Avoiding FCA Liability on Public Projects

Contractors Face False Claims Act Liability When The Federal Government Picks Up The Tab On State And Local Projects

by David W. Kiefer

David W. Kiefer is an attorney in Sills Cummis & Gross P.C.’s Construction Law Practice Group. He may be reached at dkiefer@sillscummis.com. The views and opinions expressed in this article are those of the author and do not necessarily reflect those of Sills Cummis & Gross P.C.

With all of the public works projects happening in the New York area, contractors should familiarize themselves with the federal False Claims Act (“FCA”), even if they are not contracting directly with the federal government. The FCA is implicated when a contractor submits fraudulent claims for payment to the federal government. The two aspects of the FCA that make it both unique and effective are its provisions that allow for treble damages and for a qui tam relator, or “whistleblower,” to initiate an action against a contractor. These provisions provide for heightened detection, through whistleblowers, and severe punishment in the form of monetary damages. For these reasons, the FCA must be taken very seriously by those who contract with the federal government and, as will be explained, those who contract with state and local governments as well.

Recent decisions from federal courts have expanded the reach of the FCA to projects in which contractors have contracted with and are paid directly by state or local governments. For example, in United States ex. rel. Maxfield v. Wasatch Constructors, 2005 U.S. Dist. LEXIS 10162 (D. Utah May 27, 2005), whistleblowers alleged that a contractor on a highway reconstruction project submitted false claims to the Utah Department of Transportation (“UDOT”). Although the project received federal funding, UDOT made the actual payments to the contractors and determined whether final acceptance was achieved. The Court in Maxfield held that so long as the federal government is the ultimate source of the funds, either directly or indirectly, the FCA covers situations in which false claims are submitted to federal grantees. The Court reasoned that it was “pure happenstance” that UDOT was the one issuing payment to the contractors instead of the federal government and that to hold otherwise “would leave literally hundreds of millions of federal dollars outside the act.”

In United States ex rel. Sialic Contractors Corp. v. Sequel Contractors, Inc., 402 F. Supp.2d 1142 (C.D. Cal. 2005), the plaintiff alleged that the contractor and construction manager on a project for Orange County, California colluded to overstate the amount of work performed by the contractor. The Court held that the plaintiff’s allegations supported a cause of action under the FCA because they established that the defendants caused Orange County to present a false claim for payment to the Federal Aviation Administration (“FAA”), which ultimately reimbursed Orange County for 80% of the cost of the project. This case should make contractors particularly uneasy because Orange County did not submit a request to the FAA for reimbursement until 14 months after it paid the contractor on its claims and plaintiff did not even allege that the defendants knew that their claims would be submitted to the federal government. Therefore, the fact that defendants might not have known that Orange County would seek reimbursement from the federal government did not allow them to escape FCA liability.

Fortunately, contractors can minimize their exposure to FCA liability by simply following sensible business practices. First, contractors should develop a system for maintaining detailed accounting records. The accounting system should track the cost of both base scope work and work due to changes on the project. Periodic audits can help ensure that records are being properly kept and payment requests are being properly submitted. In fact, accurate accounting records were cited as a reason for dismissing a FCA claim against a contractor in Trafalgar House Constr., Inc. v. United States, 77 Fed. Cl. 48 (2007). The Court noted that the contractor’s behavior was “far from a model of best contracting practices,” but concluded that its claim for payment “was consistent with underlying financial records.” Second, contractors should require that their employees and subcontractors accurately record their time and progress on the job. These field and progress reports can provide the government with an additional level of detail that support requests for payment. Third, project management should be familiar with all applicable governmental rules and regulations that concern documentation, claims and payment. Management should then provide training on the regulations to lower level employees, emphasizing any nuances in the regulations that will bear on each employee’s particular area of responsibility. Utilizing project controls such as these will help a contractor minimize its exposure to FCA liability on any type of publicly funded project.

* This is a reprint of a column originally run in the March 2008 issue of New York Construction. Because of an editing error, certain information was omitted in the original.