When construction projects are funded by federal dollars, additional regulations apply. One of these regulations is the False Claims Act. Under the False Claims Act, serious penalties come into play when – you guessed it – improper claims for payment are made to the government. But these rules apply to the entire project – not just to the contractors or project managers hired directly by the government. Let’s take a look at some important aspects of the False Claims Act.
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What is the False Claims Act?
The False Claims Act (FCA) is the government response to penalize any acts of fraud against the Federal Government. Specifically, it allows individuals with evidence of fraud concerning payments on government projects to sue the wrongdoer on their behalf. This applies to any false or fraudulent claims, whether actually approved or not.
What Does it Have to do With Construction?
When a construction project will be paid for by the Federal Government, any payment application or invoice made to the government will be subject to the False Claims Act. If a contractor or supplier overbills the government and the False Claims Act comes into play, serious penalties are possible.
Plus, it’s worth mentioning that the False Claims Act will apply even where the party directly contracted with the government isn’t involved in or even aware of the overbilling. That’s right – if a sub or supplier overbills their customer and that cost is eventually passed along to the Federal Government, the entire payment chain could find themselves entangled.
Violations of the False Claim Act
Some of the most common violations under the FCA are:
- Knowingly submitting a false claim for payment to the government;
- Making false statements to induce a claim to be paid;
- Conspiring to defraud in order to have a claim paid; &
- Making a false record to conceal an obligation to pay an amount of money back to the government.
When analyzing a violation under the False Claims Act, the courts will look for the following elements. First and foremost, a submission of a claim for payment has been made to an agent of the government. Secondly, the claim was false or fraudulent. Next, the contractor knew that the claim was false or fraudulent. This doesn’t require actual knowledge, this can include any deliberate ignorance or reckless disregard for the falsity of the claim. Lastly, the falsity should be “material” to the government’s decision to pay the claim. The Act defines “material” as having a natural tendency to influence, or capable of inducing payment.
Examples of How a Violation Could Occur in Construction
So, there’s one obvious example of how the False Claims Act could be violated by a construction company. If a party who is directly contracted with the Federal Government overbills them for work or materials furnished to the job, then the False Claims Act would apply.
But there’s another, less-obvious example here.
Say a subcontractor submits a bill to their GC and “inflates” the amount of time or materials for that particular invoice. While that sub or supplier is not under a direct contract with the Federal Government, that is where the money will ultimately come from – federal coffers. Plus, as mentioned above, the False Claims Act will apply when any person presents a false or fraudulent claim for payment, or even if they merely cause that claim to be presented. If a sub or supplier submits an application for payment that contains more than what’s actually owed, the sub or supplier might become liable under the False Claims Act since they caused that invalid claim for payment to be presented!
Construction Fraud Can Take Many Forms
Penalties for violating the False Claims Act can get out of hand quickly since the government is being defrauded.
If you are found guilty under the FCA, you will be forced to pay treble (that means triple!) damages. Meaning the total actual damages to the government, thrice! Regardless of whether the claim for payment was authorized or not. Additionally, there is a civil penalty added for each separate violation. Each request for payment will be treated as a separate violation. These fines can be anywhere from $5,000 to $10,000 depending on the facts surrounding the case.
Most violations under the FCA also give rise to potential criminal liability as well. So piling on top of the civil penalties and damages, you could also face additional fines and imprisonment. Some crimes associated with FCA cases can include theft, forgery, bribery, money laundering, insurance fraud, or any other crime depending on the circumstances.
Whistleblowers are Incentivized to Bring Actions Under the False Claims Act
As stated above, this Act encourages individuals to file claims on behalf of the government. But why would anyone want to? There are two key reasons:
- (1) whistleblowers get paid a percentage of the recovery; and
- (2) they’re protected from backlash.
There are some incentives to filing a claim under the FCA. (Besides doing the right thing, of course!) Whistleblowers can receive between 15% and 30% of the total recovery. This is true whether there is an actual judgment or an out of court settlement. Most cases brought under the False Claims Act are actually filed by whistleblowers on the government’s behalf.
With that in mind, let’s do a quick math problem:
- A contractor defrauds the government for $100,000.
- Someone finds out, and they decide to file a claim under the False Claims Act.
- The contractor is found guilty, and the damages are 310,000 (the original $100,000 multiplied by 3 is $300,000, plus a penalty of $10,000!)
- The whistleblower is awarded 15-30% of that total (up to $93,000!)
The False Claims Act also includes a section for protection against any employer or co-worker retaliation. This provides that any employee who is fired, demoted, harassed or otherwise discriminated against in response to an FCA claim are afforded certain protections. These remedies can include reinstatement to your position, double back pay and compensation for any special damages incurred, such as litigation and attorney costs.
When working on federal jobs, take extra care when billing. If you do become aware of potential misconduct on the project, consult an attorney immediately. Finding yourself on the wrong end of a False Claims Act suit is a nightmare, and even those construction businesses who aren’t implicated will be affected if a project comes into question.