Court of Federal Claims Addresses Fraudulent Claim Pricing

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"Men must turn square corners when they deal with the Government." So began the Court of Claims decision entitled Lodge Construction, Inc. v. United States, Nos. 13-499 and 13-800 (January 1, 2022), which the court described as "a cautionary tale to government contractors."

The court went on to state:

For those who seek to recoup sums of money from the Federal Government, and thus burden taxpayers, rudimentary recordkeeping and approximated claims are likely insufficient. When job cost data and recordkeeping are inaccurate, the claim will inevitably contain errors and the line between negligence and reckless disregard for the truth becomes vanishingly thin. Cross it, and the government contractor's claim becomes fraudulent as a matter of law, a designation that carries financial, practical, and stigmatic consequences.

In this case, the court noted that while some elements of the contractor's claims may have reflected nothing more than "slapdash formulae," overwhelming evidence established that substantial portions of those claims were patently deceitful.

The Court's Analysis

To support its statements, the court provided a detailed analysis of the shortcomings of the contractor's claims, including (a) a failure to accurately identify the equipment it used and support the valuation of that equipment with proper documentation, (b) a "dubious metric" to measure its inefficiencies and dishonestly inflate its claims, (c) an "artifice" through which it sought to inflate costs of its equipment by reporting operation hours to the Government differently than it recorded them internally, and (d) an effort to seek recovery of costs for which the contractor assumed the risk of increased operation.

The court was unsparing in its criticism of the contractor's witnesses and the methodologies they employed to calculate damages arising out of a levee rehabilitation project in South Florida. The contractor filed three claims, and the Government filed counterclaims accusing the contractor of fraud in its submissions to the contracting officer and fraud in maintaining those claims in the Court of Claims. The basis for the counterclaims was the Special Plea in Fraud defense and the False Claims Act, for which the Government sought forfeiture of the contractor's claims, damages, and civil penalties.

A five-day trial was conducted on the two fraud issues between August 2 and August 6, 2021, and post-trial briefing was filed on August 30, 2021. Some of the analysis the court used to support its decision follows:

  • The court explained in detail how the contractor had overstated the applicable hourly rates for its Euclid dump trucks based on misuse of equivalent equipment operating rates contained in the USACE Manual. This, most notably because it ignored the "considerable discrepancy in value and age" between the equipment it used and the equivalent equipment upon which it based its hourly operating rate.
  • The court described the shortcomings in the contractor's inefficiency ratio to measure the impacts of excavation work, among which were the use of "activity days" which inflated the number of actual days of impact, and the inclusion of days after payment requests showed the impacted activity was complete.
  • The court described how the contractor had overstated its batch plant costs by calculating operation hours based on the hours the control center operator logged on his timesheet as opposed to the hours metered by the generator to log the duration the batch plant operated. The court pointed out that the generator hours were how the contractor determined batch plant use for internal reporting purposes and were the most accurate since the batch plant could not operate absent the generator running.

In each of the above instances, the court provided detailed references to testimony and exhibits to support its conclusions that the Government met its burden of establishing by clear and convincing evidence that the contractor knowingly submitted fraudulent claims.

Lessons for Federal Contractors

A government contractor should take from this decision that its claims should be consistent with its own internal records. Furthermore, the claim methodology utilized by the contractor should be consistent with accepted industry and internal practices.

Finally, the records used to support the claim should be detailed and accurate. Otherwise, the contractor runs the risk of violating the court's admonition that its claim "will inevitably contain errors and the line between negligence and reckless disregard for the truth becomes vanishingly thin." Cross it, and the government contractor's claim becomes fraudulent as a matter of law, as occurred in this case.

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DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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