By Michael S. Zetlin, Esq. and Jaimee L. Nardiello, Esq.
Zetlin & De Chiara LLP

The current economic climate has changed the landscape of government-funded construction projects. As the demand for experienced contractors and design professionals and the availability of new construction projects have decreased, those in the industry must do what they can to set themselves apart in order to bring in work. For some, that is relatively straightforward, as they can rely on their knowledge and reputation to earn jobs. Others may consider resorting to corrupt tactics when submitting bids, or attempt to obtain or siphon money from a project.

To combat such corruption in government construction projects, Congress enacted the Federal False Claims Act (“FFCA”). The FFCA is a body of law originally passed during the Civil War in response to overcharges and other abuses by defense contractors. Under the FFCA, both the Attorney General and private persons – known as qui tam “relators” or colloquially as “whistleblowers” – may institute civil actions to enforce the FFCA. Congress intended the FFCA to help the government uncover fraud and abuse by unleashing a “posse of ad hoc deputies to uncover and prosecute frauds against the government.”

The first substantial amendments to the FFCA came in 1986. In those amendments, Congress sought to broaden the reach of the FFCA to “enhance the Government’s ability to recover losses sustained as a result of fraud against the Government.” Thus, the FFCA currently enables private litigants to bring actions on behalf of the government against anyone who:

1. Knowingly presents, or causes to be presented, a false or fraudulent claim for payment or approval;
2. Knowingly makes, uses, or causes to be made or used, a false record or statement to get a false or fraudulent claim paid or approved by the Government; or
3. Conspires to defraud the Government by getting a false or fraudulent claim allowed or paid.

The success of the FFCA has become evident in recent years. Since being revised in 1986, the federal government has recovered over $21 billion through actions brought under the Act. In fiscal year 2008 alone, the federal government recovered over $1 billion.

In addition to the FFCA, many states have enacted their own versions of a False Claims Act. At least 16 states, including California, Florida and Massachusetts, have adopted versions of the FFCA.

Who Can Bring an Action?

The FFCA authorizes an action to be brought by any “person.” This means that almost any current employee, former employee or even business competitor possessing evidence of fraud, can initiate a civil suit under the FFCA. Importantly, if a claim is brought under the FFCA by a current employee, contractor or agent, certain safeguards are in place to protect him or her. The FFCA specifically protects any employee, contractor or agent who is “discharged, demoted, suspended, threatened, harassed or in any other manner discriminated against in the terms and conditions of employment” when that individual brings an action under the FFCA by allowing recovery of damages from the employer.

There is considerable incentive to institute an FFCA action. If the relator prevails, he or she receives 15 to 25 percent of the government’s total recovery (if the Attorney General joins the lawsuit) or 25 to 30 percent (if the Attorney General declines joining the lawsuit but allows the relator to pursue the lawsuit alone). Between January and September of 2008, relators were awarded approximately $198 million in successful FFCA actions.

Who May Be Liable?

The FFCA allows a wide range of project participants to be found liable. Owners, design professionals, construction managers and contractors have all been found liable under the FFCA. For example, in a recent Nebraska case, the owner of an architectural and engineering firm was ordered to pay the government $460,428 for violating the FFCA. Similarly, a builder was found to have committed 76 FFCA violations when it falsely certified the costs of construction of a low-income housing project.

Basically, anyone in the construction industry who presents a false claim for payment to the government can be liable under the Act. Importantly, the FFCA requires that the defendant know of its wrongdoing, as it prohibits a contractor from “knowingly” presenting a false or fraudulent claim to the government or “knowingly” making a false record or statement to get a false claim paid. However, the Act defines “knowingly” as actual knowledge, deliberate ignorance or reckless disregard. This means that, in some instances, a contractor can be subject to liability under the FFCA even if it did not actually know of the falsity of the claim submitted.

Though it may be hard to imagine how a false claim could be unknowingly submitted, a Pennsylvania Court was recently faced with that very situation. In that case, the Court found that enough evidence existed to allow a case to go to trial where a contractor had submitted reports to the San Francisco Bay Area Transit System that overstated the amounts of money it paid to certain subcontractors. Though the contractor claimed that the report contained only “honest mistakes,” the Court found that the evidence showed that the contractor knew of these mistakes or should have caught them while reviewing the reports prior to their submission.

Contractors Beware

The Department of Justice has had remarkable success in prosecuting claims under the FFCA. In fact, of the cases that the Department of Justice has prosecuted to resolution since the enactment of the Act, it has recovered money approximately 97 percent of the time. This alone is troubling for contractors, and when coupled with the fact that a claim under the FFCA is so easy to allege, contractors encounter treacherous ground.

Though there are many ways to be found liable under the FFCA, there are three examples which demonstrate the most prevalent of those situations.

a. False Representations in the Bidding Process

Any time a party submits a bid for a government contract, it must be mindful of the representations it makes as part of its submissions. If a contractor knowingly makes a false statement in submitting a bid, it could face liability under the FFCA.

