Monday, August 22, 2011

Prime Contractors Have a Duty to Ensure Subcontract Costs are Accurate

The other day, we came across an item that illustrates the importance of prime contractors maintaining adequate oversight of their subcontractors. It involved a cost-reimbursable contract with the Department of Labor and a cost-reimbursable subcontract between that contractor and a subcontractor. Somewhere along the way, the subcontractor falsified its timekeeping/payroll records and inflated billings to the prime contractor. The prime contractor, in turn, submitted the subcontractor's "inflated" billings to the Government and was reimbursed. The scheme was eventually uncovered (not by the prime contractor but by a whistle-blower) and the Department of Labor has demanded restitution from the prime contractor.

Besides restitution however, the Government has additional tools it can use to mete out justice. Consider the Government's comments addressing this situation.

...both the prime and its subcontractor's could be charged under 18.U.S.C 1001 for making false statements by submitting false payroll information. Additionally, both may be prosecuted for making false claims under the Civil False Claims Act, 31 U.S.C. 3729-33 for submission of false payroll information. Moreover the prime may be liable under the criminal statute for False Claims, 18 U.S.C. Section 287 as well. This is because both the prime contractor and its subcontractors are responsible for the accuracy of claims filed with the government.
In the case of the criminal false claim, the statute imposes liability on "Whoever makes or presents to any person or officer in the civil, military, or naval service of the United States, or to any department or agency thereof, any claim upon or against the United States, or any department or agency thereof, knowing such claim to be false, fictitious, or fraudulent, shall be imprisoned not more than five years and shall be subject to a fine in the amount provided in this title." While there may be certain defenses for the prime, since it has a duty to ensure the claims of its subs are accurate, it can be held accountable. Filing of charges against either the prime or its subs whether criminal or civil is at the discretion of the Justice Department. In the case at hand, the prime may have a defense to responsibility depending on the facts.  
A contractor's responsibility to the Government is not limited just to subcontract cost issues. It would also extend to qualitative and quantitative aspects of subcontract performance - parts meeting specifications and product substitutions are a couple of things that come to mind.
This is a good reminder on the need for contractor's to maintain an active oversight roll in any subcontract it awards.

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