A Cautionary Tale for Contractors on Government Projects: False Claims Act Liability

September 21, 2022 Construction Law Corner

“Men [and women] must turn square corners when they deal with the Government.”[1]

With this introductory sentence in its January 2022 opinion in Lodge Construction, Inc. v. United States, 158 Fed.Cl. 23, 28 (2022), the Court in that case issued a harsh reminder to contractors that precision, accuracy, and honesty are critical elements required for claims submitted on government projects.  Indeed, the Court itself couched its opinion by stating: “This case should serve as a cautionary tale to government contractors.”  Id. at 29.  Ultimately the Court levied forfeiture and fines on the contractor for its finding that the contractor had presented false claims or presented claims with reckless disregard of their accuracy.

The dispute in Lodge Construction arose from a construction project to rehabilitate a levee in South Florida.  Dewatering and soil issues plagued the project.  After the failure of a cofferdam, the Government retroactively rejected Lodge’s cofferdam design and sent Lodge a cure notice.  Lodge submitted two certified claims to the Government seeking roughly $4 million in additional compensation and 154 additional days to complete its work.  The Government denied Lodge’s claims.  Ultimately, the Government terminated Lodge for default.  Lodge filed a lawsuit seeking adjudication of its claims.  Id. at 30-31.

Lodge’s Certified Claims

Lodge submitted two certified claims, attesting they were “made in good faith that the supporting data are accurate and complete to the best of my knowledge and belief; that the amount requested accurately reflects the contract adjustment which [Lodge] believes the Government is liable. . .”  Id.

Under its “Design Claim,” Lodge sought $679,279 in compensation and 63 additional days to complete work related to the Government’s retroactive disapproval of Lodge’s cofferdam design.  Id.  Under its “Dewatering Claim,”  Lodge sought $3,282,123 in compensation and 91 additional days to complete work based on alleged conditions on the project that impacted Lodge’s performance.  Lodge asserted that inefficiencies related to these conditions were the Government’s responsibility.  To calculate this claim, Lodge measured its inefficiencies with a methodology that used a ratio that it multiplied by a cost pool, including operation costs for certain equipment.  Id.

The Government’s Response: False Claims Act

The Government responded, asserting as an affirmative defense that Lodge’s claims (and that of its surety) were “barred by illegality as a result of submitting a false claim.” Id. The Government also asserted affirmative counterclaims against Lodge seeking forfeiture, damages, and civil penalties pursuant to the Special Plea in Fraud Statute; the anti-fraud provision of the Contract Disputes Act; and the False Claims Act.  Id. at 31. 

The Court broke Lodge’s alleged fraudulent conduct into four categories:

(1)          Euclid Dump Trucks.  Lodge used materially different equipment rates in the Government’s USACE Manual to determine rates for its Euclid Dump Trucks.  Lodge used operating and standby rates for a 2006 773D Caterpillar Truck to establish the rates for Lodge’s Euclid Dump Trucks.  However, Lodge’s trucks were worth, at most, $14,000 – $24,000 apiece – far less than the $888,686 USACE evaluation for the Caterpillar Truck.  Lodge’s failure to properly use the USACE Manual, coupled with Lodge’s disregard of a consultant who advised that their valuation was erroneous, resulted in Lodge overvaluing the claim.  The Court held that Lodge’s valuation of its Euclid Dump Trucks was knowing, intentional, and duplicitous.  Id. at 33-36.

(2)          The Inefficiency Ratio.  In its Dewatering Claim, Lodge sought to hold the Government partially responsible for the higher-than-expected water levels on the Project which delayed Lodge’s progress.  To quantify its inefficiency cost, Lodge applied a unique “inefficiency ratio” to a cost pool.  Lodge’s inefficiency ratio was not a reasonable, accurate, or truthful measure of inefficiency.  Lodge used an inaccurate and improper “tick mark” method to count actual days but that methodology was so flawed that it did not accurately capture or characterize the claimed inefficiencies.  Further, Lodge counted days outside of the relevant time period in its ratio which further exacerbated the inaccuracy of the methodology.  Lodge’s use of unsupportable and inaccurate data artificially inflated its claim. The Court was also swayed by the lack of credibility of Lodge’s witness who prepared the inefficiency ratio due to her personal interests in relation to Lodge. The Court found that Lodge’s use of this inaccurate inefficiency ratio was intentional, not a mistake. Id. at 37-43; 55-59. 

(3)          Lodge’s Batch Plant Costs. Lodge double-billed the Government for costs relating to the ownership and operation of its “batch plant,” a concrete manufacturing facility constructed on site.  Lodge utilized incorrect methods to measure run time of the batch plant in calculating its claim.  The Court found that Lodge intended to artificially inflate its claim by knowingly using inaccurate measurements. Id. at 43-49.

(4)          The Dewatering Pumps.  Lodge included the operating costs of its dewatering pumps in its certified Dewatering Claim even though Lodge was already compensated for those costs through a fixed monthly price arrangement. The Court found that Lodge was aware of the fixed price for dewatering being paid to Lodge by the Government and still improperly included those costs in its Dewatering Claim.  Id. at 49-52. 

The Court’s Findings

The False Claims Act provides penalties for a contractor who “’knowingly presents’ to the government ‘a false or fraudulent claim for payment or approval’” Id. at 52.  A contractor found to have submitted a claim in violation of the False Claims Act “is liable to the United States Government for a civil penalty … plus 3 times the amount of damages which the Government sustains.”  Id.  The standard for “knowingly” presenting a false claim is broad.  Under the False Claims Act, a contractor can be deemed to have “knowingly” presented a false claim with a showing of “actual knowledge, deliberate ignorance, or reckless disregard for the truth of a false or fraudulent claim.”  Id.  So, a contractor can be determined to have submitted a false claim – regardless of that contractor’s intent – if there is a finding that the contractor ignored obvious deficiencies in a claim. 

Contractors have an obligation to examine their records to submit valid, supportable claims

The Court ultimately found that Lodge’s claims violated the False Claims Act and Special Plea in Fraud Statute.  While the Court determined that certain of Lodge’s claims showed intent to submit fraudulent information, for the Inefficiency Ratio issue, the Court found that Lodge’s use of a flawed methodology showed its reckless disregard for the accuracy of its claim.  Id. at 55-56.  Similarly, for the dewatering pumps, the Court noted that even if Lodge did not have actual knowledge of its double-billing, Lodge acted in reckless disregard for the accuracy of its claim.  Id. at 61.

Due to the findings that Lodge violated the False Claims Act and Special Plea in Fraud Statue, the Court found that Lodge forfeited all of its claims, including any claim it might have sustained for wrongful termination, and the Court levied significant financial penalties against Lodge.

Key Takeaways

  • It is critical to maintain accurate and complete records supporting costs due on public projects.
  • To the extent a methodology is utilized to determine damages, such as inefficiencies or delay, be sure the basis of the methodology is sound and supportable.
  • Even if a contractor is not intending to submit a false claim, a contractor’s failure to review its claim to ensure accuracy can be found to be “reckless disregard” and result in False Claims Act liability
  • Though this case dealt with public projects, the same concepts apply to private projects. Using inaccurate, unsupportable, or overreaching billing practices can result in an Owner’s refusal to pay, a contractor’s inability to recover costs, and potential additional ramifications against the contractor

[1] Lodge Construction, Inc. v. United States, 158 Fed.Cl. 23, 28 (2022) citing Rock Island A. & L. R. Co., v. United States, 254 U.S. 141, 143 (1920).