Pitfalls Of State And Local Contracting

Pitfalls Of State And Local Contracting Breakout Session # A05 William D. Guernier, Vice President, The Kenrich Group Erin L. Felix, Associate, Polsinelli Date: December 12, 2016 Time: 1:00PM - 2:15PM

William D. Guernier Bill Guernier is a Vice President of The Kenrich Group in its New York office. Bill s career includes nearly ten years as a financial officer in the real estate and construction industry and over twenty years as a consultant. Prior to joining The Kenrich Group, Bill was a partner at a Big-Four accounting firm, a Managing Director at an international consulting firm and a Vice President of Tucker Alan Inc. Bill is a CPA and is a graduate of the College of William and Mary with a BBA in Accounting, and holds a MBA in Finance from the George Washington University. Bill has provided expert consulting services on financial, accounting, economic and damages matters in numerous areas, construction, government contracts, real estate and commercial bankruptcies. He has testified on damages issues in various courts and in arbitration. 2

Erin L. Felix Erin Felix is a Government Contracts attorney with Polsinelli PC and currently serves as the Vice President of Communications for the NCMA Tysons Chapter. Erin counsels prime and subcontractor clients through all phases of procurement, including contract negotiations, compliance, claims and disputes, bid protests, audits, and investigations. Her experience spans multiple industries and contracting agencies, with particular focus on Defense and Aerospace; intellectual property and data rights under government contracts; sole source issues, including certified cost or pricing data and the Truth In Negotiations Act; and ITAR compliance. For 15 years prior to practicing law, Erin managed government and commercial contracts and subcontracts for one of the largest defense contractors in the industry. Her extensive business background gives Erin a unique understanding of client concerns and enables her to provide practical solutions to complex business issues. 3

Here is What We Are Going Try to Do Overview Federal Acquisition Regulation FAR Provisions In State & Local Government Contracts Challenges For Contractors With REAs/Claims False Claims Act 4

What We Are Going To Try NOT To Do 5

Table Of Contents Overview Federal Acquisition Regulation FAR Provisions In State & Local Government Contracts Challenges For Contractors With REAs/Claims False Claims Act 6

Overview What are the rules? Federal Acquisition Regulations (FAR) False Claims Acts (Federal and State) State rules modeled after the Federal When do the rules apply? Cost based contracts REAs and Claims on Fixed Price Contracts What are the risks? 7

Table Of Contents Overview Federal Acquisition Regulation FAR Provisions In State & Local Government Contracts Challenges For Contractors With REAs/Claims False Claims Act 8

Federal Procurement Rules Armed Services Procurement Act of 1947 (10 U.S.C. 2301) Federal Property and Administrative Services Act of 1949 (40 U.S.C. 471, 41 U.S.C, 251) Contract Disputes Act of 1978 (41 U.S.C. 661) Plus: False Claims Act and Other Fraud Provisions Truth In Negotiations Act (TINA) Codified In The Federal Acquisition Regulation System (1984) (48 CFR). Includes: Federal Acquisition Regulation (FAR) Various Agency Supplements (e.g. DFARs) Truth In Negotiations Act (10 U.S.C. 2306a, 41 U.S.C. 254b) Plus: Other Congressional Mandates and Funding 9

Federal Acquisition Regulations (FAR) Subchapter A: General Part 1. Federal Acquisition Subchapter Regulations System B: Acquisition Part Planning 2. Definitions of words and terms Part 3. Improper Part 5. Publicizing business practices contract actions and personal Subchapter Part 6. Competition conflicts of C: interest requirements Contracting Part 4. Administrative Methods Part 7. Acquisition matters and planning Contract Types Part 8. Part Required 13. Simplified sources acquisition of supplies and services Subchapter procedures D: Part 9. Part Contractor Socioeconomic 14. Sealed qualifications bidding Programs Part 10. Part Market 15. Part Contracting research 19. Small by business negotiation programs Part 11. Part Describing 16. Parts Types 20-21. agency of contracts Reserved needs Part 12. Part Acquisition 17. Part Special 22. of Application commercial contracting of methods labor laws to items Part 18. Emergency Government acquisitions Part 23. Environment, energy and water efficiency, renewable energy technologies, occupational safety, and drug-free workplace Part 24. Protection of privacy and freedom of information Part 25. Foreign acquisition Part 26. Other socioeconomic programs Subchapter E: General Contracting Requirements Part 27. Patents, data, and Subchapter copyrights F: Special Part Categories 28. Bonds and of insurance Contracting Part 29. Part Taxes 34. Major system acquisition Part 30. Part Cost Subchapter 35. accounting Research standards G: development Contract administration Management contracting Part 31. Part Contract 36. Part Construction cost 42. principles Contract and administration and architectengineer audit contracts services and procedures Part 32. Part Contract 37. Part Service financing Forms 43. Contract contracting modifications Part 33. Part Protests, 38. Part Federal disputes, 44. supply and Part Subcontracting 52. Solicitation schedule policies provisions and and appeals contracting procedures contract clauses Part 39. Part Acquisition 45. Part Government 53. of Forms information property technology Part 46. Quality assurance Part 40. Part Reserved 47. Transportation Part 41. Part Acquisition 48. Value of engineering utility services Part 49. Termination of contracts Part 50. Extraordinary contractual actions and the safety act Part 51. Use of Government sources by contractors Subchapter H: Clauses and 10

