Practices For Reducing Exposure To False Claims Liability – An Interview

For those who have been following the developments in the false claims arena, you no doubt have that lingering thought that one of your or your client’s claims will inevitably attract a response that everyone loathes and fears – it’s a false claim! For those of you who don’t — watch out! So, I and Nicole Woolard, an associate in the Construction Group, sat down with Patrick McGeehin, CPA, of FTI Consulting to get his suggestions on best practice recommendations for avoiding federal and other public agency false claim allegations.

FTI is a publically traded company with over 3,500 professionals with a wide range of practice areas and specialties. Pat is the Leader of the Americas Sector for FTI’s Construction, Environmental and Government Contracts Practice, and manages approximately 100 professionals as part of that responsibility. Pat has been working in the trenches – or rather the file cabinets – for over 20 years in reviewing claim submissions in either defending against these false claim assertions or vetting draft claims in attempts to purge them of offending elements. Pat has worked for both the US Government as well as contractors, so he brings a balanced perspective to the subject.

Richard Dyer — Pat, from a pricing and accounting standpoint, what types of practices will get contractors into trouble the most in these cases?

Patrick McGeehin — I see a lot of different practices that pose risk for contractors, but some examples include:

  • Billing journeyman rates for apprentices as part of change orders or time and material billings.
  • Obtaining concessions from subcontractors but billing the original quotes in a change order situation.
  • Representing General Liability, Health Care and Workmen’s Compensation insurances as if based on third party premiums when, in fact, the company is self-insured.
  • Billing full materials cost when vendors have provided discounts or rebates.
  • “Marking up” certain cost elements such that they are not billed at actual costs (e.g., IT services, training, insurances, bond, car and truck usage, etc.).
  • Not paying subcontractors for amounts requisitioned and paid by the owner before submitting the next requisition.
  • Billing equipment as if rented when equipment is owned by the contractor or by a related entity.
  • Not paying the initial bond premium before requisitioning for the total amount under a Federal project.
  • Billing bond costs at full rates when bond rates were discounted based on rebates.
  • Using a related party subcontractor in a change order proposal and not disclosing the relationship. A public client might consider this as information that is not “complete” when assessing the cost and pricing data, and, if a Federal project, there should be no markup on the sub costs in the proposal unless it is a commercial item.
  • Billing full airfare rates when airfare rates were discounted based on rebates.

Richard Dyer — When it comes to actual damage calculations for a project claim, where should management look to see if the claim is being prepared and submitted correctly?

Patrick McGeehin — Scrubbing the claim before submission is essential. Looking for these “no-nos” will help in cleaning things up.

  • Including FAR Part 31 unallowable costs (e.g., interest, entertainment, etc.) in formula calculations for home office overhead mark-ups.
  • Claiming the cost of equipment that is not on site or is being repaired for all or part of the period being claimed.
  • Billing General Liability, Workman’s Compensation or other insurances at rates that include a markup and do not represent actual costs.
  • Duplicating indirect costs in both a daily rate and a markup percentage for field office overhead.
  • Including one time charges in a daily field office overhead rate.
  • Including FAR Part 31 unallowable costs (e.g., charitable contributions, entertainment, etc.) in a field office overhead rate.
  • Failing to reflect discounts or rebates from suppliers and subcontractors in pricing change order costs.
  • Including any non-cost-based charges that include intercompany profits, commissions, fees, etc. as proposed ‘costs’, without adequate disclosure.

Nicole Woolard — What recommendations do you have for claim preparers to assist in calculating and quantifying a proper submission?

Patrick McGeehin — In addition to the over-arching principle of disclosing exactly what the bases are for your pricing actions, some practical guidelines in preparation of calculations should include:

  • Read and understand the contract pricing provisions before preparing and submitting the claim. Too many times, project level people submit claims based on their personal experiences, when in fact those approaches are in conflict with the contract (e.g., equipment rates, mark-up rates, etc.).
  • Use actual costs whenever possible and where not possible, use reasonable estimates and disclose the methodology used.
  • Use approaches to claims that are consistent with construction industry-accepted methods (e.g., measured mile analyses).
  • If some costs are being claimed under alternate approaches, clearly identify them and calculate some type of credit in the submission to avoid claims of overlap. An example of this is claiming a field office overhead daily rate and a mark-up rate. Care must be taken to give a credit in the claim submission, or split the overhead pool into two pools and calculate separate rates based on these pools.
  • Make sure subcontractor payments are consistent with certification of requisitions to the owner.
  • Fully analyze the claim for duplication.

Nicole Woolard — What are some other general best practice recommendations for personnel involved with the administration and submission of extra work requests and claims?

Patrick McGeehin — There are some additional practices that should always be considered, such as:

  • Don’t submit claims hastily.
  • Have non-project personnel review claim submissions BEFORE they go in.
  • Communicate fully with experts.
  • Compare rates and assumptions being made in a claim to those found in the bid documents.
  • Closely review subcontractor claims and consider the use of detailed written questionnaires to flesh out any potential problem areas.

Nicole Woolard — When it comes to documentation, what helps in keeping the claim out of harm’s way or preparing to defend against a false claim allegation?

Patrick McGeehin — Following these practices will go a long way:

  • Maintain properly organized and current project documentation.
  • Maintain an audit trail from claim calculations to contemporaneous project documents.
  • Keep copies of all materials given to auditor or claims consultant hired by the owner.
  • Fully disclose the necessary explanatory information of contract interpretations and costing methodologies.
  • Clearly disclose any issues that are estimated.

As mentioned above, disclosure is critical to help protect against false claim allegations. It might be that the Government disagrees with a particular claim or approach to pricing, but if every basis is disclosed, it is difficult, in most situations, for them to maintain that there was a false submission.

Richard Dyer — What are some internal policies and procedures that executive level management should adopt in light of federal, state, and local false claims laws?

Patrick McGeehin — A compliance program is essential to instilling the proper mind set and guarding against errors and oversights in claims processing. Include these steps at a minimum:

  • Develop, support and “live by” a company-wide Ethics program.
  • Develop a due diligence program for the development and review of claims.
  • Conduct periodic seminars and training programs for project level staff and accounting departments, and encourage and support continuing education for company employees so that basic requirements are understood and current trends and issues are identified.

Richard Dyer — Thanks Pat. Let’s talk next time about preparing a detailed interview, or as you put it, a questionnaire, for vetting of subcontractor claims, an area where contractors have extraordinary exposure.

© 2009- Duane Morris LLP. Duane Morris is a registered service mark of Duane Morris LLP.

The opinions expressed on this blog are those of the author and are not to be construed as legal advice.

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