What is the "Christian Doctrine"?

What is the "Christian Doctrine"? We discussed the basis of the Christian Doctrine back in 2010. You can find that post here.

Briefly stated, under the Christian doctrine, a court may insert a clause into a Government contract by operation of law if that clause is required under applicable federal administrative regulations. In "Christian", the Court of Claims concluded that the standard termination clause required by ASPR (Armed Services Procurement Regulations, since replaced by FAR) must be read into the contract, even though the contract lacked a termination clause. For a court to incorporate a clause into a contract under the Christian doctrine, it generally must find (i) the clause is mandatory and (ii) that it expresses a significant or deeply ingrained strand of public procurement policy.

A recent Appeals Court decision illustrates how the Christian Doctrine is applied to the absense of the Bonding clause in a construction contract.

The Army awarded a contract to K-Con, Inc. that lacked the standard bonding clause for construction contracts. FAR 52.228-15 requires offerors in construction contracts valued at $150 thousand or greater to furnish performance and payment bonds. Through probably an oversight, the Army failed to include that clause in the solicitation or the resulting contract.

The Appeals Court ruled that the clause was "read into" the contract under the Christian Doctrine because it is required by statute. The statute, 40 USC 3131-34 (formerly known as the Miller Act) requires that before any contract of more than $100 thousand is awarded for the construction, alteration, or repair of any public building or public work of the Federal Government, a person must furnish to the Government performance and payment bonds which become binding when the contract is awarded.

Under the second prong of the Christian doctrine, the Appeals Court ruled that performance and payment bonds express a significant or deeply ingrained strand of public procurement policy. Payment bonds are intended to provide security for those who furnish labor and materials in th e performance of Government contracts. For private contracts, subcontractors and suppliers can obtain a mechanic's lien against the improved property to ensure that they are paid. Government property however, cannot be subject to subcontractors' and suppliers' liens. Thus the payment bond requirements was created to provide, in Government contracts, an alternative remedy to protect those who supply labor or materials to a contractor on a Federal project.

Guilty Plea in Product Substitution Case

Granite Bay is an unincorporated area northeast of Sacramento California located along the north shore of Folsom Lake. It began as Granite Bar when gold miners first settled the banks of the American River. At its peak, there was 37 gold mines along both sides of the river.

Granite Bay (formerly Granite Bar) has a long and unique history. Besides the gold found there, it happened to be located along the supply line that was used to bring goods to the gold miners and carry gold nuggets to the banks in San Francisco. It was also a place for bandits to hang out - laying in wait to relieve travelers of their belongings. One brazen and famous robber along the stretch was known as "Rattlesnake Dick", so named, not because he was sneaky but because he was once an honest gold miner upriver at Rattlesnake Bar before turning outlaw.

Granite Bay is still home to thieves. The Justice Department just announced a guilty plea by a Granite Bay man accused of product substitution fraud. The scope of his fraud would probably leave Rattlesnake Dick jealous however. Between 2011 and 2017, Mr Meron used two office supply businesses he operated to defraud federal government agencies out of $3.5 million. He did this by substituting and delivering cheaper, generic versions of expensive, name-brand products his customers ordered, and pocketing the price difference.

Meron's two companies contracted to sell office supplies to federal agencies through two web-based government sales portals; GSA Advantage and DoD EMall. After Meron received payments for the premium products his customers ordered, he obtained compatible products from his suppliers that cost him a fraction of what his customers paid for the brand-name products they ordered. Meron then substituted and delivered those cheaper products for the more expensive products and retained the difference in cost. Over time, Meron extended his substitution scheme to nearly all orders for those name-brand products, and never intended to deliver what his customers ordered.

The use of knockoff products is significant because the United States Trade Trade Agreement Act requires federal agencies to buy products made or designed in the US. It bans federal agencies from buying products made in China. Meron's suppliers used cheaper products made in China.

Contractors Need to Avoid Even the Appearance of a Conflict of Interest

An anonymous source tipped off the Mayor of Nashville Tennessee that one of its public works contractors was improperly entertaining city officials who were responsible for directing city business to that contractor. The Mayor immediately requested an audit. The now completed audit concluded that there was an "appearance of preferential treatment" to that firm who has more than tippled its average yearly revenue from the City. Since 2010, it has received nearly $50 million in contracts for street paving, sidewalks, and other work.

City officials responsible for awarding those contracts were spotted (and photographed) in the Contractor's suite at sporting events (Bridgestone Arena) and according to the audit, those City employees did not appear to have paid for their own tickets. Photographic evidence also showed City employees having drinks after hours with the Company Vice President.

While the audit concluded that there was an appearance of a conflict of interest, the audit did not produce evidence that the Contractor received a benefit from the city in exchange for the entertainment. Most of the employees involved denied taking any tickets for free. One employee admitted to failure to reimburse the contractor for two of his tickets. With regard to the after-hours entertainment, claimed they paid cash for their drinks.

Other allegations the audit was unable to substantiate included:

• Invoices with no support
• Only inspectors on good terms with the Contractor were allowed to perform inspections
• City officials "directed" the Contractor to work with specified subcontractors
• There was a conflict of interest because the City's senior procurement officer once worked for the Contractor.

So what was the outcome of this audit?

• The mayor returned the Contractor's campaign contributions
• The Contractor agreed to pay for certain re-work for which it was trying to obtain an equitable adjustment
• City employees will undergo ethics training.