Important FAR Sections For Contractors Subchapter A: General Part 3. Improper business practices and personal conflicts of interest Subchapter C: Contracting Methods and Contract Types Part 14. Sealed bidding Part 15. Contracting by negotiation Part 16. Types of contracts Subchapter D: Socioeconomic Programs Part 19. Small business programs Part 22. Application of labor laws to Government acquisitions Subchapter E: General Contracting Requirements Part 30. Cost accounting standards administration Part 31. Contract cost principles and procedures Part 33. Protests, disputes, and appeals Subchapter F: Special Categories of Contracting Part 36. Construction and architectengineer contracts Subchapter G: Contract Management Part 42. Contract administration and audit services Part 43. Contract modifications Part 44. Subcontracting policies and procedures Part 49. Termination of contracts Subchapter H: Clauses and Forms Part 52. Solicitation provisions and contract clauses 11

FAR Part 36 Construction And Architect-Engineer Contracts Historical Bias Towards Design-Bid-Build A/E Firms Selected Based On Qualifications Construction Firms Selected Based On Sealed-Bidding Growing Use Of Design-Build (Since 1996) Two-Stage Selection Process Has Been Used By BOP, FHWA, Military Housing 12

FAR 3.10 Code Of Business Ethics And Conduct Written code of ethics be implemented within 30 days if the contract will exceed $5 M and longer than 120 days Mandatory disclosure of: Credible Evidence of any violation of law Overpayment by the Government 14

Contracting Methods (Parts 14 and 15) Lower Risk To Government Higher Procurement Method Part 14 Sealed Bidding Best Price Mandatory When: Time permits Award will be on price No discussion with the offeror is necessary Reasonable expectation of > 1 Bid Part 15 - Contracting By Negotiation Best Value With Adequate Price Competition Two or more responsible offers Reasonable expectation of two offerors (even if only one responded) Price analysis shows the price is reasonable Prices Set By Law or Regulation Commercial Items Waiver Granted All Other Negotiations Certified Cost Or Pricing Data Required

Contract Types (Part 16) Lower Risk To Government Higher Contract Type Fixed-Price With or without Economic Price Adjustments Level-of-effort (e.g. Unit Price) Cost- Reimbursement Various fee structures (none, fixed, incentive, award) Indefinite-Delivery Definite quantity Requirements Indefinite quantity Time & Material, Labor Hour, Letter Incentive fee (e.g. GMP type contracts)

Certified Cost or Pricing Data This is to certify that, to the best of my knowledge and belief, the cost or pricing data (as defined in section 2.101 of the Federal Acquisition Regulation (FAR) and required under FAR subsection 15.403-4) submitted, either actually or by specific identification in writing, to the Contracting Officer or to the Contracting Officer's representative in support of * are accurate, complete, and current as of **. This certification includes the cost or pricing data supporting any advance agreements and forward pricing rate agreements between the offeror and the Government that are part of the proposal. 18

Cost Allowability 31.201-2 Determining allowability. (a) A cost is allowable only when the cost complies with all of the following requirements: (1) Reasonableness. (2) Allocability. (3) Standards promulgated by the CAS Board, if applicable, otherwise, generally accepted accounting principles and practices appropriate to the circumstances. (4) Terms of the contract. (5) Any limitations set forth in this subpart. 21

