Today, there are more programs than ever at the federal, state and local levels to ensure the participation of small businesses in contracting opportunities. Congress, as well as many state and local legislators, have enacted laws to support businesses owned by veterans, disabled veterans, minorities and women. These businesses are usually referred to as “disadvantaged small businesses.” Because governmental entities offer incentives and set aside a percentage of contracting dollars for small businesses, there are a growing number of fraud claims developing in this area. According to a report issued by the Department of Justice in December, 2017, the number of lawsuits filed under the qui tam provisions of the federal False Claims Act are increasing with an average of twelve new cases being filed every week. Given the competitiveness in the construction industry to obtain contract awards, and the increasing number of governmental and private “whistleblower” claims, it is important to know and understand the fraud that occurs with government contract work.
Congress enacted the False Claims Act (“FCA”), 31 U.S.C. §§3729-3733 to address fraud against the government. There is a civil False Claims Act and a criminal False Claims Act, both of which can apply when false claims are made on construction projects that are wholly or partially funded with federal funds. Under the civil false claims provisions of the Act, a private individual, referred to as a relator under the statutes and who stands to share in any recovered damages, can bring an action on behalf of the government under the FCA, in part, for the following:
- Knowingly presents or causes to be presented a false or fraudulent claim for payment or approval;
- Knowingly makes, uses or causes to be made or used a false record or false statement to get a false or fraudulent claim paid or approved by the government; or
- Conspires to defraud the government by getting a false or fraudulent claim allowed or paid.
While the FCA covers false claims liability that can arise in construction projects for contractors, owners, suppliers and design professionals who work on public projects, there are additional concerns for businesses that obtain work on public projects based on their status as small disadvantaged businesses. Veterans, service disabled veterans, women and minority owned businesses typically are certified by agencies that are recognized by the federal government for contracting opportunities. When the disadvantaged small business obtains work on a federal project based on its status as a disadvantaged small business, and the business does not in fact qualify for such status because it is not owned and controlled by a disadvantaged individual despite having presented a valid certification certificate from the certifying agency in the bid process, there is potential false claims liability under the FCA.
A prime contractor can also face liability under the FCA for contracting with subcontractors or suppliers who represent they are legitimate disadvantaged businesses, when in fact, the disadvantaged businesses may not be validly owned and/or controlled by a disadvantaged individual despite having supplied a valid certification to the prime contractor in the bidding process. A prime contractor that misrepresents to the government that it will spend a certain contract amount with subcontractors and suppliers who are legitimate disadvantaged small businesses also violates the FCA when it arranges for a disadvantage business to act as a “pass-through” entity where the “pass-through” entity does not actually perform any work on the project.
There is no requirement under the FCA to prove specific intent to defraud, so a contractor can face liability under the Act if it submits claims of its own or of its subcontractors and suppliers knowing they are false, acts in deliberate ignorance of the truth or falsity, or in reckless disregard of whether they are true or false. The penalties under the FCA for violations can be devastating to a contractor. If found liable for a violation under the FCA, a party will have to pay treble damages, plus civil penalties of $5,000-$10,000 for each false claim in addition to possibly facing debarment or suspension from government contracting. The FCA also allows for the award of reasonable attorney fees and costs to a successful claimant.
Contractors also need to be aware of criminal false claims, as a person who presents a false claim to the government knowing it to be false can also face criminal liability under the criminal False Claims Act, 18 U.S.C. §287. While the elements of criminal false claims are similar to civil false claims, there is one difference in that the alleged violator must actually know the falsity of the claim in order for there to be liability. A violation of the criminal False Claims Act can result in imprisonment for up to five years in addition to being subject to fines.
In addition to federal false claims, many states have enacted their own version of the false claims acts. A violation of the FCA or a state false claims act can be detrimental to a contractor who routinely performs work on public projects. It is therefore important for contractors, owners, construction managers and design professionals to understand and educate their personnel about the risks involved in working on projects funded by any federal or state funds. Systems should be in place to carefully review bid documents and claims before they are submitted to the government for payment in order to minimize the risk of a violation of the FCA or states false claims acts.