It is even more important than ever that you know 1) whether you are receiving any Federal funds for services or supplies provided as a contractor, loan, grant or agreement holder, or as a subrecipient or subcontractor thereunder, 2) what rules apply to you, and 3) the appropriate steps to compliance!
Congress and the current Administration have been quite active, putting in place laws and regulations that require specific compliance and reporting. Thousands of pages of new and proposed, interim and final rules affecting administration, compliance and reporting requirements for government contracts, grants, loans and/or cooperative agreements have been issued since this Administration took office. Many of these rules have been implemented with the aim of bringing about a better and more efficient government and greater transparency and accountability of those who use and receive Federal funds. Funding is shrinking at a time when Government needs remain steady and possibly increasing. The Government expects these new requirements will aid in its recovery of funds improperly paid out to prime contractors, loan and agreement recipients, as well as subcontractors and subrecipients at all tiers.
Even if you do not deal directly with the federal government, you still may be subject to Federal government contracting laws, rules and regulations. Moreover, if you provide goods, services, research or development, or you receive loans or other payments directly or indirectly from Federal funds, you in fact may be subject to Federal laws, rules and regulations that include a number of mandatory reporting and disclosure requirements. And, as noted below, recent changes now significantly increase the risk that you may be the subject of an audit or investigation.
Improper Payment Elimination and Recovery Act, Public Law 111-204 (IPERA) and the New OMB Guidance
Under IPERA, the Government can engage private auditors to perform payment recapture audits to identify and recover wasteful or fraudulent spending, including improper payments.1 The Administration estimates that there were approximately $125 billion in improper payments made in FY 2010 alone. Its announced goal is to recapture at least $2 billion of these improper payments by 2012. To facilitate this recapture effort, OMB issued new guidance in April that now requires agencies across the Federal government to engage in potentially far-reaching audit and review activities, targeting payments for "any good or service that is not permitted under any provision of any contract, grant, lease, cooperative agreement, or other funding mechanism." Id. This means that they are looking at "any payment or transfer of Federal funds (including a commitment for future payment, such as cash, securities, loans, loan guarantees, and insurance subsidies) to any non-Federal person or entity that is made by a Federal agency, a Federal contractor, a Federal grantee, or a governmental or other organization administering a Federal program or activity." Id. Activities to audit and recapture improper payments may be quite far-reaching. If you do business with the Federal government or otherwise receive Federal funds, the Government may be coming to audit you.
OFCCP Increases Scope and Coverage of its Audits
On the labor audit front, Buchanan Ingersoll & Rooney recently reported that the Department of Labor's Office of Federal Contract Compliance Programs (OFCCP) has expanded its staff and plans to increase the number of government contractors and subcontractors to be audited for OFCCP compliance. Under its expansion plans, one in every twenty-five employers on the agency’s scheduling list will be selected for a full OFCCP compliance review, including an onsite investigation by OFCCP compliance officers. See Falcusan, I, "OFCCP Directive Will Increase Agency’s Onsite Visits to an Employer’s Workplace" (February 28, 2011).
DFARS Interim Rule on Business System Audits
You may have problems getting paid now. Effective May 18, 2011, provisions to incorporate interim Defense Federal Acquisition Regulation (FAR) Supplement (DFARS) business systems rules to improve oversight of contractor business systems will start to be included in certain solicitations for new contracts, as well as delivery and task orders, and thereafter will be included in all solicitations for contracts awarded on or after August 16, 2011. The new rules apply to a "covered contract," defined as a "contract that is subject to the Cost Accounting Standards under 41 U.S.C. chapter 15, as implemented in regulations found at 48 CFR 9903.201–1…." The new rules require the covered contractors to maintain compliant business systems. The Government can withhold varying percentages of amounts due you under covered contracts where a Government business system audit reveals you have a significant deficiency in one or more of your business systems: accounting systems, estimating systems, purchasing systems, earned value management systems (EVMS), material management and accounting systems (MMAS), and property management systems. The rules also provide for continued Government withholding where you do not timely establish an acceptable cure plan to address the deficiencies found.
Mandatory Disclosure Rules
We reported on these previously, but it is important you know they are in effect and you must comply with them. These FAR rules require federal contractors and subcontractors to "to timely disclose to the Government, in connection with the award, performance, or closeout of a Government contract performed by the contractor or a subcontract awarded thereunder, credible evidence of a violation of Federal criminal law involving fraud, conflict of interest, bribery, or gratuity violations found in Title 18 of the United States Code or a violation of the civil False Claims Act." See FAR 3.1003. These mandatory disclosure rules apply even if you do not have FAR 52.203-13 Contractor Code of Business Ethics and Conduct in your contract.
There is a three-year claw back too! This means you can be debarred or suspended for a knowing failure to timely disclose to the Government credible evidence of a covered violation by your company or one of your subcontractors, even if you learn of the evidence after final contract payment.
Debarment or suspension affects your ability to be awarded any new contracts or subcontracts and can also affect your ability to continue to perform current contracts and have available contract options exercised during the period of the debarment or suspension.
Fraud Enforcement and Recovery Act of 2009
Pub. L. No. 111-21 (FERA). Amending the civil False Claims Act, 31 U.S.C. § 3729 (FCA), this 2009 provision expanded the government's ability to investigate and prosecute false or fraudulent claims. Recent developments have further clarified what may be considered a covered matter. False claims can include more than just false statements or false claims for payment submitted directly to the government under a prime contract. Though open questions still remain, it is now clear that you don't need to have a contract directly with the Federal government or be a direct recipient of federal funds to run the risk of an FCA lawsuit or investigation. Where a false or misleading statement or claim is knowingly submitted to a higher tier prime or subcontractor, or another entity for use to obtain Federal funds, or to obtain the Federal government's forbearance from recovering the overpayment of Federal funds, that may result in a civil false claim or reverse civil false claim. Moreover, courts have held that FCA cases can be brought not only for an alleged intentional factual misstatement or claim, but where there is an implied false certification of compliance with a material contractual requirement. See, e.g., U.S. v. Science Applications Intern. Corp., 626 F.3d 1257 (DC Cir. 2010).
The FCA authorizes qui tam actions under which private parties may blow the whistle on an alleged false or fraudulent claim or overpayment. If successful, the whistleblower can recover a share of the damages recovered by the government against the wrongdoer.
What to Do?
Given the foregoing, it is more likely than ever that government contractors and subcontractors, and recipients of Federal funds, may be subjected to one or more different audits or investigations. If an audit report alleges certain compliance issues, there are now tools that the government may invoke to delay or prevent your receipt of present or future payments, and to recover improperly made payments. Know and understand your requirements. If you are a government contractor or subcontractor, you should have a suitable code of conduct and compliance program in place. Depending on your contract terms, you in fact may be required to have one in place. Changes in the laws and rules governing your activities and contracts may require tweaking or significantly changing your code and program to assure your continued compliance. Audit your program proactively to ensure that your code, compliance program, and business systems are compliant. If you have a problem or you find that changes are needed, consult with counsel to address any problems or compliance issues early.
If you have questions about this advisory, or other government contracts questions, please contact Buchanan Ingersoll & Rooney's Government Contracts group.
1 "Payment recapture audits may be performed by employees of the agency, by any other department or agency of the Federal government acting on behalf of the agency, by non-Federal entities (as defined in OMB Circular A-133) expending Federal awards, by contractors performing payment recapture audit services under contracts awarded by the executive agency, or any combination of these options." Memorandum for the Heads of Executive Departments and Agencies, at Appendix C, p. 22.