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Undisclosed Billing on Public Contracts May Turn “Cost Plus Fee” into “Cost Plus Fines”




by:
Jonathan T. Elder
Hinckley, Allen & Snyder LLP - Boston Office

 
June 20, 2014

Previously published on June 18, 2014

A recent settlement between a large construction management firm and the FBI is the latest reminder that when doing business with a public awarding authority - state or federal - anything less than full transparency is likely to result in serious trouble. A recent unwitting student of this hard lesson in government contracting is Miron Construction Co., Inc., one of Wisconsin’s largest construction firms, which the FBI determined had overbilled five school districts in connection with public school construction projects throughout the state.

Miron had performed all of the five projects on a “cost-plus” basis, meaning it was to be paid for the actual cost of the work plus a previously-negotiated fee. However, the investigation by the FBI and the U.S. Attorney’s Office showed that Miron routinely overbilled the school districts for its labor costs. The contracts with the school districts defined chargeable labor costs as “wages” or “wages paid.” But Miron applied an undisclosed markup, by which it included some portion of its overhead and other expenses like insurance and benefits, resulting in charged costs that were over and above what Miron actually paid its laborers.

Miron’s failure to follow contract labor cost billing requirements proved, in a word, costly: it was ordered to pay $4 million in restitution as part of a non-prosecution agreement (“NPA”) with the U.S. Attorney’s Office. Miron’s punishment under the NPA did not end with monetary fines. Miron also had to change its accounting practices (including by dismissing its accounting and auditing firm); appoint an independent monitor approved by the federal government to oversee Miron’s operations for the three-year life of the agreement; and revamp its financial statements to include more accurate reporting of profits across its various projects.

As harsh as the outcome might sound, Miron should feel fortunate to have avoided criminal prosecution, which in any event it may still face should it violate any aspect of the NPA. That is not so much because Miron’s conduct warranted punishment - there are two sides to every story, after all - but because of the Government’s propensity to prosecute anything that resembles contractor misbehavior on public projects. In this case, Miron resolved the matter without criminal sanctions, but only after years of negotiations with federal authorities, and only by agreeing to several highly restrictive conditions.

The “cost-plus” payment model is increasingly common in both state and federal contracting throughout the United States and on projects abroad. Miron’s case emphasizes how careful Construction Managers must be when charging anything based on “cost” to the Government. If the CM cannot get the public awarding authority to pre-approve stipulated billing rates for labor and related costs, then the CM must be 100% transparent on charging its actual costs. Anything less can have serious consequences, including substantial fines, “probation”-like compliance monitoring, and criminal prosecution of both the company and its individual employees involved in the misconduct.

Given the host of prosecutorial weapons readily available in the enforcement arsenal of state and federal governments - from false claims and false statements statutes that outlaw a wide range of often seemingly innocuous conduct to traditional civil and criminal claims related to fraud and unjust enrichment - contractors engaging in unauthorized or undisclosed billing practices are likely to face liability with potentially serious consequences. Miron avoided that outcome, but most contractors will not escape so easily.



 

The views expressed in this document are solely the views of the author and not Martindale-Hubbell. This document is intended for informational purposes only and is not legal advice or a substitute for consultation with a licensed legal professional in a particular case or circumstance.
 

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