Contractor Pays $940 Thousand to Settle False Claims Allegations

FAR (Federal Acquisition Regulations) 31.201-5 is a succinct statement on how Government contractors need to account for income derived from their Government contracts. It reads: "The applicable portion of any income, rebate, allowance or other credit relating to any allowable cost and received by or accruing to the contractor shall be credited to the Government either as a cost reduction or by cash refund. We've discussed this provision before. See for example, this one from 2010 or a somewhat related one from 2015. Examples of credits that should be deducted from costs charged to the Government might include prompt payment or cash discounts, airline refunds, sales of scrap, and tax refunds (e.g. state income taxes that are allowable under Government contracts).

But what happens if a contractor does not give the Government back its allocable share of credits? Here's a recent case where a contractor did not pass along discounts. A whistleblower took notice and filed a False Claims Act lawsuit. The Government enjoined and a settlement was just reached where the contractor agreed to pay $940 thousand (of which the whistleblower received $160 thousand).

International SOS is a provider of overseas healthcare services for the Government. Among the services it provided was aeromedical evacuations which, since it did not have its own aircraft, subcontracted with other companies. For more than four years, up until 2017, International SOS billed TRICARE for the full cost of these aeromedical evacuations. Unknown to the Government however, International SOS negotiated discounts from its third-party air ambulance providers. It should have passed those discounts  back to the Government but didn't. The company billed the full non-discounted cost to TRICARE.

We should also note here that failure to disclose the discounts could also result in defective pricing, i.e. violations of the Truth in Negotiations Act if the available discounts were not disclosed during contract negotiations.

Hiring, Wage, and Employment Subsidies

There exists a variety of Federal, state and local programs intended to reduce unemployment. These are commonly known as hiring subsidies, wage subsidies, or employment subsidies, and compensate employers for a certain percentage of their wages for a specific period of time. Whether such programs are effective in the near term or over the long haul in reducing unemployment or reducing the number of chronically unemployed, is subject to much debate. A lot of companies eschew such programs, thinking the cost (increased training and reduced productivity) outweigh the benefits. Others find great benefit in hiring subsidized labor. A lot depends upon the skills needed for a particular position and the level of training and supervision required.

For Government contractors (with cost type contracts), there is little monetary incentive to join a subsidized labor program. If the subsidy is a cash payment from a Governmental entity or even a tax credit, it must be treated as a credit in accordance with the FAR (Federal Acquisition Regulations) credit clause (see FAR 31.201-5) and passed back to the Government. Federal contracting rules will not allow contractors to obtain double reimbursement for the same cost.

To illustrate, consider the Workforce Investment Act (WIA) of 1998. This Act was intended to help turn the "hard-core" unemployed into productive wage earners. One incentive to industry to participate in the program is a partial subsidization of these new workers' wages, up to 50 percent for the first weeks or months of their employment. According to the law, this subsidy was intended to compensate employers for the increased training costs and reduced productivity associated with hiring.

If a contractor includes costs in its proposals or billings that are subject to reimbursement under the WIA, an appropriate credit should be given the Government as required by the FAR credit clause. To read more about the FAR credit clause, click here.