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Understanding Liability Under the False Claims Act

Understanding Liability Under the False Claims Act

Over the years, government compliance requirements have grown and grown. They've become more intricate, too – as have the tools needed to enforce them. Using a wide array of enforcement methods, the federal agencies work to control and enforce compliance.

There is one tool the government uses that affect contractors more than others – the False Claims Act. While understanding the False Claims Act can be difficult, it's imperative for contractors and surety professionals. The risks associated with violating the Act are significant.

What is the False Claims Act?

Before we get too far in, let's break down the False Claims Act. While complicated, the Act boils down to this: the law imposes liability on companies and individuals who defraud any government program. The federal government uses the act as the primary litigation device in fighting fraud against the government.

Not Too Difficult?

Contractors are typically aware that defrauding a customer, company, or government is completely prohibited and illegal. The False Claims Act extends beyond full-on fraud. A doctrine known as the "false certification doctrine" states that a contractor who falsely states they have complied with a variety of compliance policies imposed by the government can be held liable under the False Claims Act.

Violating the False Claims Act is far easier than committing traditional fraud. The government doesn't have to prove any damages suffered. They simply have to find a contractor who has submitted a claim that was "known" to be false.

Due to how the Act is enforced and the "false certification doctrine" – it is incredibly simply to violate the False Claims Act. Once you do, the violations can add up. Most contractors find a violation can be exceptionally costly.

Volatile and Expensive

There are two different types of liabilities the government can dish out to violators of the False Claims Act. Both actual damages and statutory penalties can be lobbied against violators.

The penalties can be between $10,781 and $21,563 for each claim submitted by the government. As individual invoices are treated as separate claims, a large penalty can be enforced – even when the government hasn't suffered any actual harm.

Not only are the fines costly, but they can be unpredictable, too. Even subcontractors without a direct relationship to the government can be subjected to liability – just like federal prime contractors.

Due to the whistleblower provisions in the False Claims Act, individuals with knowledge of a company's operations can bring suit on the government's behalf. This clause often catches contractors flat-footed and unaware of the consequences that may be coming.

What Sureties & Their Contractors Should Know

Paying attention to the False Claims Act is mandatory these days. While it seems to be tougher and tougher to stay in compliance with the Act than ever before, the consequences for failing to do so continue to get higher and higher.

As a surety, it's imperative to educate contractors on the perils of the False Claims Act. Contractors can take a number of steps to ensure risks are minimized. For example, a contractor could:

  • Implement a mandatory independent review of every single invoice by a project manager before submitting and completing the project.
  • Continual communication with the federal government through counsel. Details of contractual difficulties that arise and compliance issue may be discussed.
  • Fully implementing a compliance, monitoring, and training program for all employees that covers a majority of significant contractual requirements.

On top of these ideas, a contractor may seek to consult with outside counsel regarding changes to federal regulations and implementation. By doing so, a contractor can limit exposure to liabilities under the Act. 

To learn more about liability under the False Claims Act and how this effects your business contact Skyline Risk Management, Inc. at (718) 267-6600.

The Strength of the Surety Market

The Strength of the Surety Market

It's not too complex. Naturally, the power of the surety market strongly correlates with the success of the construction industry. The stats show that when the construction industry is down – so are the surety markets.

With over $5.5 billion in 2008, the construction markets took a dive following the recession. Once the economy improved, the markets rebounded, and construction activity increased to over $5.5 billion once again in 2015. Looking at statistics isn't the only way to know the markets have bounced back.

According to Susan Hecker, director of national contract surety and area executive vice president, Arthur J. Gallagher & Co:

"One way I measure what's going on in the construction industry is how many tower cranes I can count on my drive to work every day. Over the past few years in the San Francisco area, it has gone from a handful to more than 50."

Understanding the Upswing

Private projects are thriving, and more bonds have been issues on these plans as of late. Most see this as a great thing for sureties, as lending institutions have started to require bonds for financing projects in the private sector.

However, spending on public projects has not found the same level of bounce-back. State and local governments don't have the funding that they did before the recession. While there is still a demand for projects, the government has to get creative in finding ways to meet their needs.

Enter P3s. One creative manner many government entities are working on is public-private partnerships or P3s. While the name is self-explanatory, the surety side has been working to offer bonds that fill this ever-growing market. Typically, a P3s bond offering will need to be more liquid.

Is All Growth Good?

While the upswing in the construction and bonding demand is a good thing, there are still concerns. Many worry about the availability of high-skilled employees and workers. It can be hard to find a qualified workforce for many construction companies these days.

