Contractor Disclosure Program - High Number of Reported Cases of Labor Mischarging

We've written from time to time concerning the DoD Contractor Disclosure Program. Any contractor with a $5 million contract must have a code of business ethics (if you're unsure, check your contract for the FAR Clause 52.203-13). The ethics program must contain a requirement that contractors self-report to the DoD-IG (Inspector General) criminal and civil violations of law. Specifically, the clause requires contractors to:

...timely disclose, in writing, to the agency Office of the Inspector General (OIG) with a copy to the contracting officer whenever, in connection with the award, performance, or closeout of this contract or any subcontract thereunder, the contractor has credible evidence that a principal, employee, agent, or subcontractor of the contractor has committed a violation of Federal criminal law involving fraud, conflict of interest, bribery, or gratuity violations found in Title 18 of the US Code or a violation of the civil False Claims Act.

In a recent DoD-IG report, the Inspector General reported that it had received 86 contractor (or subcontractor) disclosures in a six month reporting period. At the same time, it had 687 active cases on the books. Evidently, the IG has a difficult time closing out reported cases of "credible evidence".

Of those open cases, 548 or 80 percent concern labor mischarging. Is it any wonder that contract auditors spend so much of their time and effort performing labor floorchecks and other labor audits?  Other open cases, all representing less than five percent of the total, include violations of the anti-kickback act, false claims counterfeit parts, false certifications, non-conforming parts, and significant overpayments.

But lets get back to the labor mischarging issue. It is absolutely imperative that contractors develop adequate policies and procedures for ensuring the propriety of labor charges. Its not easy. There are a lot of players involved in the process from employees, to their supervisors, to timekeepers, to management, and even to stockholders. There are incentives and pressures, opportunities, attitudes, and rationalizations at play. Everyone wants to meet budget. Perhaps there are incentives tied to performance; bonuses or promotions. We read of a case where a someone felt justified in mischarging because the contracting officer never returned phone calls. We read of another case where an employee wanted to "... stick it to the Government whenever he could."

There are two conditions we see repeatedly the contribute to labor mischarging. One is the "tone at the top". If management does not buy in, neither will employees. The second is the lack of monitoring. Its a fairly simple task to write up sterling policies and procedures for labor charging. Its really pretty basic. Check out the DCAA Contract Audit Manual - all of the attributes are listed. However, often times, there is no on-going monitoring for compliance. After awhile, employees realize that no one is looking so why do they need to comply. As the old adage goes, what gets monitored, gets done.

Two words of advice here. Management must believe that labor charging is important and must convey that message in word and deed. Secondly, companies need a robust compliance review program to ensure that employees and their supervisors are adhering to policies and procedures.