A significant number of government contracts and grants have been terminated recently by federal agencies pursuant to the U.S. Department of Government Efficiency's (DOGE) "cost efficiency initiative" and review of "covered contracts and grants" outlined in the executive order (EO) "Implementing the President's 'Department of Government Efficiency' Cost Efficiency Initiative." These terminations have led to a complex landscape for contractors and grant recipients navigating the aftermath and resulted in a substantial increase in settlement proposals and grant closeout packages as contractors and grant recipients seek to recover costs and mitigate losses. However, this process is fraught with potential legal pitfalls, particularly concerning the False Claims Act (FCA or the Act).1
The FCA imposes liability on individuals and companies that knowingly submit false claims for government funds. In the context of settlement proposals and grant closeout packages following terminations, contractors and recipients face heightened risks of FCA liability. This is due to the stringent requirements for accuracy and transparency in the claims submitted to the government. Misrepresentations, whether intentional or accidental, can lead to severe financial penalties and legal consequences.
As contractors and grant recipients engage in the submission, negotiation and finalization of settlement proposals and cost proposals, it is crucial to understand the implications of the FCA. This blog post will delve into the risks associated with these activities and provide guidance on how to navigate them effectively, ensuring compliance and minimizing potential liabilities.
General Overview of the FCA
The FCA is a critical piece of legislation designed to combat fraud against the federal government. Enacted during the Civil War, the FCA provides the government with a powerful tool to address fraudulent claims for government funds and property. It imposes civil liability on individuals and companies who knowingly submit false claims for payment or approval or engage in fraudulent activities related to government contracts and grants.
Under the FCA, violators may face significant financial penalties, including treble damages and per-claim fines. Recoveries under the FCA exceeded $2.9 billion in fiscal year 2024, as discussed in our prior post on DOJ's False Claims Act statistics.
The government's enforcement of the FCA is robust, with various agencies involved in investigating and prosecuting violations. The Act also includes provisions for whistleblowers, known as "relators," who can file qui tam lawsuits on behalf of the government. These whistleblowers are incentivized to report fraud by receiving a portion of the recovered funds if the case is successful. The overwhelming majority of FCA cases are brought by relators; last year, 979 new FCA cases were filed by relators.
Relators are often current or former employees with knowledge of internal conduct that may violate the FCA. This underscores the importance for contractors to maintain rigorous compliance programs and be aware of the risks associated with FCA liability, especially when negotiating and finalizing settlement proposals following the termination of a government contract or grant.
The FCA is particularly relevant in the context of government contracts and grants, where compliance with contractual obligations and accurate reporting are paramount. Contractors and recipients must be vigilant in ensuring that all claims and proposals submitted to the government are truthful and accurate. Failure to adhere to these standards can result in severe consequences, including legal action, financial loss and damage to reputation.
Overview of Government Contract or Grant Termination
Government contracts and grants can be terminated by the federal government under specific circumstances, which are either negotiated for under the particular agreement or available to the federal agency by federal regulation or statute. The termination process involves several procedural steps, including the federal agency's issuance of a termination notice, which must comply with the contractual terms and applicable regulations. The government is primarily terminating federal contracts for convenience under applicable clauses2 and federal grants for "no longer effectuat[ing] the program goals or agency priorities." See, e.g., 2 C.F.R. § 200.340(a)(4). Both are based on the government's unilateral termination for reasons that are not the fault of the contractor or recipient. (Our team previously summarized steps to take in responding to a termination for convenience and grant termination.)
When a government contract is terminated for convenience, the contractor is typically entitled to receive compensation for work performed up to the termination date, along with reasonable costs incurred as a result of the termination. The process involves a formal notice from the government, outlining the effective date of termination, and any specific instructions for winding down the contract. Contracts typically contain a termination clause such as 52.249-2 Termination for Convenience of the Government (Fixed-Price) or 52.249-6 Termination (Cost-Reimbursement) outlining the process.
The contractor submits a termination settlement proposal to the contracting officer. For contractors operating on a fixed price contract, the settlement process in effect converts to a cost-type analysis to capture recoverable costs. Recoverable costs generally include the costs incurred in performance to date, administrative and legal costs to settle the termination, and fair and reasonable profit, with special provisions provided for in Federal Acquisition Regulation (FAR) Part 31 or FAR Part 12.403 (for commercial item contracts). If accepted, the parties negotiate a settlement to recover costs to which the contractor is entitled. The contracting officer will then issue a modification to the contract to enable payment of the negotiated amount. If the settlement is not accepted, the contractor can file a claim under the disputes clause, which must be certified if it is over $100,000 in accordance with FAR Parts 33.207 and 52.233-1.
There is a similar process for grant recipients, which involves closing out the grant with the federal agency in accordance with grant regulations plus the appropriate agency supplement.
Risks Associated with Settlement Proposals
Contractors and grant recipients must navigate the settlement process and grant closeout process to recover allowable costs but be cautious to avoid potential liabilities. Understanding the grounds for termination and associated procedures is crucial for contractors and grant recipients to protect their interests and ensure compliance with federal regulations. Contractors and grant recipients must be acutely aware of these risks to avoid severe legal and financial repercussions.
