Federal project funds: understanding the laws, requirements

June 8, 2010
What parts of federal law, if any, do contractors now have to worry about by taking money that came from the U.S. Government?

Doing business with the federal government is different. While it can be lucrative, it requires a working knowledge of a procurement system which is a world unto itself — as far away as you can get from the world of "in the old days we just worked on a handshake." Aside from the paperwork, inspections, delegation-of-authority issues, etc., every contractor working on federal work is presumed to know all of the laws and regulations that it must comply with. That covers a lot of ground. For this reason alone many contractors make the conscious decision not to pursue federal work.

Times have changed and the contraction of the private market has driven people to pursue types of work that they might have taken a pass on just a few years ago, including federal work. These contractors are, presumably, going into this market with their eyes open, and prepared to accept all the strings attached, courtesy of the U.S. Congress and whoever it is that writes all those regulations. But what about state and local work that receives some federal assistance, including ARRA (stimulus) projects? What parts of federal law, if any, do contractors now have to worry about by taking money that came from the U.S. Government?

The answer is, unfortunately, but not surprisingly, really hard to arrive at, and at the same time really important to know. There are legal requirements applicable to federal contractors that have teeth in them — fangs, actually, that would give even the most avid vampire fans sleepless nights. Some of these apply to all projects that receive $1 of federal funds. Others only apply to state highway work that is done through Department of Transportation grants. And others, well, you may never get a straight answer as to whether they apply to you. Some examples are as follows.

False Claims Act: This Act has civil penalties of treble damages and $5,500 to $11,000 (adjusted for inflation since 1990) for each claim (which could mean each invoice), and criminal penalties of up to five years imprisonment. The federal law applies to inaccurate information submitted in connection with obtaining money from the federal government. This is not just limited to invoices. Representations that products delivered met the specifications when they did not, erroneous percentage of completion statements in payment applications, or the use of false disadvantaged business "fronts" could trigger a violation. Please note that one of the biggest risks is that "whistle-blowers" who turn in violators can receive up to 20% of whatever the government collects, so competitors and former employees have an incentive to tell what they know to prosecutors.

Anti-Kickback Act: This Act has penalties of double the amount of the kickback at $11,000 per kickback and criminal penalties of up to 10 years imprisonment. This law specifically covers "the amount of any kickback ... in the contract price charged by a subcontractor to a prime contractor or a higher tier subcontractor or in the contract price charged by a prime contractor to the U.S."

Bribery and Gratuities statutes: These statutes impose criminal penalties of treble the amount of the bribe, up to 15 years imprisonment for bribes, and two years for illegal gratuities. If a contractor persuades a government employee to pass on an overstated invoice in exchange for any "consideration," including money but also the promise of a job, or a new deck on his house, he could be found to have violated this law. Under the Standards of Ethical Conduct for Employees of the Executive Branch, a “gift” is defined to include a meal more than $20.

Truth in Negotiations Act: This Act requires contractors asking to be reimbursed for costs to be accurate and honest as to what their true costs are. If it is violated, affected agreements can be renegotiated by the government, plus the contractor has potential liability under the False Claims Act, False Statements Act, and mail and wire fraud statutes. This is a real exposure for all contractors, since any change order that is priced based on your representations of your costs is vulnerable. Materials that were billed for but not used in full, or insurance/bond rates that were retroactively adjusted can constitute violations.

Public Integrity Act: This Act prohibits the disclosure or receipt of confidential information in the hands of the government about bids, proposals or source selection with civil penalties of up to $50,000 per violation for individuals, $500,000 per violation for companies, plus double the amount received/offered, and imprisonment for up to five years.

The burden is on you, as the contractor receiving federal funds, to operate in such as way as to not violate applicable federal laws. If you have any question as to whether a specific law applies to your project, do your homework and find out. "Ignorance is no excuse under the law."

Susan McGreevy is a partner at Stinson, Morrison, Hecker LLP, Kansas City, Mo., 816/842-4800, e-mail to [email protected].

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