Emerging risk area for government contractors: Labor category job qualifications in time and materials contracts

Government contractors who have time and materials (T&M) contracts with the federal government, or who have these types of subcontracts under a federal government prime contract, should be aware of recent trends regarding findings of inadequate support for T&M billings. (For the purposes of this article, time and materials contracts are inclusive of labor hour contracts.) Since the T&M billings represent a “claim” to the government, any finding in this area will often lead to assertions of false claims by the government. In this article, we will discuss the requirements and risks relative to billing hours under T&M contracts, and suggest controls that are likely necessary to mitigate risk for government contractors.

T&M CONTRACT SPECIFIC REQUIREMENTS

For contractors that have T&M contracts with the government, the contract often includes specific qualifications for each labor category (LCAT) that can be billed under the contract. As we will discuss, the government expects contractors to be able to fully support any hours charged to a labor category with documentation justifying how each employee fully meets those contractual category requirements.

DCAA APPROACH TO AUDIT OF T&M CONTRACTS

The Defense Contract Audit Agency (DCAA) Contract Audit Manual (CAM), which is used as best-practice guidance by DCAA and other government and commercial federal contract auditors, discusses expectations of auditors when auditing labor. In Chapter 6-412.2e, the CAM directs auditors to  “…evaluate, on a selective basis, personnel files of employees assigned to Government contract work to determine whether qualifications of workers performing the contract are commensurate with the rates charged and all other requirements of the contract.” Therefore, when performing an incurred cost audit, auditors are charged with verifying that contractual requirements for education, experience, etc., are being met. If auditors find during an audit that this documentation does not meet their expectations, they may question the cost, and could also instigate a review by the Department of Justice or other applicable agency for violation of false claims requirements.

FALSE CLAIMS ACT CASES RELATED TO T&M JOB QUALIFICATIONS

In recent years, a significant number of false claims cases related to job qualifications have been successfully pursued by the government against contractors. The following represent examples where companies agreed to settle allegations that they violated the False Claims Act (FCA) by billing hours for employees who lacked contractually required job qualifications:

• DRS Technical Services (2014). DRS agreed to pay $13.7 million.
• Lockheed Martin Integrated Systems (2014). LMIS agreed to pay $27.5 million.
• Northrop Grumman Systems Corporation (2019). NGSC agreed to pay $5.2 million.
• Information Innovators Inc. (2021). III agreed to pay $6.05 million.

CIVIL FALSE CLAIMS ACT

31 USC 3729-3733 provides the legal enforcement mechanism related to false claims. Significant penalties are included, as well as treble damages in some instances. Civil actions may be brought by the government or by private persons (relators) under a “qui tam” suit filed by a citizen on behalf of the U.S. government. 

CONTROLS OVER T&M SUBCONTRACTORS

In addition to the requirements related to support for prime contract labor charges, contractors should be aware of risks relative to T&M subcontract cost that the prime then bills the government as subcontract cost. These T&M subcontracts also often include contractual provisions relative to education, experience, etc., for the T&M labor categories included in the subcontract. The government expects that prime contractors have controls in place to ensure these subcontract T&M hours are adequately supported with regard to meeting contractual requirements. 

BEST PRACTICES TO MITIGATE RISK

Contractors should place a high priority on ensuring that adequate controls exist to prevent T&M billings for hours that are not adequately supported with regard to meeting job qualification requirements. It is too late to go back and remediate documentation issues after the lack of documentation has been exposed. The submission of a billing with the hours represents a claim to the government, which could trigger an FCA investigation. In addition, the government typically is not generous in how it determines the impact of any lack of support. In general, the total amount billed is disallowed and subject to penalty.

Practices to be considered should include:

• After contract award, the contractor should check that LCAT requirements are fully understood and controls are functioning to help ensure compliance.
• Before any hours are billed under T&M contracts, a review should be performed to confirm that the company has documentation that fully supports that the employee meets the requirements for the LCAT under which they are to be billed. The Project Manager for the project should review time charges by category to confirm that personnel are to be billed in the correct category. This documentation should be retained in a way that it is readily available in the event that an audit occurs years in the future.
• The company should perform periodic mock “audits” of T&M billings, conducted by someone separate from the billing function (could be internal audit, human resources, or another program manager), to ascertain that proper documentation is being maintained.
• For any T&M subcontract costs that are being billed under a government flexibly priced prime contract, the prime contractor should have controls to ensure that the subcontractor is maintaining adequate documentation to support its LCAT billings.
• If it is determined that hours have been billed incorrectly to an LCAT for which the person does not fully meet the requirements, the company should be proactive to correct the situation as quickly as possible, to potentially mitigate some of the more serious consequences of the government discovering the billing error.

SUMMARY

Inadequate support for hours incurred under T&M contracts has become a growing area of focus, both of auditors and of government personnel charged with enforcing the Civil False Claims Act. Government contractors should make sure sufficient attention is paid to this area to mitigate risk of disallowed costs, penalties, or, potentially worse, False Claims Act actions.