Monday, September 25, 2017

$2 Million Settlement in Small Business Subcontracting Fraud

The Department of Justice (DOJ) announced last Friday a partial settlement in a case involving questionable subcontracting practices by an Energy Department contractor and one of its subcontractors. The investigation is ongoing but one of the parties agreed to pay $2 million to resolve its part of the case.

The DOJ press release can be found here while a newspaper article with more detail can be read here.

Government contracts and subcontracts contain small business subcontracting goals. Although in most cases, contractors make diligent attempts to meet those goals, there is no real penalty for not meeting them. Except in the case of some DOE contracts. DOE is known to base a portion of award fees on contractors' successes in meeting those goals.Therefore in those cases, failure to meet those goals has a direct impact on profits.

In this case, the prime contractor was Washington Closure Hanford (WCH). The Federal case against that company continues. One of its subcontractors was Federal Engineers & Constructors (FE&C). Although admitting no liability, FE&C settled with the Government for $2 million to resolve its part in the affair.

FE&C, in turn, awarded two subcontracts totaling $19.5 million to a third company called Sage Tec cleanup work at DOE's Hanford site. Sage Tec is a small, woman-owned business and awarding $20 million worth of subcontract to a small woman-owned business counted significantly toward both WCH and FE&C meeting their small-business goals.

Things began to unravel when another woman-owned small business, Savage Logistics, called foul. Its owner, Salina Savage, filed a whistleblower suit claiming that Sage Tech was a front company and had no relevant experience, no equipment, and no employees other than its owner.

Turns out that was true. When FE&C awarded the first subcontract to Sage Tec, Sage Tec had no experience, equipment, or employees. When it awarded the second subcontract three years later, Sage Tec still had no employees or equipment although by then it must have had a little bit of experience.

So how did Sage Tec pull off $20 million worth of subcontracting without any equipment or employees? Easy, it "rented" trucks from its prime contractor, FE&C, and used FE&C employees to drive those trucks. So, Sage Tec certainly looks like a front company. It probably doesn't seem helpful to know that the owner of Sage Tec was also the wife of an FE&C Vice President.

For her part in blowing the whistle, Salina Savage gets $470,000 of the $2 million settlement. Also, FE&C agreed to reimburse her for $100,000 in attorney fees.

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