Most Common FCA Violations in the Construction Industry
It’s not uncommon to encounter fraud in the construction sector, and federal projects are no exception. The government has been taking steps to reduce the likelihood of fraud for a long time. In the 1930’s, it adopted the Miller Act, which requires contractors working on federal construction projects to post contract bonds as a guarantee for a job well done.
Another measure in the same direction dates all the way back to the Civil War. Overwhelmed by the many cases of fraud against the government, President Lincoln passed the False Claims Act (FCA). Sometimes called the “Lincoln Law,” this measure envisions criminal and civil penalties for anyone who tries to defraud the government. It also contains the “qui tam provision,” which encourages so-called “whistleblowing.” Anyone who points out a case of fraud that leads to a successful lawsuit can receive up to 30 percent of the compensation awarded to the government. This has turned out to be a pretty successful practice, as currently close to 70 percent of government compensation awards come from lawsuits sparked by whistleblowers.
The False Claims Act covers all areas of federal contracting, so its provisions are frequently encountered in the construction industry. Let’s look at some of the most common types of construction fraud along with some real-life examples.
A popular type of bid ridding is when one contractor submits a non-competitive bid in order to help another contractor to get the contract. Bid rigging is considered very harmful to the public, because it stifles competition and does not result in the best value for taxpayer money.
A popular case of bid rigging occurred last year when an executive of Xcel Construction Services Inc., a Detroit-based construction company, admitted to defrauding the government to win an $11-million public housing contract. Calvin Hall, the executive in question, teamed up with another contractor who filed an excessively overpriced bid, so that Xcel’s proposal would appear cheaper in comparison.
Overbilling occurs when a contractor bills the government for a sum that is larger than legally allowed. Although overbilling frequently occurs as a mistake during a contractor’s calculations, purposefully doing it is considered a criminal offense. Overbilling mostly occurs in two ways: overcharging for materials and exxgarating hours spent working on a project.
Cases of overbilling are a frequent occurrence in the construction industry. Earlier this year the Philadelphia Gas Company accused one of its contractors of overbilling for construction materials. The materials in question were used for paving jobs, but an investigation found that “some of the roadbeds fell short of the concrete and asphalt standards established in the contract.” Although the contractor denied doing this on purpose, they agreed on a $1.84 million settlement and will have to pay another $525,00 in penalties to the city of Philadelphia.
Misrepresentation of Disadvantaged Small Business Status
The Small Business Administration is trying to protect the rights of small businesses. That’s why it requires that some of the work on certain projects should be awarded to disadvantaged small businesses. A disadvantaged small business is any small company, whose owners are women, minorities and/or other disadvantaged groups.
A recent case of this fraud involves five California subcontractors who attempted to falsely pass off their company as a small disadvantaged business while working on military construction projects in Camp Lejeun and Camp Pendleton. The allegations were filed by an ex-employee of one of the contractors, who will now receive $393,383 as part of the whistleblower provision. The total amount of the settlement is $1.9 million.
How Contractors Can Protect Themselves from FCA Claims
Of course, the FCA is not without opponents. The opposition thinks that the government is not impartial during claims and the limitations imposed on contractors are too severe. Sometimes a contractor might be unknowingly in violation of FCA regulations, but there are still some steps to reduce the likelihood of being liable:
It is very important to make sure all certifications you make to the government are accurate, regardless of whether you gave them in a written or more informal form of communication.
Be careful which contractors you choose to team up with. If they commit fraud without you knowing it, you might still be liable.
- Make it okay for your employees to whisteblow to you first rather than go straight to the government. Assure them there won’t be any retaliation if they point to something that’s not okay. You can even create a way for them to do it anonymously.
If you have received an overpayment from a federal project, consult with a lawyer before you keep it or you might become liable.
Make sure you’re using a scrupulous compliance mechanism. Frequently, compliance and monitoring programs don’t work properly or exist only on paper, but this could potentially backfire.
When an employee is leaving, ask them if they notice anything of concern. If they answer negatively, you can ask them to sign a statement indicating so.
These are the most common ways in which the False Claims Act can affect you. Taking the abovementioned steps to protect yourself from liability is important, but if you want to be absolutely certain you’re abiding fully, always consult with a legal professional.
Have you been under attack because of an FCA violation? How did the case unfold? Share your story with us by leaving a comment below.