Federal Construction Contracting Blog : Federal Construction Contracting Law Firm : Cohen Seglias Pallas Greenhall & Furman PC : Construction Law, Dredging and Claims

By: Edward T. DeLisle

On April 26, 2010, President Obama issued an executive order to study the way in which the government provides assistance to veteran-owned and service-disabled, veteran-owned businesses. This executive order could not have come at a better time. It appears that the government has a two-fold problem: achieving federally mandated goals for veteran-owned and service-disabled companies and eliminating fraud in its small business programs, generally. 

On April 30, 2010, the Government Accountability Office issued a report to the House of Representatives, Small Business Committee concluding that fraud continues to run rampant in the government's small business programs. In an investigation conducted between October of 2008 and January of 2010, the GAO identified fourteen (14) companies that falsely held themselves out as 8(a) eligible and secured work through the government's set-aside programs.  The work obtained by their companies totaled $325 million. This report was issued less than six (6) months after the GAO issued a similar report that focused on fraud relating to contracts set-aside for veterans and service-disabled veterans.

As revealed by the GAO reports, fraud in the federal small business programs is wide-spread and, undoubtedly, has been exacerbated by the economic slowdown. The once robust private sector has run dry. As a result, more and more contractors have become interested in entering the federal marketplace. That has resulted in many more contractors bidding on federal work. This increased competition has generated much interest in small business set-asides, where the field is not nearly as crowded. Unfortunately, not all contractors have entered the small business world consistent with the Federal Acquisition Regulations or the Small Business Administration's regulatory framework.

If fraud was not enough, legitimate small businesses, including veteran-owned and service-disabled, veteran-owned firms, are also being hurt by the failure of the government to hit its contracting goals. As reported by BradentonHerald.com, the Department of Defense represents but one prominent government agency that has fallen short. In recent testimony before the House of Representatives, Veterans' Affairs Subcommittee on Economic Opportunity, a representative of the American Legion cited statistics indicating that less than one percent of DoD's contracts were awarded to service-disabled, veteran-owned companies last year, far less than the Congressionally-mandated three percent goal. While such numbers sound insignificant, they account for billions of dollars government-wide.

President Obama's executive order is aimed at addressing at least some of these issues. The executive order requires the Administrator of the SBA to serve as the chairperson of a government-wide task force designed to do the following, among other things:

* Ensure achievement of the pre-established federal contracting goals for small business concerns owned and controlled by veterans and service-disabled veterans through expanded mentor-protégé assistance and matching small business concerns with contracting opportunities; and
* Increasing the integrity of certifications of status as a small business concern owned and controlled by a veteran or service-disabled veteran.

The task force must issue a formal report to President Obama within one year. After back to back GAO reports depicting systemic problems in the government's small business programs, one can only hope that this administration says "Yes We Can" to small business reform. Lip service to reform is no longer an option. 

Edward T. DeLisle is a Partner in the firm and a member of the Federal Contracting Practice Group. 
 

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The U.S. Army Corps of Engineers awarded an $88 million contract for the construction of a fifty-three mile road around a tropical island in the North Pacific. During contract performance, the contractor submitted a certified claim contending that the contract clause, "Time Extensions for Unusually Severe Weather," was defective, resulting in a gross misrepresentation of the number of adverse weather days that could be anticipated during performance of the work.  The contractor also contended that reliance on the defective specification led to an increase in the cost to perform the work. The certified claim included costs incurred up to the date of the claim submission and costs estimated to be incurred in the future.

The United States Court of Federal Claims found that $50 million of the contractor's certified claim of $63.4 million was clearly fraudulent. During the trial, witnesses, including the corporate officer who certified the claim, testified that the $50 million claim "was a means to get the Government's attention, and to show the Government what would happen if it did not approve the new compaction method that plaintiff wanted."  The Court stated that this part of the certified claim was not submitted in good faith, and was not for an amount which the Plaintiff honestly believed it was entitled. Daewoo Engineering and Construction Co., LTD. v. U.S., No. 02-1914C, October 13, 2006.  Accordingly, the projected additional costs based on estimates, and not yet incurred, were found to be fraudulent.

Characterizing the contractor’s submission as a "negotiating ploy," the Court stated that "using a claim to gain leverage against the United States violates the principle on which Congress enacted the Contract Disputes Act, including its efforts to prevent contractors from using the claims process to obtain higher profits.  Congress called it 'horse trading'." The Court was highly critical of the credibility of the contractor's witnesses, and even commented that the contractor's intent "was to obtain the contract, then profit through demands for equitable adjustments."  The Court’s decision demonstrates that a contractor must be certain that the amount requested in a certified claim accurately reflects the contract adjustment for which the contractor actually believes the Government is liable. Put simply, it is not a good idea to use a claim to “get the government’s attention.”

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