Government Contractor Can Be Penalized for Kickbacks Employees Receive Even If the Company Has No Knowledge of the Kickbacks

Mandatory Anti-Kickback Act procedures will not protect a government contractor from paying civil penalties for kickbacks given by subcontractors to company employees, under the Anti-Kickback Act (AKA), 41 U.S.C. 8701-07. A company is liable for kickbacks its employees receive regardless of whether the company was aware of or profited from the kickbacks. The decision shows the need for government contractors to closely monitor their employees’ compliance with company AKA procedures required by FAR 3.502-3.

A kickback can take many forms including money, football tickets, or anything of value that a subcontractor gives back to a prime contractor in exchange for something of value, like undeserved good past performance ratings.

The rationale for prohibiting kickbacks is not only that they poison the procurement system - they also needlessly raise the price the government pays the prime who in turn pays the subcontractor: since the kickback is ultimately government money, kickbacks cost the government needless expense.

The decision involved Kellogg Brown and Root (KBR)’s ID/IQ contracts with the U.S. Army for transporting military equipment and supplies to Iraq, Afghanistan and Kuwait between 2002 and 2006. The work could be done by KBR or by subcontractors that KBR selected. Two of the subcontractors gave a KBR supervisor and his colleagues meals, drinks, golf outings, tickets to rodeo events and other gifts and entertainment. In exchange, the KBR employees overlooked performance failures of the subcontractors, and continued to give them new subcontracts despite the failures.

After the government joined in a qui tam (whistleblower) lawsuit against KBR and the employees, KBR asked the court to throw the case out, arguing that the AKA did not allow corporate officials to be responsible for acts of the employees, that is, the company had no “vicarious liability” for what its employees did behind the scenes. The District Court agreed with KBR and threw the lawsuit out but the government appealed and won, keeping the case alive.

The appeals court focused first on the AKA’s definition of “person” who could be liable under the Act. The Act defined “person” broadly to include corporations and other business entities.  Thus, since the AKA “makes corporations liable for kickback activity, it requires attributing liability to corporate entities for that activity under a rule of vicarious liability.”

This decision shows why all government contractors must monitor their employees’ compliance with company Anti-Kickback procedures required by FAR 3.502-3 and FAR 52.203-7. Berenzweig Leonard LLP can provide your company with contract compliance guidance as well as white-collar defense strategies to help you comply with legal provisions such as the AKA.

John Polk is a former Assistant U.S. Attorney and handles contract compliance and white-collar issues for the firm. Terry O’Connor has over 40 years of government contract experience in all aspects of contract compliance.  Berenzweig Leonard can help government contractors avoid not only AKA penalties but also avoid being found non-responsible due to kickbacks.  John can be reached at jpolk@berenzweiglaw.com.

The Government Shutdown’s Impact on Payment to Contractors

All companies contracting with the Federal Government should ensure that they are doing everything they can to protect themselves and maximize their chances of payment once the government shutdown ends. Congress has approved back pay for federal workers once the shutdown is over, and President Obama recently signed a bill requiring the DoD to continue paying civilian Federal Government employees and contractors that provide support to the armed services.  Government contractors, however, have been put in limbo, and need to make careful decisions while navigating the shutdown.

Contractors who do not serve the armed services must typically operate on a case-by-case basis, and should stay in contact with their Contracting Officers (COs) and Contracting Officer Representatives (CORs), if they are working, to understand what the procuring agency is doing and how it is operating during the shutdown. The worst thing to do is to drop off the CO’s communication radar and give the CO proof by way of an email track record that your company did not contact him or her during the shutdown to confirm understandings on contract performance. Assumptions cannot be made during this uncertain time, so it will be beneficial to contractors to send regular written communications to agency representatives to ensure everyone is on the same page.

Each contract will have varying factors affecting its appropriation, but generally speaking, a contractor should not expect to get paid for work it does not perform – the Federal Government cannot accept payment for voluntary services under the Anti-Deficiency Act. However, contractors covering work that is fully funded, or incrementally funded and not yet reaching the funding limit, should still be funded by the Government, although each case can differ. Time and materials contracts are more problematic, and contractors should proceed with caution. FAR § 52.242-15 gives the Government discretion to terminate or suspend work independent of whether a contract is funded, and so if contractors have not already initiated creative cost-cutting mechanisms, now is the time to think outside the box and be protective.

