Piliero Mazza &
Pargament, PLLC

Vol. IV, Issue 3
March/April 1999

An Update for Federal Contractors and Commercial Businesses


Proposed Changes
to Progress Payments
and Related
Financing Policies

Investigations of
Suspected Wrongdoing



Proposed Changes to Progress Payments
and Related Financing Policies

On February 10, 1999, the Civil Agency Acquisition Council and the Defense Acquisition Regulations Council announced proposed amendments to the Federal Acquisition Regulation that are intended to reduce the burdens imposed on contractors and contracting offices when using progress payment financing. The proposed regulations are also intended to make the existing policies and procedures related to progress payments easier to understand.

The proposed regulations would make a number of changes to the current progress payment regulations. First, the proposed regulations would eliminate the "paid cost rule." Under the "paid cost rule" a large business is required to pay a subcontractor before including the payment in its progress payment request to the government. Under the proposed revisions, a large business would be able to include subcontract costs that it has incurred but not actually paid, provided the payment to the subcontractor will be made in the ordinary course of business. Previously, only small businesses were permitted to request progress payments for subcontract costs that were incurred but not actually paid.

Secondly, the proposed revisions would permit the use of performance-based payments in contracts for research and development and in contracts awarded through the competitive negotiations procedures. Significantly, the revisions would not remove the prohibition against performance-based financing in contracts awarded using sealed bid procedures.

Additional changes provided by the proposed regulations include:

    1. Increasing the threshold for using progress payments with large contractors from $1 million to $2 million and adding a $2500 minimum for individual progress payment requests;

    2. Abolishing the contracting officer review of quarterly statements under price revision or redeterminable contracts; and

    3. Eliminating the limitation on general and administrative expenses for contractors with inventory expense accounts.

Obviously, this rule would help streamline the progress payment process and alleviate some of the burdens that the current rules impose on contractors. We are available to assist any interested parties in commenting on the rule.

Comments to the proposed rule are due on or before April 12, 1999.



Government Investigations
of Suspected Wrongdoing

Government contractors may sooner or later be faced with an investigation by a governmental agency. Indeed, with the growth of whistleblower suits and increased regulation, investigations are a relatively common occurrence in the government contracting industry. Owners and management often feel that investigations are the result of meritless allegations by disgruntled employees or overzealous competitors. However, regardless of whether there is any merit to the allegations, the government has an obligation to follow-up and a company must be prepared to take prompt action to limit potential liability, minimize business interruption, curtail negative publicity, reduce costs, and avoid other adverse consequences associated with a government investigation.

Preventative Measures

Obviously, the best way to limit the time, expense, and burden of a lengthy investigation is to take steps to avoid situations that give rise to investigations. The first step that a company should take is to become familiar with the various statutes applicable to government contracting. For example, a government contractor must comply with the False Statements Act, the civil and criminal False Claims Act, the Truth in Negotiations Act, the Program Fraud Civil Remedies Act, the Major Fraud Act, the Anti-Kickback Act, the Procurement Integrity Act, the Fair Labor Standards Act, the Service Contract Act, Title VII, and a variety of state and local laws prohibiting discrimination and sexual harassment.

Violations of these and other statutes may prompt a governmental investigation and result in severe penalties. For example, violations of the False Statements Act and the criminal False Claims Act can result in imprisonment for up to five years and/or fines. Violations of other statutes, such as the Fair Labor Standards Act and the Service Contract Act, can result in substantial monetary damages and possible debarment.

Another step that a contractor should take to avoid investigations is to provide guidance to employees to comply with these federal laws. For example, a contractor should prepare and distribute to all employees a company manual that specifies the company’s policies regarding compliance with applicable laws. The manual should also set forth non-discrimination and non-harassment policies. The company manual should encourage employees to report violations and should clearly state that failure to comply with company policies and applicable laws may result in disciplinary action, termination or prosecution.

Companies may also sponsor mandatory employee seminars regarding compliance with applicable laws. Contractors would also be wise to engage in contractor compliance programs sponsored by governmental agencies.

Since many investigations are initiated by allegations from disgruntled former employees, one particularly effective preventative measure is to obtain releases from discharged employees. Employees are often willing to give a broader release in exchange for an enhanced severance package. The terms of the release should prohibit the discharged employee from bringing any action or assisting in any action against the company.

How Investigations Begin

Despite taking preventative measures to avoid an unwanted investigation, a contractor may still find itself involved in a governmental investigation. There are numerous ways an investigation may be triggered. For example, most federal agencies now have "hotlines" to report suspected wrongdoing. Hotlines may be utilized by government contracting officials, the general public, competitors and current employees.

Quite often, investigations are initiated following audits by the Defense Contract Audit Agency ("DCAA") or another auditing agency. Irregularities discovered during audits are often referred to investigative agencies such as the offices of the inspector general and the Defense Criminal Investigative Services.

Finally, government contractors frequently become involved in investigations because they have a relationship with another company that is the actual subject of the investigation. Government agents will often serve document subpoenas and/or interview employees of subcontractors, teaming partners or suppliers of the company that is the actual focus of the investigation. Thus, for example, a subcontractor may find itself the target of an investigation that began with the prime contractor.

