Thursday, February 11, 2016

Energy Department Still Reimbursing Excessive Legal Fees

About six years ago, the Department of Energy, Office of Inspector General (DOE-IG) revealed through an audit that the Energy Department was reimbursing contractors for legal costs that were questionable because of their association with an underlying fine or penalty, the costs of which are not allowable under Government contractors. This practice permitted contractors to incur costs for outside counsel that should not have been paid based on the terms of their engagement letters, and authorized settlement payments without performing required reviews. To state the obvious here, whatever contractors spent, were passed along directly to the Government under cost reimbursable contracts.

Earlier this month, The DOE-IG issued a follow-up report to their initial audit. In their words, "Although the Department's management of contractor fines, penalties, and legal costs had improved since our 2009 report, we found that problems with the management of these costs continue to exist. Specifically, our testing revealed that the Department was still authorizing settlement payments without documented evidence of settlement reviews to determine the allowability of costs. Furthermore, the Department had not always determined when post-settlement reviews were warranted. Our detailed review of 46 settlement agreements at six site contractors found 36 settlements (78 percent) valued at more than $62 million in which there was no documented evidence a settlement review had been performed."

The DOE-IG seems to be more aggressive on these matters than either the DOD-IG (Department of Defense Inspector General) or DCAA (Defense Contract Audit Agency) but it wouldn't be out of character for either one of those Agencies to use the DOE report as an audit lead to go out and assess the level of risk at DOD contractors - especially the larger ones with high percentages of cost reimbursable contracts. The benefits of putting allegations of improprieties behind them by settling with plaintiffs (while admitting no guilt or liability) outweigh the cost when the Government is picking up the tab.

Examples of DOE contractor settlements include allegations of discrimination, whistleblower complaints and other legal matters. To illustrate the IG concerns, discrimination is a violation of Federal and State law, DOE policy, and contract terms. Unless the contractor can establish during the settlement review process that the plaintiff had little chance of success on the complaint, settlement and outside legal costs associated with allegations of discrimination are not allowable.

You can read the entire DOE-IG followup audit report here.

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