Hopefully Congress can lead the way to a solution so that the current standoff can end, and hard working contractors can go back to work and slowly resume a normal and uninterrupted routine to help federal customers achieve their missions.

Katie Lipp is an attorney the Washington, DC regional business law firm Berenzweig Leonard, LLP. She can be reached at KLipp@BerenzweigLaw.com.  

Can Contractors Ask the Government for More Price Information?

With budget cuts making price more important in winning government contracts, contractors should know that the government is allowed to provide more helpful information during price discussions than the standard “sharpen your pencil” refrain.  FAR 15.306 (e)(3) lets the government “inform an offeror that its price is considered by the Government to be too high, or too low, and reveal the results of the analysis supporting that conclusion. It is also permissible, at the Government's discretion, to indicate to all offerors the cost or price that the Government's price analysis, market research, and other reviews have identified as reasonable.”

Unfortunately, the government rarely uses this broad authority. Contracting officers can be reluctant to get more specific on price, and prefer to err on the side of caution when it comes to price discussions. In the end, they disclose only the bare minimum that they have to disclose.  This safe approach, however, is not always the right one. In one GAO decision, an agency told an offeror simply that its price was “overstated” when its price was 8 times the government estimate. GAO said that the agency had to tell the offeror much more than “overstated.”  Creative Information Technology, Inc.  B- 293073.10, Mar. 16, 2005.

If the government is stingy with price information, it might help to remind the agency that the FAR lets the government be more helpful in discussing price with government contractors.  In one case, the GAO had no problem with an agency telling offerors during the first round of discussions about those line item prices which varied from the government estimates by more than 20%, nor with telling offerors during the second round all of the agency's estimates. Kaneohe General Services, Inc., B- 293097.2, Feb. 2, 2004.

More recently, the GAO concluded that there was nothing wrong with the VA telling each offeror in the competitive range where its price stood in comparison to the average of all current offers in the competitive range. Walsh Investors, LLC, B-407717, B-407717.2, January 28, 2013.  These decisions show that an agency can often give government contractors information more helpful pricing than to just “sharpen your pencil.”  Because there is no harm in asking the government for more information, contractors should ask.

Terry O’Connor is the Director of  Government Contracts with Berenzweig Leonard, LLP, a DC region business law firm. Terry can be reached at toconnor@BerenzweigLaw.com.

Bidders Must Not Delay Protesting Solicitation Amendments

Filing a protest before the agency even awards a contract can be a very difficult business decision because it seems like you are suing your potential customer to get the order. But sometimes that difficult decision must be made and, as we will see, might not be a bad business decision at all.

Recently, the U.S. Court of Appeals for the Federal Circuit (CAFC) set a firm timeliness rule for pre-award protests: If the agency amends the solicitation and in the process hurts a bidder’s chances of winning the contract, a bidder cannot wait until after losing the contract to protest that amendment. Any protest must be filed right away, before award. Failing to do so waives a bidder’s right to protest the amendment after award.

DoD issued a solicitation that initially made contract award dependent on the evaluation of the bidder’s proposals for a “basic contract” and 2 specific task orders. Only those offerors providing the best value for the basic contract would be considered for award of the task orders. Later, the agency issued Amendment 5 stating that only the basic contract would be awarded, that the task orders would be converted to sample task orders, that the proposals for task orders would be used for evaluating the pricing factor for the basic contract, and that no proposal revisions would be accepted.

After award, an unsuccessful bidder protested, arguing that the amendment was improper because it prohibited changes to proposals.

The appeals court concluded that the bidder should have protested Amendment 5 before award. By not doing so, the bidder had waived its right to protest after award. The court’s explanation was based on keeping the solicitation process fair: “a contractor with knowledge of the solicitation defect could choose to stay silent… If his proposal loses to another bidder, the contractor could then come forward with the defect to restart the bidding process, perhaps with increased knowledge of its competitors.”

As mentioned above, not all pre-award protests are bad business decisions. For example, a protest alerting the Contracting Officer to ambiguities in the solicitation might be welcomed and not counter-productive. Berenzweig Leonard for years has helped its government contract clients decide whether to protest pre-award and, if so, whether to protest to the agency, the Government Accountability Office, or the U.S. Court of Federal Claims. Although a pre-award protest can be a difficult business decision, it can also be the right one.