Learning that Your Company Is Under Investigation

After an investigation begins, it may be many months before a contractor learns it is under investigation. Investigators prefer to keep the investigation confidential to avoid destruction of documents or other evidence. For this and other reasons, investigations prompted by suits under the False Claims Act must remain confidential or "under seal" until the government has had an opportunity to complete its review of the allegations.

In many cases, a company will not learn about an investigation until it receives a subpoena for documents or testimony. A company may also learn about the investigation from subpoenas served on its banks, accounting firm, subcontractors, or other related entities. An additional sign that an investigation may be underway is increased audit activity and government interviews of current and former employees.

Government agents employ a wide variety of investigative methods. As noted, interviews of current and former employees are often conducted. Generally, agents will visit employees at home or after hours and on weekends. Although investigators may seek to conduct interviews outside of the presence of supervisors or attorneys, employees should be advised of their right to have counsel present during any interview.

Subpoenas are also a frequently used investigative method. Most subpoenas are issued by the Office of Inspector General or a grand jury. Investigators are given broad authority to issue subpoenas for any relevant information and grand jury subpoenas are easily enforced by contempt proceedings.

Investigators may also rely on an informant within the company to provide them with information regarding suspected wrongdoing. Finally, in certain circumstances, government agents will use wire taps, recording devices, and other methods to obtain information regarding suspected wrongdoing. On rare occasions, government agents will also resort to search warrants when there is reason to believe that records may be destroyed if a subpoena is issued.

What To Do When You Learn Of An Investigation

Once it is determined that an investigation is underway, a company should immediately contact outside legal counsel. It is very important that the investigation only be discussed with legal counsel to ensure that the attorney-client privilege is maintained. A strategy should be developed depending on the circumstances of a particular case. The following are only some general outlines of possible courses of action.

In seeking counsel, the contractor should clarify whether the attorney will represent the company’s interest, the individual officers of the company, or both. This is important because the company’s interests may diverge from the interest of employees who may have actually been involved in any wrongdoing. Under certain circumstances, however, counsel may represent both the company and high ranking officials of the company.

Once legal counsel is retained, the first step will be to determine the subject of the investigation. Generally, legal counsel will contact the investigators to determine whether the corporation or an individual employee is the subject of the investigation. Legal counsel will also attempt to determine whether the company is a target, subject, or witness in the investigation. A target of an investigation is a person to whom the prosecutor or grand jury has substantial evidence linking to a crime, and who may become an actual defendant. A subject is an individual who is within the scope of an investigation and from whom information is sought regarding possible wrong doing. Finally, a witness is usually someone who has not committed any wrongdoing, but who may have information or documents related to the investigation.

The next step in responding to an investigation is to conduct an internal investigation. This will involve a comprehensive review of relevant documents and interviews of relevant employees. In order to maintain the attorney/client privilege for information obtained during the internal investigation, all communications should be to and from outside legal counsel and should be marked privileged. Use of outside counsel for an internal investigation is also important because it creates the appearance of a neutral investigation by a third party.

Prior to beginning the internal investigation, it may be advisable for the company to notify its employees of the existence of the investigation. Notification should usually be in writing and, if appropriate, should advise the employees that the company is not aware of any wrongdoing, but has retained legal counsel and intends to cooperate with the investigation. Importantly, the notification to employees should also advise them that, if they are contacted by investigators, they have the right to have legal counsel present during any discussion and may refuse to speak with an investigator. Employees should be requested to advise the company of any contact by investigators and to allow the company’s legal counsel to be present during any interview. The notification should also advise employees not to destroy or alter any documents, and that they are not permitted to produce any corporate records directly to agency investigators. Requests for corporate records should be made to the company, not individual employees.

Frequently, companies will be served with a subpoena requesting large numbers of documents covering many years. Compiling requested documents may involve enormous time and expense and severely disrupt normal business operations. Therefore, legal counsel will almost always contact investigators in an attempt to limit the scope of the subpoena. In certain cases, if the subpoena is issued for an improper purpose, such as harassment, or the information requested by the subpoena is not relevant to the investigation, legal counsel may request that a court "quash" or narrow the subpoena. Generally, however, courts are reluctant to limit subpoenas issued by the Inspector General or a grand jury. A company should also discuss with counsel whether it should assert its Fifth Amendment right against self-incrimination if disclosures of the requested documents would tend to incriminate the company.

After completing an internal investigation, the company’s legal counsel may make a presentation to investigators and/or prosecutors. The presentation may include a written brief, documents, and, if appropriate, affidavits that tend to prove the innocence of the company. Such a presentation may be useful in persuading the government to discontinue the investigation or refrain from taking legal action. Under appropriate circumstances, the presentation may also set the basis for a possible settlement or plea bargain.

In sum, while investigations are an ever increasing occurrence for government contractors, there are numerous steps that contractors may take to avoid or reduce the negative consequences of an investigation.

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