Contractor Disclosure Program - Contractor Repays $1.8 Million in Billing Discrepancy

Early on in our blog publication (February 2010), we discussed DoD's implementation of the voluntary disclosure program - an opportunity for contractors to self-disclose instances of contract "wrong-doing". You can read our initial post on the subject here and although that information is still current, we were reminded of it again after the the Justice Department announced a $1.8 million recovery under the program.

The Contractor Disclosure Program is not voluntary. It was once voluntary and called the Contractor Voluntary Disclosure Program. But sometime around 2008 or 2009, FAR Clause 52.203-13 was published making disclosures of certain violations of criminal law and violations of the civil False Claims Act not so voluntary so they dropped the word "Voluntary" and it became the Contractor Disclosure Program. Now, as part of the Business Ethics Compliance Program, contractors have an affirmative duty to report "credible evidence" of wrong-doing.

The Program has several key features.

• It affords contractors a means of reporting certain violations of criminal law and violations of the civil False Claims Act discovered during self-policing activities
• Provides a framework for Government verification of the matters disclosed.
• Provide an additional means for a coordinated evaluation of administrative, civil, and criminal actions appropriate to the situation

Contractors can also report suspected counterfeit parts or non-conforming parts through the submission of a contractor disclosure.

Each Agency gets to designate an organization for managing the Contractor Disclosure Program. For most agencies, the responsibility for administering the program was handed over to the departmental Office of Inspector General (OIG) which makes sense as the OIG will most likely lead the investigation into the contractor disclosures.

As we mentioned earlier, the Department of Justice just announced a settlement in a Contractor Disclosure Program case. In this case, a contractor discovered during its self-governance activities that it had (inadvertently?) billed the Government for wages and associated costs for work that was not performed. The contractor disclosed the matter, it was investigated by the OIG and the Department of Justice's Civil Division, the contractor repaid $1.8 million and the case closed.

It seems to us that this was a quick and speedy resolution to what could have been a contentious and protracted settlement process had the over-billing been discovered say, through an audit or by a whistleblower. You can read the Justice press release here.

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.