Terry O’Connor is the Director of  Government Contracts with Berenzweig Leonard, LLP a DC region business law firm. Terry can be reached at Toconnor@BerenzweigLaw.com.

Equal Justice Under Law?

“Equal Justice Under Law.” Those words are engraved above the entrance to the United States Supreme Court building. They express an aspirational goal rarely achieved. The dispensing of “justice” is, more often than not, unequal. It is no secret that in litigation rich people have a great advantage over the less affluent. Or to put it in contemporary terms, the one percent has a big advantage over the ninety-nine percent. Just to illustrate the point, I recall a story that a friend told me long ago. One day he was in the federal courthouse at Foley Square in Manhattan. It was at a time when the paparazzi were pestering Jackie Kennedy Onassis, and she was in the midst of litigation against one of the paparazzi. My friend peeked into the courtroom, and there was Jackie Onassis sitting at counsel table with no less than six lawyers from a large, blue-stocking New York law firm. Can most people afford that style of representation? Obviously not! When it comes to legal disputes, big, well-heeled litigants can not only grind down less well-financed adversaries, but they are also far better able to defend against actions by the government, such as debarment. Justice is not exactly equal.

The lack of equal justice certainly applies to the debarment system. Big contractors have a huge advantage. The government rarely debars big contractors, or even proposes them for debarment; and that is not just because big contractors are clean as a whistle. The disparity results mainly from the sheer size and “market power” of big contractors. Big contractors employ thousands of people; they have operations in multiple states; they perform many contracts; they have numerous subcontracts; they have plenty of lawyers and lobbyists on retainer; they have political clout. Debarring a large contractor would throw many people out of work, adversely affect important government programs, and create headaches for elected officials and political appointees. So, it just isn't done. Several years ago, I heard a government official make an astonishing statement, astonishing for its candor and truth. He said: “If a small contractor does something wrong, we will debar the contractor; if a big contractor does something wrong, we will work it out.” There it is! Big contractors can rest easy, but small contractors, watch out. More often than not, debarment is lethal for small contractors. If debarred, or even proposed for debarment, a contractor cannot be awarded new business – no new contracts, task orders, options, etc. – and that includes subcontracts. (FAR 9.405) Debarment cuts off a contractor’s oxygen supply, and suffocation follows. The period of debarment is typically three years, and three years without new government business will end the life of most small government contractors.

The author, John W. Polk, is senior counsel to the law firm of Berenzweig Leonard LLP, a law firm located in the Washington D.C. Metropolitan Area. John can be reach at jpolk@berenzweiglaw.com.

Termination for Convenience Can Be Tricky

A recent Washington Post article pointed out that the government is increasingly terminating government contracts for convenience in order to stockpile agency funds in anticipation of severe budget cuts in FY 2013. According to the Post, terminations for convenience have doubled in just over several years.
Unfortunately for government contractors, getting fairly paid for terminations for convenience can be a significant problem because the specific termination for convenience clause in their contract could be one of almost a dozen different clauses available to the government. Not only are the compensation terms different-so are the paperwork requirements.  For example, the commercial item termination for convenience clause limits the government’s right to audit the contractor’s records.

The government may not use the right clause. Berenzweig Leonard has recently had to inform a Contracting Officer that the government had invoked a termination for convenience clause that was not even in the client’s contract. The clause the government wanted to use gave the government more rights than the correct clause.

Berenzweig Leonard can quickly review and advise government contractors on whether the government is doing a termination for convenience properly. And our advice would be at no cost to the client because legal fees associated with a termination for convenience are generally fully reimbursable as termination settlement expenses.

Terry O’Connor is the Director of  Government Contracts with Berenzweig Leonard, LLP a DC region business law firm. He can be reached at Toconnor@BerenzweigLaw.com.

Debarment Under the “Catch-All” Regulation

Government contractors do not like to think about debarment . . . and with good reason.  For a government contractor, debarment is like dreaded terminal illness.  It is unpleasant to contemplate.  Nonetheless, as unpleasant as it is, government contractors need to know a few basics about debarment: one of which is the “catch-all” regulation.

