Contractor Pays $1.1 Million to Settle False Claims Allegations

This is a followup to a posting we made just last month discussing the necessity of contractors including T&M (Time and Material) contracts in their Incurred Cost Submissions. You can read that posting by clicking here. One of the points we made was this:

Auditors are also interested in the qualifications of the employees billed under the various skill codes specified in the contract. For example, a T&M contract might spell out rates for Senior Engineer, Junior Engineer, and Technician. The auditor will want to ensure that the contractor is not billing a Junior Engineer at a Senior Engineer rate. That is why auditors sometimes request HR information related to employees charging T&M contracts. It doesn't matter nor will the contractor be able to assert that the Junior Engineer was better qualified than the Senior Engineer for the job. If the Government called for a Senior Engineer and paid the rate for a Senior Engineer, it should get the services of a Senior Engineer. Any evidence that the contractor is using lower priced employees will get referred to the contracting officer.

One company found out the hard way what happens when a contractor bills higher rates for lesser skills. The Department of Justice, in a press release yesterday, announced that it had settled a False Claims allegations with a contractor that did just that - falsifying the qualifications of employees in order to bill for labor charges at rates higher than allowed under its Government contract. It cost the company $1.1 million to resolve the issue. The press release did not state what the damages were to the Government but presumably, this settlement covered the known damages and a little more.

 The press release indicated that the contractor had falsified resumes for employees to qualify them for higher paying positions, thereby falsely increasing the amount of money billed for labor. The problem was uncovered by DCAA (Defense Contract Audit Agency) in the course of reviewing an annual incurred cost submissions, simply by following standard audit guidance and audit program steps. The auditors simply asked to examine the qualifications of the individuals billed under the T&M contracts and then dug a little deeper when the data submitted to them seemed a little "fresh".

If the Government calls out for a civil engineer with a masters degree and six or more years of experience, contractors need to provide employees that meet those qualifications. Don't provide someone who doesn't meet those qualifications, even if you know that they can perform the work effectively. Buoyed by these results, you just know that every auditor is going to start asking the penetrating questions concerning labor billed under T&M contracts.

Annual Incurred Cost Submissions and Time and Material Contracts

This is a followup to our discussion in Monday's post describing the need for contractors to include T&M (Time and Material) contracts in their incurred cost claims. If you missed it, you can read it here. There is some good news for contractors that have T&M contracts but no flexibly-priced contracts (e.g. CPFF, CPAF, CPIF, etc). The annual incurred cost submission becomes very simple.

FAR 52.216-7, Allowable Cost and Payment, contains requirements in section (d)(2)(iii) and (iv) for contractors to submit adequate indirect cost rate proposal withing six months following the end of the fiscal year. Most contractors are familiar with the requirement - it contains required schedules 'A through 'O as well as optional schedules 'A through 'O (not too many contractors submit the optional schedules).

Required schedules 'A through 'H, 'L, 'M, 'N, do not apply to T&M contracts. Those are the schedules where contractors identify their indirect cost pools and corresponding allocation bases, calculate indirect rates, reconcile those costs to the General Ledger and accumulate claimed costs at the calculated indirect rates, among other things that do not apply to T&M contracts. That leaves only Schedules 'I, 'J, 'K, and 'O as applicable or potentially applicable.

Schedule 'K, Summary of each time-and-materials and labor-hour contract information, including labor categories, labor rates, hours, and amounts is the primary schedule for detailing hours and costs charged to T&M contracts. This information is rolled up into Schedule I, Schedule of cumulative direct and indirect costs claimed and billed by contract and subcontract. Its largely redundant and doesn't serve a useful purpose but if a contractor fails to provide it, the auditor will most certainly reject the submission on that technicality.

Schedule 'J lists subcontractors and subcontracts. This may or may not be applicable depending upon whether there are subcontractors under a contractors' T&M contracts.

Schedule 'O simply indicates whether particular contracts are ready to close.

So there you have it. Contractors with T&M (and labor-hour) contracts but no flexibly-priced contracts, don't have much to do when it comes to completing their annual incurred cost submissions.

Floorchecks and Time and Material Contracts

Most Government contractors with cost-reimbursable contracts are very familiar with floorchecks - where auditors make surprise visits to contractor facilities to interview employees and assess the propriety of hours charged to Government contracts. On cost-reimbursable contracts, the objective is to ensure that employees charging the contract(s) are actually performing work in support of the contract(s).

For Time and Material (T&M) contracts and Labor-Hour (LH) contracts, the audit focus is a little different. The fixed hourly rates are already negotiated. The risk to the Government is that they are getting the skills they are paying for.

The procedures followed by DCAA auditors for floorchecking contractor employees charging T&M and LH contracts include:

1. Obtain a list or roster of employees charging hours under T&M/LH contracts.
2. Select employees to be floorchecked (can be a random or judgmental selection)
3. Gather appropriate background data on the selected employees, such as ID number job classification or category, contractually required labor qualifications, nature of work performed by the employee, and his/her department or cost center prior to conducting the floorcheck.
4. Prepare worksheets to use during the floorchecks to help guide the questioning and facilitate the recording of the employee's responses.
5. Obtain a plant layout and note the selected employees' locations.
6. Floorcheck the employees selected

• Identify each selected employee by verifying the employee's ID number and name to the control list or roster.
• Discuss the nature of the work being performed and observe the actual work performance to determine whether the employee is performing in the proper direct labor capacity (as specified in the contract) and whether the time is being charged correctly.
• Discuss the employee's timekeeping procedures to determine compliance with internal controls.
• Compare employee responses with previous data gathered. If inconsistent, ask appropriate follow-up questions.

Sometimes, with certain auditors, these questions take on an interrogation atmosphere. It is perfectly acceptable, if this happens, to call a time-out and allow things to cool down. Never underestimate the perceptive and intuitive skills of the auditors. Some of like to think and act like Columbo.