Selected Costs (FAR 31.205) Defined Costs that are specifically allowable: Compensation for personal services Depreciation Costs that are specifically unallowable: Advertising Interest on Borrowings Bad debt expense Contributions and Donations Entertainment Costs that require special treatment Independent research and bid and proposal costs Self-insurance 22

Reasonableness 31.201-3 Determining reasonableness. (a) A cost is reasonable if, in its nature and amount, it does not exceed that which would be incurred by a prudent person in the conduct of competitive business.. No presumption of reasonableness shall be attached to the incurrence of costs by a contractor.., the burden of proof shall be upon the contractor to establish that such cost is reasonable. (b) What is reasonable depends upon a variety of considerations and circumstances, including (1) Whether it is the type of cost generally recognized as ordinary and necessary for the conduct of the contractor s business or the contract performance; (2) Generally accepted sound business practices, arm s-length bargaining, and Federal and State laws and regulations; (3) The contractor s responsibilities to the Government, other customers, the owners of the business, employees, and the public at large; and (4) Any significant deviations from the contractor s established practices. 23

Allocability 31.201-4 Determining allocability. A cost is allocable if it is assignable or chargeable to one or more cost objectives on the basis of relative benefits received or other equitable relationship. Subject to the foregoing, a cost is allocable to a Government contract if it (a) Is incurred specifically for the contract; (Direct Costs) (b) Benefits both the contract and other work, and can be distributed to them in reasonable proportion to the benefits received (Overhead Costs); or (c) Is necessary to the overall operation of the business, although a direct relationship to any particular cost objective cannot be shown (General and Administrative Costs). 24

Table Of Contents Overview Federal Acquisition Regulation FAR Provisions In State & Local Government Contracts Challenges For Contractors With REAs/Claims False Claims Act 25

How do FAR Provisions Get Into State And Local Government Contracts? Referenced in contracts (Cost of the Work, Changes Clause, Force Account Clause) May be part of General Specifications (State DOT specs) Flow Down clauses from General Contractors AASHTO Guide 26

State Departments of Transportation that Reference the AASHTO Guide Arizona (ADOT). California (Caltrans). Connecticut (CTDOT). Florida (FDOT). Minnesota (MnDOT). South Carolina (SCDOT). Texas (TxDOT). Virginia (VDOT). 27

DOTs that Require Certification of Indirect Cost FAR Compliance Arizona (ADOT) Florida (FDOT) New Jersey (NJDOT) New York State (NYSDOT). Vermont (VTrans). Virginia (VDOT). 28

Washington, D.C. (Department of Transportation) Cost/price proposals, must include a complete cost and pricing data breakdown with labor costs, other direct costs, indirect costs and profit each clearly identifiable. Encourages the use of Defense Contract Auditing Agency (DCAA) recommended rates when pricing proposals. 29

Maryland Maryland Department of Transportation Request For Proposal Guidelines for Preparation of Price Proposals To be in compliance with Code of Federal Regulations (CFR), Title 48 Federal Acquisition Regulations (FARs), consultants must maintain adequate cost accounting systems to be eligible for a cost plus fixed fee basis of payment Agreement. 30

21 Virginia VDOT Contractor Cost Certification of Final Indirect Cost Rates All costs included in this proposal to establish final indirect cost rates are allowable in accordance with the cost principles of the Federal Acquisition Regulations (FAR) of title 48, Code of Federal Regulations (CFR), part 31. This proposal does not include any costs which are expressly unallowable under the cost principles of the FAR of 48 CFR 31.

Table Of Contents Overview Federal Acquisition Regulation FAR Provisions In State & Local Government Contracts Challenges For Contractors With REAs/Claims False Claims Act 32

The Accidental Government Contractor (REAs on Fixed Price Contracts) Accounting System Compliance Direct vs. Indirect Costs Unallowable Cost Unsupported Allocations Difficult Costs to Quantify (e.g. Owned Equipment) Adequacy of Documentation Reasonableness of Claim 33

Common REA Audit Exceptions Claiming unallowable costs Mischarging of costs Double-counting Claiming costs in violation of contract terms. Inconsistency in how similar costs are treated. Inadequate support. Poorly documented rationale of basis for estimates. Causation (Total Cost Claims) Reasonableness 34