Probably, most contractors know that if a contractor is convicted of a crime related to federal procurement, then the government can propose the contractor for debarment without any other facts in the record.  The conviction is sufficient.  It is a prima facie basis for debarment.  The same is true of a civil judgment for procurement fraud; that too is prima facie basis for debarment.  But, how many contractors know about the catch-all regulation, which greatly expands a debarring official’s authority?

The catch-all regulation says that the government may debar a contractor for any cause of “. . . so serious or compelling a nature that it affects the present responsibility of the contractor . . . .”  (FAR 9.406-2(c))  Think about this broad language.  It seems to give a debarring official unbridled discretion to debar a contractor for any reason that the official thinks, in his or her subjective judgment, is serious or compelling.  The regulation lacks objective standards.  It is vague and overly broad, and one court, the U.S. Court of Appeals for the D.C. Circuit, held that the government can invoke the catch-all regulation only if a preponderance of the evidence shows that the contractor committed a crime related to federal procurement.  However, some debarring officials continue to apply the catch-all regulation more broadly, even though the evidence does not prove the commission of the crime.   If a contractor is proposed for debarment under the catch-all regulation, the contractor should consider challenging the regulation on the ground that it is unconstitutionally vague and over-broad.

The author, John W. Polk, is Special Counsel to Berenzweig Leonard LLP, a business law firm located in the Washington, D.C. region.  He can be reached at jpolk@BerenzweigLaw.com.

Debarment: A Potentially Deadly Problem for Small Government Contractors

A few years ago, a government official made a startling statement about debarment from government contracting.  The statement was startling not because of its content, but because it was made at all, considering the natural tendency of people, including government officials to spin the facts to put themselves and their agencies in the best light.  The government official said: “If you are a small contractor and you do something wrong, we will debar you.  If you are a big contractor and you do something wrong, we will work it out.”  Amazing: candor and truth all in one breath, and from a government official no less.  Big government contractors, fear not!  You are not only too big to fail, but also too big to be debarred.  Big contractors rarely, if ever, are debarred.  I cannot recall that it has ever happened to a big contractor.  The Air Force brags that more than nine years ago it temporarily suspended three business units of Boeing.  That was a long time ago, and even then the Air Force granted temporary waivers of the suspension to permit Boeing to bid on new work.

However, small contractors, watch out!  Debarments are on the rise.  Congress has been pushing departments and agencies to debar more contractors.  The game is on – that is, the numbers game.  Government agencies want to bolster their debarment statistics.  So, who will they debar?  You got it, small contractors!

Small government contractors should educate themselves on the potentially lethal remedy of debarment.  There is too much to cover in a short blog, but here is a fundamental point.  The government starts a debarment proceeding by proposing a contractor for debarment.  The contractor has an opportunity to respond in an effort to convince the government that the contractor should not be debarred.  But, here is the problem for a small contractor.  A proposal to debar has the same practical effect as a permanent debarment.  When the government proposes to debar a contractor, the contractor’s name goes on the Excluded Parties List maintained by the General Services Administration.  That means that the contractor cannot receive any new business from the government – no new contracts, no new purchase orders, no new task orders, and no options on existing contracts.  Bluntly put, the small contractor’s oxygen supply is cut off, and then the question is how long can the contractor hold its breath.

The author is John W. Polk, Special Counsel to Berenzweig Leonard LLP, a business law firm located in the Washington D.C. Metropolitan Area.  John can be reached at  jpolk@berenzweiglaw.com.

Whistleblowing Sounds Again

The Department of Justice recently joined a whistleblower’s lawsuit alleging that The Gallup Organization (Gallup) violated the Truth in Negotiations Act (“TINA”), 10 U.S.C. §2306a, in United States ex rel. Lindley v. Gallup, DCDC No. 1:09cv01985.

TINA provides that (in most cases), before the government awards a sole source contract, the contractor must submit and certify “cost and pricing data” on which the contractor bases its estimated cost of providing the goods of services, including labor hours required to perform the work.  If a contractor submits false cost or pricing data the contractor commits misconduct commonly referred to as “defective pricing.”  If a contractor knowingly engages in defective pricing, then the contractor violates the False Claims Act.

