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One of the country’s largest construction firms has agreed to pay nearly $3 million to the Justice Department as a penalty for fraudulently manipulating a federal contract designated for a veteran-owned business.

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Hensel Phelps
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Hensel Phelps Construction Company, based out of Greeley, Colorado, was recently reported to have participated in a “scheme” intended to “circumvent federal procurement requirements designed to promote contracting and subcontracting between small businesses and the government,” according to the Justice Department’s settlement agreement.

As part of the settlement, Hensel Phelps has accepted responsibility for its actions and has been ordered to pay $2.8 million in penalties.

The Federal Government has a number of initiatives designed to set aside contract opportunities for businesses of certain socio-economic categories. Service-Disabled Veteran Owned Small Businesses (SDVOSBs) receive particular preference — the Government aims to award at least 3% of the total value of all federal prime contracts and subcontracts to SDVOSBs.

Large general contractors of federal projects are typically required to incorporate SDVOSBs and other types of small businesses into their subcontracting plan and allocate work accordingly.

In 2011, the US General Services Administration awarded Hensel Phelps a multi-million dollar contract to build a new health building for the Armed Forces Retirement Home in Washington D.C. The contract stipulated that Hensel Phelps must subcontract certain elements of the project to SDVOSBs.

The building was to serve as a retirement community and residential facility for veterans, and Hensel Phelps initially located a subcontractor to provide kitchen and food service equipment for the home.

This contractor, identified only as “Company 1” in the settlement documents, was a large firm that did not fall into the SDVOSB category. Hensel Phelps negotiated all elements of the $1 million subcontract with Company 1, including pricing, equipment, and installation work.

Before this contract was executed, however, Hensel Phelps located another subcontractor that did fall into the SDVOSB category. Hensel Phelps then had this SDVOSB enter a second-tier contract under Company 1.

Settlement documents allege that Hensel Phelps did not prequalify the SDVOSB whatsoever — no financial statements, job history, licensing information, or OSHA logs were requested before the contract was executed. The SDVOSB apparently didn’t even submit a project bid to Hensel Phelps, but was awarded the subcontract nonetheless.

From there, “the SDVOSB was merely a passthrough for Company 1,” according to the Justice Department, and “The SDVOSB’s role was limited to providing its SDVOSB status and making it appear as though an SDVOSB was performing the work.”

The SDVOSB did not actually perform any work on the project — Company 1 “performed all or nearly all substantive work and received 98.5% of payments under the subcontract” while the SDVOSB received the remaining 1.5%, according to the settlement.

In short, Hensel Phelps allegedly cherry-picked a business that met the SDVOSB parameters, awarded it a subcontract in-name-only (with zero prequalifications), and had essentially all project work and payments funneled to a different subcontractor.

This arrangement allowed Hensel Phelps to claim the small business credit for the entire $1 million subcontract without actually employing an SDVOSB.

Hensel Phelps admitted its mistake and accepted responsibility for its actions, but the Justice Department’s penalty stuck.

This is not the first time a large, reputable contractor has been penalized for fraudulently manipulating the SDVOSB contractor scheme. Just several months ago, Trimark USA was forced to pay $48.5 million for similar actions.

While Hensel Phelps and Trimark are large, more financially stable firms, penalties like these have the potential to disrupt projects and payments across the payment chain. One contractor’s actions could have severe financial implications for others involved in the project.

“One bad egg could affect the project schedule, the quality of performance, project safety, and it could even determine whether payment disputes will occur,” said Alex Benarroche, construction attorney and legal associate at Levelset.

Alex Benarroche

Alex Benarroche

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Hensel Phelps is highly regarded, receiving a respectable 85/100 on Levelset’s payment score. With 2020 revenues of over $5.8 billion, the firm is one of the US’ largest contractors.

Despite generally good reviews, Hensel Phelps has also received a number of warnings from subcontractors who have worked with the construction giant. On top of multiple reports of slow payments, several subs appear to have battled with Hensel Phelps over contract issues.

“Get everything in writing — no matter what,” wrote one subcontractor.

“When dealing with HP, we would suggest that absolutely nothing be done on a verbal agreement and that all written instructions are double checked for clarity and liability loopholes,” wrote another.

Even the largest of general contractors can be caught off-guard and left liable for the fraudulent actions of its subs. It’s always important for contractors of all sizes to conduct comprehensive prequalifications on all project partners to avoid snags, delays, and payment problems wherever possible.