze all costs to ensure accuracy and retain supporting documentation. If a cost- based change order results in overpayment by the government, a contractor’s failure to refund the overpayment may result in FCA liability.

Given the expansion of the FCA, the steep liability for violations, and a substantially more aggressive attitude by the federal government toward enforcement, contractors that perform government work at any level should establish an internal education and compliance system to reduce potential liability under the FCA.

(Published in the Idaho Business Review, April 2011)

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