Northrup Grumman to pay $31 Million for Time-card Fraud

Northrop Grumman has agreed to pay the Government $31 million to resolve criminal and civil charges for over-billing the Air Force on a couple of contracts. The over-billings were a result of employees being paid for work not performed and occurred over a three-year period ending in 2013. In exchange for admitting its employees' misconduct, making full restitution, and agreeing to cooperate in the ongoing criminal investigation, no criminal charges will be filed against Northrup Grumman. The employees involved in the mischarging are no doubt concerned however.

According to the Justice Department press release, Northrup Grumman employees deployed to an air base in the Middle East defrauded the Air Force by over-billing time charged to a Government contract. Those employees charged exactly 12 or 13.5 hours per day, seven days a week, despite the fact that the employees were not working those hours. What were they doing? Following are some representative acts of what those employees were doing while charging time to the contract.

• Went for ice cream and a movie
• Went golfing
• Watched the Super Bowl from their hotel
• Went to a local amusement park
• Went skiing
• Laid by the pool
• Did not show up for work
• Was drunk
• Went to a music festival
• Couldn't get on the base because of an expired badge (yet claimed 13.5 hours of work)
• Shopped for a Chanel purse
• Picked up wife and children at the air port and went out to dinner

Some of the employees involved in this mischarging earned 3.6 times their base pay.

Among the corrective action that Northrup Grumman agreed to take are the following.

1. Issue periodic reminders of the latest time-charging guidance and policies, and provide repeated training sessions to help ensure proper time-charging by employees
2. Create a dedicated compliance manager position specifically to monitor time-charging.
3. Install a bio-metric reader at the program site to track employees' time on base.

Additionally, Northrup Grumman must use its best efforts to make available, and encourage, the cooperation of present and former officers and employees for interviews and testimony, consistent with their rights and privileges of such individuals. Most likely however, any employee involved in this mischarging is long gone from the company.

There is no indication in the Justice Department materials as to how this fraud was uncovered. More information on this case can be found here.

What are Improper Payments?

Under OMB (Office of Management and Budget), Federal agencies are required to periodically review payments under contracts, awards, grants, and other expenditures for improper payments. Within DoD, many agencies have programs in place to test for improper payments. DCAA (Defense Contract Audit Agency), for example, checks for improper payments in connection with "Testing of Paid Vouchers".

What are "improper payments"? Here's the OMB definition (which comes from Public Law No. 107-300).

1. Any payment that should not have been made or that was made in an incorrect amount (including overpayments and underpayments) under statutory, contractual, administrative, or other legally applicable requirements, and includes any payment to an ineligible recipient, and
2. Any payment for an ineligible service, any duplicate payment, any payments for services not received, and any payment that does not account for credit for applicable discounts.

One primary purpose of an adequate billing system is to minimize improper payments. That's why contract auditors place so much emphasis on billing systems and associated internal controls. Many improper payments are inadvertent and could be avoided with a good billing system.

One area that has come into focus regarding improper payments is provisional billing rates. Contractors with cost-type contracts are reimbursed their actual direct costs and reimbursed their indirect costs at provisional billing rates. Provisional billing rates are trued up after the end of the year when contractors submit their annual incurred cost proposals. But it is contractors' responsibility to ensure that their provisional billing rates accurately reflect their best estimate of the final rate. At the beginning of the year, indirect rates are just educated guesses but as the year progresses, it becomes easier and easier to see what the final rate will look like. If the provisional billing rate is significantly higher than what the final rate is expected to be, contractors have an affirmative duty to revise those rates downward. Billing excessive provisional rates for too long will land contractors in the improper payment pool.

Has the Labor Department Stepped Up Its Investigations?

Is it just us or has the Labor Department been stepping up its compliance activities regarding labor laws and regulations?

The Labor Department has two offices established to ensure compliance with various laws and regulations related to labor. There is the Office of Federal Contract Compliance Programs (OFCCP) with responsibility for ensuring that contractors comply with laws and regulations requiring nondiscrimination in all of its many forms. There is also the Wage and Hour Division (WHD) who enforces Federal minimum wage, overtime pay, record-keeping, FLSA, Davis-Bacon, and SCA (Service Contracting Act), among many others. Additionally, the Labor Department Office of Inspector General (OIG) also dabbles in compliance matters.

Last week we reported on the case of a contractor in Minnesota who had to pay $400 thousand to female employees for systemic pay discrimination violations. (See Routine Labor Department Audits - What Could Go Wrong?)

A couple of months ago, we reported on a case where as a result of an investigation by WHD, a contractor was found to have misclassified worker skill levels thereby shortchanging them in violation of the Davis-Bacon Act (see Contractor Agrees to Pony Up for Shortchanging its Workers).

Back in June, we reported on another case, brought by a whistleblower, where the OIG found a contractor was underpaying its employees and had submitted false certified payroll reports for work it performed on several construction projects (see Davis-Bacon Act Violations Cost Company $625 Thousand).

Just yesterday, the Labor Department announced another settlement where a contractor was found to have shortchanged its workers by failing to correctly calculate and pay the proper health and welfare fringe benefits to employee accounts. That resulted from a WHD investigation that ultimately cost the contractor $2.8 million (see Labor Department Recovers $2.8 Million for 443 Employees).

But wait, there's more. Two days ago, the OFCCP announced another settlement involving a contractor who agreed to pay $410 thousand in back wages to settle allegations of systemic hiring discrimination. The company was alleged to have discriminated against women for security guard services (see Federal Contractor Agrees to Pay $409,947 in Back Wages to Settle Hiring Discrimination Allegations).

Government contractors should periodically self-assess their level of compliance with the various labor laws that apply. There are many and a good place to learn about them is with Labor Department on-line resources (See Wage and Hour Laws - Compliance "Toolkit").