An Ohio-based construction company has paid $500,000 to settle federal False Claims Act allegations related to the Department of Transportation’s Disadvantaged Business Enterprise program, according to a statement published by the U.S. Department of Justice.
This case is particularly interesting because the allegations made by the government sound an awful lot like circumstances that, I have heard, may occur on many government projects requiring small business subcontracting plans. Some in the industry have complained that sometimes, a small and/or socioeconomically disadvantaged business is named as a subcontractor under a large prime’s subcontracting plan, but the small business is expected to pass all or most of the work through to a large, second-tier sub.
It’s not that different from what happened in Ohio, and now the prime contractor in question is half a million dollars poorer. The settlement begs the question: will the government use the False Claims Act to root out this type of subcontracting plan abuse in the near future?
The facts presented in the DOJ announcement are brief. Anthony Allega Cement Contractor, Inc., a construction company based in Cleveland , was the prime contractor on a DOT project to construct a new runway at Cleveland’s Hopkins International Airport. To obtain the contract, Allega was required to accurately report DBE participation on the project.
According to the DOJ, Allega claimed that Chem-Ty Environmental, which was apparently a DBE, had provided materials and services on the project. Instead, the DOJ contends, Chem-Ty was merely a “pass-through” entity used to make it appear that a DBE had performed the work. Apparently, the DOJ’s allegation was that Allega or other non-DBE entities actually performed the work attributed to Chem-Ty.
As is common in such settlements, Allega admitted no liability. However, the fact that it coughed up half a million dollars to settle the matter might lead one to suspect that it thought that it had a real problem on its hands.
The Allega settlement may be just the tip of the iceberg. In the last few years, several folks in the industry have complained that so-called “subcontracting plan abuse” (my own term) of the type alleged in the Allegra case is rampant in government contracting. Although I have no independent knowledge of whether this is the case, I have no reason to doubt what these people have told me: namely, that some large prime contractors have systems in place whereby subcontract work is awarded to small or small disadvantaged businesses, which in turn are expected to pass all or nearly all of it through to large, second-tier subcontractors.
If this is the case, then the primes, subcontractors, and second-tier subcontractors alike may all have good reason to worry that the government is no longer willing to turn a blind eye to this practice. In Allega’s case, the price of an alleged pass-through subcontracting relationship was $500,000. I’ll be very interested to see who pays what next.