By William L. Baggett, Jr. Smith, Currie & Hancock LLP.
In January 2022, the United States Court of Federal Claims issued a harsh reminder of the serious implications of the certification of a claim when dealing with the federal government. In Lodge Construction, Inc. v. the United States, not only did the contractor fail to recover on its affirmative claims, but the Court also found merit in the government’s affirmative defenses and counterclaims that raised false claims. The result was forfeiture and fines for the contractor. Indeed, the Court began its opinion with Justice Oliver Wendell Holmes’ famous observation that “men must turn square corners when they deal with the government.” This adage usually bodes ill for contractors.
A Project Literally Mired In Trouble
This project required the contractor to rehabilitate a levy in Florida for the United States Army Corps of Engineers (“Corps”). Dewatering and soil issues plagued the project from its inception. After a cofferdam failed, the Corps retroactively disapproved the contractor’s cofferdam design and issued a notice to cure. The contractor certified two claims — the Design and Dewatering claims—requesting nearly $4 million in additional compensation and several months of time extensions. About a month after the submission of the dewatering claim, the Corps terminated the contractor for default. The contractor then sued the government in the Court of Federal Claims on both the Dewatering and Design claims.
False Claim Allegations
In the litigation, the Corps eventually raised false claims as both affirmative defenses and as counterclaims under the False Claims Act and another federal statute. The Corps also sought both forfeiture of the contractor’s claims and the imposition of statutory fines against the contractor. The Corps focused on four cost aspects of the contractor’s claims: 1) operating and standby rates for off-road dump trucks; 2) the methodology of an inefficiency ration developed by the contractor; 3) additional costs alleged by the contractor for the ownership and operation of a batch plant; and 4) additional costs alleged by the contractor in connection with dewatering pumps that were part of a fixed price, lump-sum contract line item.
- Dump Trucks
In both the Dewatering and Design claims, the contractor used operating and standby rates under the United States Army Corps of Engineers Equipment Manual (“ USACE Manual”) for a 2006 773D Caterpillar truck as equivalent to the size, capacity, horsepower, and value of the equipment is used, which was not listed in the Corps’ manual. The claims’ operating rates were based on this valuation. According to the evidence at trial, four Caterpillar trucks were worth over $3.5 million. The actual equipment used, which was much older, was worth closer to $40,000 according to the Contractor’s principal’s testimony. This resulted in dramatically higher rates charged to the government in the claim. The contractor did not explain how it arrived at these higher rates. The Court was plainly influenced by the fact that the contractor was warned by one of its consultants that these rates were inflated. Nevertheless, it did not revise them or properly follow the USACE Manual’s valuation procedures. The Court found this erroneous valuation “knowing, intentional, and duplicitous.”
2. Inefficiency Ratio
The Contractor also priced its Dewatering claim by establishing an inefficiency ratio because of delays due to higher-than-expected water levels. The ratio was then applied to a pool of overhead, labor, and equipment costs for a defined segment of work. This calculation used “actual days” of work as a numerator and allocated (planned) days as a denominator to create the ratio.
Unfortunately, the methodology of this ratio was suspect in the eyes of the Court. First, actual days were actually “activity days.” Frequently, there were multiple “activity days” in one calendar day. For example, in one instance the contractor counted five activity days for two hours and forty minutes of work within one actual work day. Another two activity days were recorded when there was no record of any work recorded on the particular task that the contractor alleged was delayed. There was also “undercounting.” In the end, however, the calculation ended up with 285 “activity days” for a claim that only involved work spanning 192 calendar days. The net result was an inflated inefficiency factor and a higher-priced claim.
Even worse, the “activity days” also included work performed after the impacted segment of work was complete. These methodological problems, which the Court found the contractor’s consultant admitted, were not the only problem with this aspect of the claim. The Court also determined that the consultant’s credibility was dubious due in some part to financial arrangements associated with the consultant’s testimony. The Court concluded that the contractor intended to include both the inaccurate “activity days and the days beyond the claim period. For these reasons, the contractor “knew or should have known that its inefficiency ratio was not a reasonable, accurate, or truthful measure of inefficiency.
3. Batch Plant Costs
Part of both the Contractor’s Design and Dewatering claim costs were costs associated with the ownership and operation of a batch plant. The batch plant was comprised of custom equipment that mixed water, excavated soil from the site, and injected Portland cement to produce a soil-cement that would armor the levee. The Corps contended that both ownership costs and operating rates associated with the Contractor’s claims should be forfeited because 1) the Contractor’s inclusion of any batch plant ownership costs was fraudulent because the Corps reimbursed the Contractor in full for the installation and commissioning of the batch plant; 2) the operating rates billed the Contractor were fraudulent, and 3) the Contractor improperly calculated the hours of operation for the batch plant. The Court rejected the first two government arguments but concluded the contractor intentionally overstated the number of hours of operation because it did not tie it to the run-time of the plant’s generator (the batch plant could not operate without the generator).
4. Dewatering Pumps
In the Dewatering claim, the Contractor sought to operate and standby costs for its dewatering pumps for the roughly six-month claim period despite the fact that it had agreed to a lump sum, all-inclusive price to be paid in monthly installments. The government paid for the pumps per the agreement. The contractor’s principal, according to the Court, admitted that he knew the price was all-inclusive. The government alleged that this part of the claim was intentional double billing. The Court agreed. It found that “at a minimum … [the Contractor] was obligated to examine its records to determine whether the government already paid the costs associated with the dewatering pumps…. Failure to make a minimum examination of the records satisfies the intent for fraud under the False Claims Act and the Special Plea in Fraud Act.”
Result
In addition to the forfeiture of its Design and Dewatering Claims and the fines for false claims, the finding of false claims also undercuts a separate case by the Contractor for wrongful termination. The Court stated in a footnote that there was no issue to litigate in the termination case, even though that matter was not before the Court. Given the factual findings here, unless an appellate court comes to a much different conclusion, the termination for default likely will stand.
Lessons
• When the government is involved, knowingly problematic and overreaching positions are not only deadly to a contractor’s claims but also carry risks well beyond the project at hand.
• Even in a private setting, profound errors of methodology and perceived witness bias can completely sink a case. It is clear that the judge, in this case, was troubled by the contractor’s witnesses’ testimony.
• When preparing claims, beware of excluding constructive, but critical, viewpoints. The Court observes in Lodge that the contractor’s principal decision-maker siloed himself from others who had more knowledge about certain details of the claim and rejected differing viewpoints without much analysis. Claim vetting is crucial.
Smith Currie provides comprehensive legal services to all parts of the construction industry across the nation. Smith Currie lawyers have decades of demonstrated success representing construction and federal government contracting clients “From the Ground Up,” including procurement matters, contract formation and negotiation, project administration, claims prosecution and, when necessary, in litigation and other forms of dispute resolution.
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