According to the allegations, Gallup compensated its employees based, in part, on the gross margin generated by projects for which the employees were responsible.  Under Gallup’s pay-for-performance system, employees received incentive compensation based on the projects gross margin – i.e., the difference between total costs and revenue.  Gallup had many years of historical data showing the cost of performing contracts.  The complaint alleges that Gallup employees submitted false cost and pricing data to the government, inflating the supposed cost of performing contracts in order to artificially increase the price of the contracts.  The employees kept a separate internal set of books showing the actual lower costs which the Gallup used to calculate its gross margin and the amount of the employees’ incentive pay.

The complaint also alleges other misdeeds by Gallup, including shifting costs from fixed-price to cost-plus contracts, improperly upgrading labor categories, and conflicts of interest.  But the flagship allegation is the alleged violation of TINA.  The fact that Department of Justice has joined the lawsuit shows that DoJ believes that the whistleblower’s claims have substantial merit.

Gallup’s compensation system is an example of how a compensation system that was intended to incentivize employees to increase the company’s gross margin by reducing costs can have the opposite effect of encouraging employees to increase profit margins by submitting false cost and pricing data, thereby fraudulently inflating the price of sole source contracts.  As this case illustrates, it is important for contractors to carefully assess their compensation systems to assure they do not encourage fraud.

The author, John W. Polk, is an attorney with Berenzweig Leonard LLP located in the Washington, D.C. region.  He can be reached at jpolk@berenzweiglaw.com.

Are Small Business Set Asides Now Illegal?

In a recent legal decision that could have a big impact on contractors, the D.C. federal court has ruled that awarding contracts to minority owned companies under the government’s  Section 8(a) Program may be unconstitutional.  The 8(a) Program was designed to remedy past effects of discrimination against minority businesses by providing preferential award of certain contracts.

DynaLantic Corporation sued the Defense Department alleging that a DoD contract award to a minority owned company for flight training equipment was illegal, since the 8(a) set-aside Program was allegedly unconstitutional under the equal protection clause of the Fifth Amendment to the Constitution.  DynaLantic is a small business but is not minority owned.

The DC court ruled that the 8(a) Program is constitutional on its face.  However, the court also ruled that the way DoD applied the program with respect to the award involving DynaLantic was unconstitutional.  In its decision, the court upheld the overall Program due to the Congressional record reflecting statistical evidence of racial discrimination, but concluded that the Program “as applied” was unconstitutional because the government failed to present evidence of actual discrimination in the applicable industry.

The implications of this ruling are significant, since the government may not want to go through the steps of compiling a record of discrimination in each specific industry it wants to issue a contract under the 8(a) Program.  Certain industries may also have different statistics that may leave the question of discrimination subject to dispute.  Government contractors need to be aware of this decision and be prepared for new battles that may now involve a constitutional controversy impacting small businesses in DC and throughout the United States.

Author Seth Berenzweig is the Managing Partner of D.C. regional business law firm, Berenzweig Leonard, LLP.  He can be reached at sberenzweig@berenzweiglaw.com.

False Bidding Estimates = Fraud

Extreme competition among government contractors for ever-increasing federal dollars has sparked a wave of “how low can you go” bidding wars among contractors.  Although a bidder may want to submit low bid prices to win a cost-reimbursement contract, the bids must be the actual prices and must have the facts to support  them.  

A recent federal court case involving a large government contractor confirms that purposefully bidding prices lower than the actual charge can constitute fraudulent bidding under the False Claims Act.  In the case, the contractor’s initial bid prices came in too high so they lowered the bids without considering the actual cost.  The contractor won the contract but a whistleblower successfully claimed that the contractor’s bidding process violated the FCA.  Although bids are only estimates and opinions, they must have some facts justifying them.  This decision shows that courts will continue to broadly interpret the False Claims Act.

The decision highlights a solid government contracts principle:  always make sure that your bid prices are backed up with solid pricing and market research data to avoid costly bid protests, FCA treble damages, and findings of non-responsibility based on ethical and legal violations.

Katie Lipp is an Associate Attorney with Berenzweig Leonard, LLP, a business law firm in the DC region.  She can be reached at klipp@BerenzweigLaw.com.  Terry O’Connor is the Director of Government Contracts for Berenzweig Leonard, LLP and can be reached at toconnor@BerenzweigLaw.com.