Table Of Contents Overview Federal Acquisition Regulation FAR Provisions In State & Local Government Contracts Challenges For Contractors With REAs/Claims False Claims Act 35

False Claims Act Federal Government s primary means of combatting fraud. Penalties: Treble damages plus $10,781 - $21,563 for each false claim. Federal Government has recovered approximately $48.4 billion under the FCA between 1987 and 2015 Approximately 70% from qui tam (i.e., whistleblower) cases 36

Qui Tam QUI TAM PRO DOMINO REGE QUAM PRO SIC IPSO IN HOC PARTE SEQUITUR WHO BRINGS THE ACTION FOR THE KING AS WELL AS FOR HIMSELF

Basic Provisions of the Federal False Claims Act Knowingly: making a false or fraudulent claim for payment or approval using a false record to get a false claim paid or approved delivering less property or money to the government than the amount of a certificate or using a false record to conceal, avoid or decrease an obligation (reverse false claim)

Knowingly Standard Has Actual Knowledge of the Relevant Information Acts in Deliberate Ignorance of the Truth or Falsity of the Information Acts in Reckless Disregard of the Truth or Falsity of the Information

Common Allegations of False Claims Falsification of Timecard Hours Overstatement of Wage Rates and Overheads Billings of Unallocable Costs Forgery or Alteration of Third Party Invoices Double Billing for the Same Work Collusion with Third Parties to Submit Overstated Charges Misstated Progress Reporting Substitution of Cheaper Materials Billing for Unallowable Costs

Other False Claim Allegations Mischarging To Contract Feasibility Of Design and Construction Misrepresenting Small Business Status Advance Billing Environmental Non- Compliance Misrepresentation of DBE Status Product Substitution Deficient Work False Disclosures of Accounting Practices

False Claims Causes Of Overstated Damage Claims Failure to consider contractual provisions Improper interpretations of regulations Improper extrapolation Wrong damage theory No consideration of offsets or credits Errors in calculations

State False Claims Acts All 50 states and several cities have some form of False Claimstatute. Cities with statutes included Washintgton, DC, New York City, Chicago, Philadelphia). Some jurisdictions include both civil and criminal penalties in their statutes. 43

Maryland state FCA. Went into effect June 1, 2015. Penalties: Treble the state s damages plus a fine up to $10,000 for each false claim. Has qui tam provision. Whistleblower reward: 15%-25% of any recovery. 44

Washington DC FCA Exceeds the Federal FCA in some respects. Penalties: Treble the state s damages plus a fine between $5,500 and $11,000 for each false claim. Has qui tam provision. Whistleblower reward: 15%-25% of any recovery (and 25%-30% of the settlement if the state does not intervene). 45

Virginia FCA Basically Identical to the Federal FCA Penalties: Treble the state s damages plus a fine between $5,500 and $11,000 for each false claim. Has qui tam provision Whistleblower reward: 15%-25% of any recovery 46

Maryland and Washington, D.C. FCA Example. Washington, D.C. nuclear cardiologist billed Medicaid for services not performed in addition to double billing for services he did perform. Maryland and Washington, D.C. joined the Federal government in the case. In 2013, a False Claims Act judgement was entered for $17 million. 47

California state FCA Example In 2014, a settlement was reached in a qui tam suit that was filed against Office Depot by a former employee who claimed the company violated the terms of contracts used by 1,200 state government agencies to purchase pens, ink, furniture and other goods. Office Depot settled the lawsuit for approximately $78 million (recipients including California state government agencies, the whistleblower and the attorney s of the whistleblower). 48

Florida FCA Example. In 2012, McKesson Corporation settled a suit as part of a global settlement totaling more than $150 million, including more than a $10 million settlement for the state of Florida. The settlement resolved allegations that McKesson Corporation violated both Federal and state FCAs by reporting inflated pricing data for prescription drugs, causing state Medicaid programs to overpay McKesson. 49

Illinois state FCA Example. In 2012, GlaxoSmithKline (GSK) settled with the Federal Government and several states for $3 billion as part of the largest healthcare fraud settlement in U.S. history, including $25 million settlement for the state of Illinois. GSK allegedly engaged in illegal schemes in marketing and pricing its drugs to sell to manufacturers. 50

Questions? 43

Contact Information William D. Guernier wguernier@kenrichgroup.com (646)-560-5431 Erin L. Felix efelix@polsinelli.com 202-626-8375