In Daewoo Engineering and Constructing Co., Ltd. v. United States, Daewoo, an engineering firm and construction company, entered into a contract with the U.S. Army Corps of Engineers to build a 53-mile road around a tropical island in the North Pacific. Daewoo’s initial bid was $73 million, which was below the government’s original estimate for the project. Daewoo was awarded the project and work ensued. Ultimately, the government brought a claim against Daewoo alleging, in part, violations of the FFCA. Following a 13-week trial, the court found the following actions by Daewoo in submitting its bid to have been fraudulent:

• Submitting a bid identifying a specific individual, who had an excellent reputation in the construction industry and considerable experience to serve as Project Manager on the job, while knowing that the individual was unavailable to work on this project;
• Representing to the government in its bid that it would perform its own earthwork removal, yet accepting bids from subcontractors to perform those services, and failing to disclose the potential use of these subcontractors to the government;
• Representing to the government in its bid that it would work double shifts to perform the earthwork and failing to do so, causing an approximately seven-month delay to the project schedule.

b. Submissions of False Certifications for Payment

Once a party is awarded a government contract, it should check and re-check its certifications for payment. In Lamb Engineering & Construction Co. v. United States, the Department of Energy, the Western Area Power Administration (“WAPA”) and Lamb Engineering & Construction Co. entered into a contract for Lamb to construct an electrical substation in Kingman, Arizona. In the course of performing the contract, Lamb submitted five progress billings to WAPA, the last four of which were supported by attached invoices from subcontractors and suppliers.

Accompanying its submission of at least four of the progress billings were certifications by Lamb that “payments to subcontractors… have been made… and timely payments will be made.” The Court found that the evidence proved that, at the time Lamb submitted its last progress billing and certification, it still owed money to at least one subcontractor and at least 12 vendors on invoices it had attached to earlier progress billings.

The Court further found that Lamb’s submission of certifications averring that payments to subcontractors have been, or will timely be made, to be a false statement made with the aim of securing progress payments from the government, thus violating the FFCA.

c. Submissions of False Certifications of  Compliance

A party must also be sure not to submit false certifications of compliance. In Commercial Contractors, Inc. v. United States, the U.S. Army Corps of Engineers awarded a contract to Commercial Contractors, Inc. (“CCI”) to construct several segments of the Telegraph Canyon Channel in Chula Vista, California, as part of a flood control project. The contract required CCI to excavate the areas in which the channel segments were to be built, to construct the channel segments, and to backfill the excavated areas surrounding the channel segments. The contract contained detailed specifications that governed all aspects of the work to be performed, including drawings indicating the lines to which CCI was required to excavate, quality control standards specifying the hardness that the poured concrete was required to achieve before the supporting forms could be removed, and other provisions specifying the proper composition and required compaction density of the backfill materials.

Ultimately, CCI asserted a claim against the government for additional costs, and the government counterclaimed against CCI, asserting violations of the FFCA and the Contract Dispute Act (CDA). The court determined that CCI violated both the FFCA and the CDA and awarded the government $14,190,161.85 in damages. The court’s judgment rested on its finding that the following submissions by CCI were false or fraudulent:

• Excavating less than the contract drawings required, but submitting cross-sections and quantity surveys indicating that it had excavated up to the contract lines;
• Overstating the amount of backfill it removed from the project;
• Burying debris under and alongside the channel at the project in violation of the terms of the contract, then submitting claims for properly filling the excavated areas and for clearing the excess fill and debris;
• Moving the survey stakes set forth in the contract documents to avoid construction difficulties due to wet ground caused by the tide; and
• Improperly heating concrete test cylinders to precipitate drying time where the contract set forth specific concrete placement methods.

Penalties and Damages for Violating

The FFCA authorizes the Court to impose a civil penalty between $5,000 and $11,000 for each violation. Though a single violation of the FFCA may impose a relatively modest penalty, in situations where a person is found liable for submitting 50 or 60 false claims for payments, the violator could be facing a substantial penalty.

Moreover, this penalty is in addition to any award of damages that may be granted against the violator, and the FFCA allows a person harmed by the false claim to recover triple its damages. For example, if the government incurred $50,000 in damages from a contractor’s submission of falsely certified work, the contractor may be required to pay the government three times its damages or $150,000. In addition, the FFCA allows for the award of reasonable attorney fees and costs to a successful claimant.

Conclusion

In view of the steep penalties and damages that may be imposed for violating the FFCA, a contractor, owner, construction manager or design professional should be petrified of (and strongly deterred from) intentionally or recklessly submitting any type of false claim. In fact, it would be prudent for every company to implement a compliance system to verify that bids and claims are vetted carefully before submission to the agency overseeing the project. In that way, project participants can steer clear of the formidable danger posed by the FFCA.

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