Government contracting fraud
I need this job, but…
We’ve all been in the position of applying for a job that we want but is just not quite right fit for our resume. You have 8 out of the 10 required skills. And you can fudge the others. You can stretch some of your experiences to kinda, sorta fit, dress them up for the occasion even though you know that you don’t have those skills. In politics, it would be called spin. In statistics, cherry picking. When it comes to trying to get a government contract, it’s called fraud.
Set aside contracting requirements.
The same thing happens when contractors work with the government. Congress has put rules in place to ensure that certain businesses receive a fair share of federal contract and subcontract dollars. Federal government contracts and subcontracts may be reserved, or “set aside,” for various categories of small businesses, such that only eligible small businesses in a particular socioeconomic category are eligible to bid on, receive, and perform the contracts. For larger companies (those not classified as veterans or small businesses) that win federal contracts, they are required to include small businesses as subcontractors and meet specific targets for small business involvement. This means that even when a large contractor wins a project, they must actively work to include small businesses in the work by giving them subcontracting opportunities.
One such category is a service-disabled, veteran-owned small business (SDVOSB), which is reserved for small businesses owned, controlled, and operated by veterans of the United States military who incurred a disability in the course of their military service to the United States. Large businesses that perform on large federal prime contracts must develop and implement small business subcontracting plans designed to subcontract portions of the work to SDVOSBs and other types of small businesses.
Federal Acquisition Regulations
For example, contractors that compete for construction contracts worth more than $1.5 million must submit a small business subcontracting plan to the government that specifies how it will attract small businesses and ensure that such businesses have a maximum practicable opportunity to subcontract. FAR § 19.702. “[A]ny contractor or subcontractor failing to comply in good faith with the requirements of the subcontracting plan is in material breach of its contract.” FAR § 19.702(c).
The scheme
Hensel Phelps is a general contractor and construction company that performs large scale private construction and public works projects nationwide, including in Washington and New York States. In 2011, the U.S. General Services Administration, which oversees construction of many federal buildings, awarded Hensel Phelps a contract to construct the Armed Forces Retirement Home’s New Commons/Health Care Building in Washington, D.C. The Armed Forces Retirement Home provides retirement communities and residential facilities for veterans. As a condition of the contract, Hensel Phelps was required to have and implement a small business subcontracting plan to provide contracting opportunities for SDVOSBs and other types of small businesses.
Hensel Phelps met almost every contracting requirement. It was so, so close to getting the contract. But it didn’t have a small business or SDVOSB sub-contractor as required by federal contracting guidelines. It didn’t meet all the required skills. So it allegedly fudged a little. Just a little. But in a material way. FAR § 19.702(c).
To make it seem like it was meeting its small business subcontracting requirements, it allegedly subcontracted work for kitchen equipment installation to a service-disabled veteran-owned small business (SDVOSB). However, instead of working directly with the SDVOSB, Hensel Phelps allegedly negotiated the terms and pricing of the subcontract with a large business, referred to as Company 1. The SDVOSB was only nominally involved, receiving just a 1.5% fee for its participation while Company 1 effectively performed all the work.
Hensel Phelps supposedly structured the deal so that the SDVOSB was involved only on paper. The company entered into a second-tier subcontract with Company 1 under terms that Hensel Phelps and Company 1 negotiated without input from the SDVOSB. The SDVOSB played a minimal role in the actual project, as Company 1 managed everything from pricing to delivery logistics and provided the certified payroll records. Hensel Phelps allegedly communicated directly with Company 1 for key aspects of the project, bypassing the SDVOSB for much of the work, which is a clear violation of the subcontracting goals aimed at supporting small, disadvantaged businesses.
The penalty
Hensel Phelps agreed to pay $2,804,110, to resolve allegations that it improperly manipulated a federal subcontract designated for a business owned and operated by a service-disabled veteran.
As the U.S. Attorney commented:
“Taking advantage of contracts intended for companies owned and operated by service-disabled veterans demonstrates a shocking disregard for fair competition and integrity in government contracting. We insisted not only that Hensel Phelps refund the government and pay a hefty penalty for its misconduct, but that it admit to its misconduct.”
The whistleblower
The whistleblower was a company known as Fox Unlimited Enterprises, LLP. Goes to show that anyone, even a company or competitor, can be a whistleblower. Under the qui tam provision of the False Claims Act, a private party (also referred to as a whistleblower or relator) may file an action on behalf of the United States and receive a portion of the recovery, typically between 15-30%.
If you think you’ve observed fraud or misconduct, we can evaluate your options. Vivek Kothari is a former federal prosecutor who represents whistleblowers. For a free consultation, contact Vivek by email, phone, Signal, or fill out the contact form.