Misrepresentation of Costs. One of the primary risks is the potential for misrepresenting costs incurred up to the termination date. Contractors and grant recipients may be tempted to include unallowable or non-allocable expenses in their settlement proposals. Such actions can be construed as submitting false claims, leading to FCA liability. It is crucial for contractors and grant recipients to ensure that all costs claimed are accurate, allowable, allocable and adequately documented.
Inaccurate or Incomplete Information. Providing inaccurate or incomplete information in settlement proposals or grant closeout packages may also trigger FCA liability. Contractors and grant recipients must disclose all relevant information, including any changes in project scope or unforeseen circumstances that may have impacted costs. Failure to do so can be seen as an attempt to deceive the government, resulting in potential legal action.
Inflated Claims. The negotiation phase of settlement proposals can lead to inflated claims if contractors attempt to maximize recovery without proper justification. It is essential to base all claims on factual and verifiable data, supported by thorough documentation. Any attempt to exaggerate claims can be perceived as fraudulent, exposing the contractor to potential FCA risk.
Whistleblower Risks. The FCA includes provisions for whistleblowers, who can file qui tam lawsuits if they suspect fraud. Employees or subcontractors aware of any discrepancies in the settlement proposals may report these to the government, leading to investigations and potential liability. Contractors and grant recipients should foster a culture of transparency and compliance to ensure potential noncompliance is brought to the entity's attention early.
False information in a settlement proposal or closeout package can result in liability under the false statements provision of the FCA or be considered to have fraudulently induced the resulting modification or termination settlement. Under the FCA, this amount can then be trebled. Similar liability can apply to subcontractor terminations, which follow a similar settlement proposal process that is facilitated by the prime contractor.
Best Practices for Mitigating FCA Liability
To mitigate the risk of FCA liability when submitting, negotiating and finalizing settlement proposals (or closeout packages) after the termination of a government contract or grant, contractors and recipients should adopt the following best practices:
- Accurate Recordkeeping. Maintain comprehensive and precise records of all costs, work performed and communications related to the contract or grant performance and termination. This documentation should include detailed accounts of expenses incurred and any changes in project scope, ensuring that all claims are substantiated with verifiable data.
- Thorough Review Process. Implement a rigorous review process for settlement proposals and closeout packages to ensure compliance with federal regulations. This process should involve legal and financial experts who can verify the accuracy and legitimacy of the claims being submitted. Regular audits and checks can help identify and rectify any discrepancies before submission.
- Training and Compliance Programs. Conduct regular training sessions for employees on the requirements of the FCA and federal regulations. Foster a culture of transparency and ethical behavior within the organization to ensure that all personnel understand the importance of compliance and the potential consequences of non-compliance.
- Engagement with Legal Counsel. Engage with legal counsel experienced in government contracts and grants to review settlement proposals and closeout packages and provide guidance on potential risks and liabilities. Legal experts can offer valuable insights into the complexities of FCA compliance and help navigate the process effectively.
- Internal Audits and Controls. Establish robust internal audits and controls to monitor compliance and detect any discrepancies or potential issues early in the process. Regular internal reviews can help ensure that all procedures are followed meticulously and that any errors are addressed promptly.
- Whistleblower Policies. Implement clear whistleblower policies to encourage the internal reporting of any suspected fraud or noncompliance. By providing a safe and confidential channel for employees to report concerns, contractors and grant recipients can address issues internally before they solidify.
By adhering to these best practices, contractors and grant recipients can significantly reduce the risk of FCA liability and ensure that their settlement proposals are handled with the utmost integrity and compliance.
Conclusion
Navigating the complexities of government contracts and grant terminations requires a thorough understanding of the risks associated with FCA liability. Contractors and grant recipients must be diligent in ensuring that their settlement proposals and closeout packages are accurate, transparent and compliant with federal regulations. The potential consequences of noncompliance, including significant financial penalties and reputational damage, underscore the importance of adopting best practices such as accurate recordkeeping, rigorous review processes and robust compliance programs.
By fostering a culture of transparency and ethical behavior, engaging with legal counsel and implementing effective internal controls, contractors and grant recipients can mitigate the risks of FCA liability. It is crucial for contractors and grant recipients to remain vigilant and proactive in their compliance efforts, not only to protect their interests, but also uphold the integrity of the federal procurement process. As the government continues to enforce the FCA vigorously, contractors and grant recipients must prioritize compliance to ensure successful and lawful negotiations following contract and grant terminations.
Footnotes
1. 31 U.S.C. §§ 3729 – 3733.
2. See, e.g., FAR 52.249-2, Termination for Convenience of the Government (Fixed-Price); FAR 52.249-4, Termination for Convenience of the Government (Services) (Short Form), FAR 52.249-6, Termination (Cost-Reimbursement); FAR 52.249-5, Termination for the Convenience of the Government (Educational and Other Nonprofit Institutions); FAR 52.212-4(l); FAR 12.403(d).
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
