By Michael C. Loulakis and Lauren P. McLaughlin
Assume you have a contract with an owner who contests and nitpicks everything. Every change order is cut back by some amount — maybe 3% one time, 10% another. The owner offers no legitimate reason for the cuts, other than generally complaining that your costs are too high and they are unwilling to approve the change order unless you agree to the reductions. You might eventually protest to the owner’s superiors. You might write letters and reserve your rights to file a claim.
Or, after enough cuts, you might be inclined to protect yourself by pumping up the value of those change orders so that you ultimately get paid for what you think you are legitimately owed. Who could blame you for fighting fire with fire?
Now change the scenario a bit. Assume that the owner is a federal or state agency. Assume that your contract requires you to certify that your claim is made in good faith, that the supporting data are accurate and complete to the best of your knowledge and belief, and that the amount requested accurately reflects the contract adjustment for which you believe the owner is responsible.
Should you still fight fire with fire and pump up the value of your change order?
If you think inflating your claim is the right thing to do, you might not be familiar with false claim statutes. These statutes are intended to protect the government from inflated claims, and everyone contracting with a government agency needs to understand what these statutes mean.
The federal False Claims Act
The most widely discussed of these statutes is the federal False Claims Act. The FCA has been around for more than 150 years and traces its origins to Abraham Lincoln, who saw it as a way to deal with unscrupulous government contractors during the Civil War. Although aspects of the FCA have changed over time, the fundamental way that the statute works has not. At its root, the FCA is targeted to any person who knowingly submits false claims to the federal government. Currently, the liability is triple the government’s damages plus a penalty linked to inflation.
In addition to allowing the United States to pursue its own claims against perpetrators of fraud, the FCA also allows private citizens to file suits on behalf of the government (called “qui tam” suits) against those who have defrauded the government. Private citizens (whistleblowers) who successfully bring qui tam actions may receive a portion of the government’s recovery.
The Department of Justice obtained more than $5.6 billion in settlements and judgments from civil cases involving fraud and false claims against the government in the fiscal year ending Sept. 30, 2021. Of that amount, more than $1.6 billion arose from lawsuits filed by whistleblowers, and those whistleblowers were paid $237 million for filing these successful actions. While the most visible cases typically involve fraud related to health care and defense contracting, there are always a handful of cases each year involving the construction industry.
As might be expected, there are many nuances associated with the FCA, and lots of smart lawyers make a lot of money advising their clients about how to avoid liability. Consider a few big-picture points. First, almost anyone can be potentially liable under the FCA, including individuals, corporations, and local governments and municipalities. Next, the statute defines a claim broadly, including any request for money in which the federal government will provide any portion of the payment. While invoices or any other documents requesting payment present the most typical types of claims, progress payments that reference the status of work (such as the percent of completion) and false certifications that a contractor’s work complies with the contract documents are also covered.
Finally, the FCA does not require proof of an intent to defraud. It relies on a lesser standard that requires only that someone knowingly presented false claims.
By last count, 29 states plus the District of Columbia had their own false claim statutes. These statutes are largely based on the FCA, including giving whistleblowers opportunities to file claims.
A recent example
While the federal government can always pursue a potential violator directly, outside of court, for a false claim, it has become common for the government to file a false claim action as a counterclaim to a contractor’s affirmative claim. That is what happened in a recent decision before the U.S. Court of Federal Claims, Lodge Construction Inc. v. U.S. The results are telling.
The project involved a contract awarded by the U.S. Army Corps of Engineers to Lodge Construction to rehabilitate a levee in Palm Beach County, Florida. The levee work required removing the top layers of the existing slopes and replacing them with a soil-cement mix and other mechanical means of shoring the levee. The project also required subsurface work, so Lodge designed and constructed a temporary cofferdam so it could perform that subsurface work in the dry.
The cofferdam failed several months after it was constructed, forcing Lodge to work in high water. Lodge argued that the problem was caused by differing site conditions and submitted approximately $6 million in claims for the increased costs of performing the work in high water. When the Corps denied the claims, Lodge sued in the Court of Federal Claims. The Corps counterclaimed for civil fraud under the FCA, alleging two primary grounds. One was that Lodge intentionally inflated its delay and disruption costs by using a faulty “inefficiency ratio” to calculate those costs. The other was that Lodge vastly overstated its equipment costs.
The court looked carefully at how Lodge calculated its ratio, finding that it was not a reasonable measure of inefficiencies and that Lodge had intentionally inflated it to increase its claim. Among other things, Lodge inflated the number of days it actually worked and reduced the number of days it had allegedly planned to work.
The court specifically focused on Lodge’s inclusion of 55 days that were included as workdays that were outside of the claim period. These days inflated the inefficiency ratio from 200% to 247% and increased Lodge’s claim by $358,953. The court concluded that this was “clearly and convincingly false” and showed “at the least, a failure to make a minimum examination of records in reckless disregard as to the accuracy of its certified claim.”
Lodge included in its cost pool four off-road dump trucks and the ownership and operation rates for them. Lodge’s internal equipment records indicated that these were older trucks and their purchase prices had ranged from $14,000 to $24,000. However, Lodge used hourly rates of ownership and operation taken from the Corps’ equipment manual for new equipment. This resulted in a valuation of these trucks at $888,686 per truck. In short, Lodge claimed more than $3.5 million for trucks that were actually worth less than $100,000 combined. The court stated that this valuation was “not the product of a mistake; it is knowing, intentional, and duplicitous.”
Given the extent and egregiousness of the fraudulent costs, the court exercised its discretion to impose the maximum penalty under the FCA for each claim. This resulted in a judgment of $22,000 in civil penalties and a forfeiture of Lodge’s affirmative claims.
One could look at the Lodge case and conclude that by paying only $22,000, Lodge did not even get a slap on the wrist. Reaching that conclusion would be a mistake. Those who are found to have violated the FCA not only have the stigma associated with a finding that they committed fraud against the government but will likely have to report this on their record forever. And committing an FCA offense results in the forfeiture of claims. Based on the opinion, Lodge lost the entirety of its $6 million claim.
What did it really deserve to get after removing the inflated items? That is impossible to answer, as there are many factors that affect entitlement and cost recovery. But by inflating its claims, Lodge eliminated the possibility of getting anything.
This Legal Brief started with a question about how to handle a difficult owner during change order negotiations. Yet there is nothing to suggest that Lodge took these aggressive positions because the Corps was not treating it fairly.
But would that have mattered? Consider the introductory paragraph of the court’s decision:
This case should serve as a cautionary tale to government contractors. For those who seek to recoup sums of money from the Federal Government, and thus burden taxpayers, rudimentary recordkeeping and approximated claims are likely insufficient. When job cost data and recordkeeping are inaccurate, the claim will inevitably contain errors and the line between negligence and reckless disregard for the truth becomes vanishingly thin. Cross it, and the government contractor’s claim becomes fraudulent as a matter of law, a designation that carries financial, practical, and stigmatic consequences. Here, while some elements of Lodge’s claims may reflect nothing more than slapdash formulae, overwhelming evidence establishes that substantial portions of those claims are patently deceitful.
It is now apparent that Lodge failed to earnestly undertake the obligations of claim certification: to ensure a claim submitted for payment is accurate and truthful.
One should not expect this or any other court to take kindly to any contractor that tries to excuse its actions by saying, “the government started this by chiseling me out of my legitimate money, and I was just fighting fire with fire.”