What Exactly Are Federal Contract Charges?
Federal contract charges are a type of indirect cost that the US government assesses on its contractors. The federal government actually allows those that work on its behalf to charge some of the costs of doing business as something known as an indirect cost. Specifically, these costs are paid for indirectly instead of being directly assigned to a specific contract or project.
The most straightforward definition of the concept is that it’s a way for the government to cover overhead expenses and indirect costs through a flat-rate assessment or percentage fee based on the requirements of the contract in question. For a private business, it’s basically the equivalent of your landlord charging a flat fee that covers all the extra expenses of owning an apartment building, rather than having to calculate the costs of water or trash pickup on a monthly basis.
There are several types of contracts that can result in federal contract charges, including cost-plus and cost-plus award fee contracts, under which the contractor agrees to cover costs beyond the base amount of the contract. The government essentially assumes that these contracts will always be over budget , and compensates them through the indirect cost charges.
Sometimes, contractors were able to slide under the radar, receiving payments from the federal government but not charging indirect costs. As a result, these government assessments have become one of the most important aspects of cost accounting for companies working specifically with the federal government.
Federal contract charges refer to the direct versus indirect cost assessments that can be made by a contractor who does business with the federal government. When companies need to do some work with the government, they often have costs that can’t be recognized as part of a specific project, and therefore are assigned under government regulations as indirect costs. The government assesses these costs on a flat contract basis, since it assumes the contractor will go over budget every time. Without depersonalizing the assessment, indirect cost contracts are meant to cover the overhead and other costs associated with running a business, allowing contractors to submit the costs of things like utilities, licenses and permits under the contract.
The Categories of Federal Contract Charges
Federal Contract Charges for Breach of Contract
There are several types of federal contract charges. Below are a few of the more common federal contract charges. Contract Cost Overruns Cost overruns on federal contracts is a catch-all term for cost accounting fraud. Falsifying Costs Falsifying costs is committed when government contractors mislead the government about the cost of work under a federal contract. Defective Pricing Defective pricing would include when the government is given false or fraudulent information by a contractor, offering to the government a price increase citing changes, and submitting a federal invoice which contains false information regarding actual costs to complete performance of a contract.
Potential Legal Ramifications and Penalties
Federal contract fraud schemes and false billing are extremely serious matters. In the hands of federal prosecutors, they often result in lengthy investigations, criminal prosecutions, civil litigation (including qui tam lawsuits), administrative proceedings that can entail exclusion from federal contracting and suspension from federal government employment, debarment, and other adverse administrative action.
There are a number of laws, regulations, and administrative guidelines that apply to false charges on federal government contracts and all have serious implications.
One example of such a law is the False Claims Act (FCA or "Lincoln Law", 31 U.S.C. §§ 3729-3733), passed in 1863 to combat fraud by unscrupulous suppliers of war materials to the Union Army.
The statute imposes liability upon any person who makes a false or fraudulent claim to the government, or who makes, uses, or causes to be made or used any false record or statement material to a false claim.
To be liable, a defendant must have acted knowingly, which includes acting with actual knowledge, acting in deliberate ignorance of the truth or falsity of the information, or acting in reckless disregard of the truth or falsity of the information. No proof of specific intent to defraud is required.
The FCA provides for three and up to treble damages plus civil monetary penalties (CACM).
A false claim for purposes of the FCA is broadly defined and includes:
Publicly filed whistleblower lawsuits under the FCA, called qui tam lawsuits, may be filed by individuals against companies making false or fraudulent claims to the federal government for monies they contracted to provide.
The Department of Justice (DOJ) also has the option of intervening in the lawsuit and assuming the plaintiff’s role as the qui tam relator.
In fiscal year (FY) 2021, the DOJ reported that it recovered more than $1.6 billion dollars in settlements and judgments in civil cases involving false claims against the federal government.
Of this amount, $2.6 billion accounted for health care fraud cases and $233 million in settlements and judgments recovered for matters involving procurement fraud. Numerous cases in the FY 2021 report involved government contractors found to have submitted false information or defective pricing on federal contracts.
In the May 2019 DOJ FCA enforcement guidelines, the DOJ emphasized its strong commitment to holding responsible:
Consequences of criminal and civil liability, qui tam exposure, debarment, and administrative sanctions, and liability to the prime contractor, and from being excluded from federal contracting and subcontracting with private sector entities that are subject to the Federal Acquisition Regulation (FAR) and system for award management (SAM), or subject to Agency-specific contracting (AGAR, SEAD 5-001, DSAM, etc.) or procurement regulations (FAR) are serious enough as is.
But the consequence for federal government contractors and subcontractors do not end there. Depending on the circumstances, liability may also arise under the Procurement Integrity Act (PIA, 41 U.S.C. § 2101 et seq.) and the National Defense Authorization Act (NDAA) false claims provisions.
How to Steer Clear of Federal Contract Charges
To avoid incurring federal contract charges, companies must ensure they meet all applicable regulations and requirements. Companies should conduct thorough audits of their compliance systems at least once a year. Audits of employee hours are particularly important. In addition, companies must ensure that their workers comply with all regulations . Employees and subcontractors should be properly trained in the expectations for describing their labor on invoices. For example, employees should be required to document any work performed in excess of the hours estimated in the contract, as well as work performed on tasks other than the contract. Such details are essential for proper invoicing and regulation compliance.
Some Examples of Federal Contract Charges
The following are some examples of cases where Federal Contracting Charges have been filed against federal contractors:
Case Study 1
In a case involving a bid protest for a federal contract for a Department of Labor program, a former DOL employee filed a bid protest alleging a majority of the ownership of the contractor was really held by a felon. The former employee a member and stockholder — which would disqualify her from owning any portion of the entity. After an investigation it turned out that the former employee was de facto 50 percent owner of the company that went on to win the contract. According to the investigators, the contract could have been terminated unless and until the felon relationship was terminated. In other words, if the contractor had not fixed the ownership issues, then the contract would have been at risk of termination.
Case Study 2
A Department of Defense contract was awarded to a discount retail store for court ordered ankle bracelet monitoring, mainly in the District of Columbia. The contract awardee holds several federal supply schedules. The FSM was 51 percent Black female owned and 99.6 percent indentured or restricted under the FDIC guidelines. The application for the contract did not mention this restriction and the reasons for the FDIC waiver as required
Case Study 3
A federal contractor submitted a claim involving legal fees that were charged to a completed contract. During the course of the contract, the contractor was charged a fee by outside counsel. This fee created an internal dispute related to billing practices between the outside attorney and the billing office. Despite the filing of the claim, the contract was terminated by the Agency and over half of the legal costs were then removed from the bill. The contractor obtained a small judgment against the District of Columbia in court. But the case was then investigated by the Agency’s Contracting Office and suspended pending a final decision on the remainder of the filing.
The above cases demonstrate that contractors who have successfully prosecuted a federal contract dispute may be subject to an Agency investigation with regards to any contracting or employment violations.
When to Seek Legal Guidance on Federal Contract Charges
Engaging a legal counsel experienced in federal contract law can provide invaluable assistance for companies facing potential penalties. An attorney can assess the full range of facts and information related to a subcontractor’s actions to determine the best avenue for defense or mitigation , or if the issues warrant the numbered letter. Your attorney can negotiate with the attorney from the agency to find a fair resolution. It is important to understand that an auditor has only a small window to decide on a letter, so need to be proactive to stop any impact to your business.