Pay Attention to Payment Clauses in Contracts

Under a Labor Hour contract, a government contractor can legally be paid for 50 hours of work performed by a salaried employee in one week, even though that employee does not receive more than what his salary pays based on 40 hours per week. Although the government claimed that this would let a contractor “pocket undue windfall profits at taxpayer expense," the Armed Services Board of Contract Appeals (ASBCA) concluded that the contract required payment.

The contract’s payment clause (FAR 52.232-7 Payment Under Time-and-Materials Labor-hour Contracts [FEB 2007]) required the government to pay the contract’s “hourly rates …for all labor performed on the contract that meets the labor qualifications specified in the contract.” According to the board, as long as the salaried employees received their salary, the government was obligated to pay the contractor for the 50 hours worked by these employees, as long as the contractor paid those employees their salary based on a 40-hour work week.

As this decision makes clear, it is critical to carefully read the specific payment clause in the contract as there can be significant differences among the more than half-dozen payment clauses available to the government.

Author Terrence O’Connor is the Director of Government Contracts for the Washington, DC business law firm, Berenzweig Leonard, LLP.  Email Terrence O'Connor 

Be Safe: Interpret "Should" In An RFP To Mean "Shall"

Although the English language clearly distinguishes the words "should" and “may” from the word “shall,” GAO does not. Recently, an RFP from the CIA required offerors to provide resumes for all personnel. KPMG submitted resumes for all personnel to be used not only for the initial performance period but also for the out years despite a letter from the agency during discussions that it “should” do so. Based perhaps on an ambiguous agency discussions letter to Deloitte that also included the word “should” regarding resumes, Deloitte did not submit resumes for personnel to be used during the out years and won.   


When KPMG challenged the different way the CIA treated the resume requirement, the CIA defended this difference by claiming that "should" does not mean “shall.”

GAO disagreed: "in the context of the discussions at issue, a reasonable offeror would understand that the agency's discussions established a duty; that is, if KPMG wished to be considered compliant with the RFP, it was required to submit resumes for all proposed personnel from all five years of contract performance. As we have noted previously, terms like ‘may’ and ‘should’ are capable of expressing a mandate."

It’s smart to play it safe and interpret “should” as “shall” – especially with resumes that typically do not count against any proposal page limits that may be limiting how much material you can submit when seeking a government contract.

KPMG LLP, B – 406409; B – 406409.2; B – 406409.3; B – 406409.4, May 12, 2012.

Author Terry O’Connor is the Director of Government Contracts for the Washington, DC business law firm, Berenzweig Leonard, LLP and has written five books on government contracts law.

Contracting options and rights expand

A recent Board of Contract Appeals case highlights that government contractors may be missing out on new business opportunities available under the GSA Federal Supply Schedule (FSS) by not taking advantage of a direct teaming opportunity unique to the GSA FSS.

Although teaming in government contracting is common among vendors, it can take a variety of forms.  FAR 9.601 describes some of them, including a “contractor team arrangement” (CTA).  This differs from more traditional arrangements, such as teaming agreements and joint ventures.  One variation of such an arrangement is the GSA Schedule CTA, a particularly useful approach because it allows vendors who have an FSS contract for some but not all work the government needs under a particular solicitation to team up with another vendor to fill in that gap with its own FSS contract.

Litigation highlighing the rights of CTA team members is rare. However, the Civilian Board of Contract Appeals recently resolved the issue of whether an individual team member, as opposed to the team leader, can file and recover a payment claim.  In Lockheed Martin Aspen Medical Services  v. Dept. of Health and Human Services, a CTA member appealed an adverse decision by a contracting officer rejecting a claim for payment, where the government asked the Board to dismiss the case since it was not filed by the CTA team leader whose name was actually on the underlying contract. According to the government, the company filing the claim was not in privity with the government, but was simply a subcontractor and therefore had no right to pursue the case.

The Board nevertheless rejected the government’s argument for dismissal and concluded that the member of the CTA was in privity with the government because the agency itself had dealt directly with each team member.  Since the petitioner provided services under its own FSS contract, the contractor was deemed to possess an existing government contract under which it was providing services to the government, rather than stemming from a prime contract that flowed down to subcontractor.  Companies need to be aware of this development and learn more about its options including CTAs, which present a unique opportunity to directly generate and get paid for work without relying on any assistance from a prime or team leader.