The lack of skilled workers comes from a few factors. First, baby boomers are retiring. This leaves a lot of knowledge at the trade level off the table. There is a void to fill. And while the unemployment rate for construction workers is lower than it has been in the last decade, the available labor force has been strained. According to Ed Titus, senior vice president of surety for Philadelphia Insurance Cos:

“We see the Texas, California, and Florida construction markets struggling with not having enough of an available trained, skilled workforce for contractors to start bidding on new projects."

Cause & Effect

With a lack of skilled labor, most sureties have been keeping a close eye on the industry. Many have found a rise in claims. A lack of workers makes it difficult to finish on time. Projects that take longer often find more damages, too.

Plus, the flow of money slows down. Often, owners can't pay sub-trades until things get completed. When this happens, a claim can be triggered. Bonds often guarantee labor providers and suppliers are paid. If the flow of cash is slow, then it comes back to the claims.

Energy Sector Issues

Construction isn't the only industry sureties work heavily in. The energy sector has been problematic for the surety markets lately, too. Bankruptcy in the energy sector has become all too familiar.

The largest surety loss of all time was an energy company, Enron. Thus, when sureties see a number of energy companies file for bankruptcy, there's a legitimate call for concern.

Understanding the Surety Marketplace

With the construction industry coming up, sureties are looking to expand their business. Professionals in the space are hungry for new business. But with pricing becoming hyper-competitive, one can expect the industry to remain active and engaged – if profitable results are to continue. 

For more information on bonds and surety contact Skyline Risk Management, Inc. at (718) 267-6600. 

Construction Joint Ventures, Subcontractor Bonds, and More

Construction Joint Ventures, Subcontractor Bonds, and More

One trend in the construction business is joint ventures. These ventures have become increasingly common in recent years as construction projects continue to get bigger and bigger. As size grows, so does complexity, and many construction companies find themselves in need of help.

What is a Joint Venture in Construction?

Enter the joint venture. Instead of passing on a lucrative job they cannot handle alone, a company enters into a partnership between one or more other construction outfits to take on a large commercial job.

These partnerships ensure companies can share risks while increasing their expertise and expanding their market reach. Often, it's a win-win for all involved. When entering into joint ventures, the key is covering each other's bases.

For example, let's say you have one giant construction company in Las Vegas. This company has the resources, experience on massive projects, and ability to bond whatever is necessary. Although this company typically stays in their area, there's a huge development going on in Grand Junction, Colorado.

Next, you have a local construction company in Grand Junction. They aren't big enough to handle this project alone. They simply don't have the experience handling big developments like this one, nor do they have the bonding capability. However, they do have the local knowledge and expertise.

A joint venture could form between these two companies to tackle the huge project. The local company can provide the local knowledge and manpower. The huge company provides the expertise, planning, and bonding capacity. It's a win-win for all involved.

What is a Subcontractor Bond?

Why is bonding capacity so critical to these joint ventures? First, it's important to understand what a subcontractor bond is. A subcontractor bond is an explicit contractual agreement that guarantees the completion of a subcontract by a surety, if the original subcontractor fails to complete the full scope of work for the project.

Owners know that requiring every subcontractor to be bonded on large projects ensures their protection against any downside risk that a contractor fails to perform work they were hired to do. Once obtained, these bonds make sure the labor is completed in a faithful and honest manner.

Why Owners Prefer Subcontractor Bonds

Many owners and project planners require any subcontractor to be bonded before beginning to work together. While contractors can use subcontractor default insurance to transfer risk, many prefer bonds for a number of reasons.

One of these reasons is using a surety to investigate the capacity, character, and ability of any subcontractor. Through detailed underwriting, the surety will be able to note exactly what a contractor is capable of. This removes the vulnerabilities for many owners when hiring for large projects.

Subcontractor default insurance also encompasses a catastrophic insurance policy. This means high deductibles, co-pays, and more. A subcontractor bond covers extra costs and offers no resistance to getting the job done. These bonds cover 100% of the entire scope of the project for the contractor. As an owner, you'll never have to be worried about only getting a percentage of that.

Subcontractor Bonds & Security

Owners tend to prefer subcontractor bonds to all else these days. The reasons listed above were just a few of the many reasons bonds beat out default insurance on large construction projects, especially joint ventures.

Due to the surety underwriting, these bonds tend to foster a relationship of trust between owners and subcontractors. And as anyone in the construction industry can attest to – a relationship built on trust has a much better chance of lasting than most built in the industry. 


If you have questions about Joint Ventures & Sub-Contractor Bonds contact Skyline Risk Management, Inc.(718) 267-6600 to voice your concerns.