Construction going on in the city.

Right now, more than half the states and the federal government have some version of a False Claims Act that is applied to the construction industry.  In general, a False Claims Act allows the government to impose civil penalties for presenting what are determined to be “false claims.”  The federal False Claims Act imposes a civil penalty upon anyone that knowingly presents a “false” claim to the government that shall be “not less than $5,000 and not more than $10,000 … plus 3 times the amount of damages which the Government sustains because of the act of that person.”  (Emphasis added)  31 U.S.C.S. § 3729.  Using the federal statute as an example is appropriate because most of the states that have their own False Claims Acts have modeled their statutes after the federal act’s requirements, penalties, and interpretation, and the states that are in the process of developing such acts are likely to do so as well.  That’s important because the federal act does not specifically define “fraud” and there is no requirement in the federal act for a claimant to have a specific intent to defraud the government before a claimant can be found liable.

Anyone familiar with construction claims would intuitively recognize the problems a False Claims Act may create.  In many instances, the preparation of a construction claim requires making judgments where reasonable people may disagree.  Thus, if the government is overly aggressive, the exercise of one’s professional judgment could give rise to a substantial civil penalty being imposed.

There are also situations where the claim amount may be determined by different methods that lead to different claim amounts for the same claim.  For example, a lost productivity claim may be calculated by the total cost approach, a modified total cost approach, measured mile analysis, and/or the use of MCAA factors.  If the government’s consultant were to reach a different claim amount by using a different method, the government could allege that the claim is a false claim.  Moreover, because the total cost approach is disfavored, the government might be able to allege that a claimant has submitted a false claim based solely upon the claimant’s methodology.

One significant example of where the methodology used to determine a claim amount makes a tremendous difference is the calculation of unabsorbed home office overhead associated with a delay claim.  Although the Eichleay formula is the most well-known method used for determining unabsorbed home office overhead, there are other methods that our courts have accepted that produce substantially different results.  Under the current interpretation of the federal False Claims Act, a claimant may be guilty of submitting a “false claim” merely by calculating unabsorbed home office overhead using a lesser-known method.  In such a situation, the claimant would have “knowingly” submitted the claim without any specific intent to defraud, but, if the government deems the claimant’s methodology inappropriate, the government could charge the claimant with making a false claim.

In my opinion, the imposition of a $5,000 to $10,000 penalty plus treble (triple) damages merely because of the decisions the claimant made in the preparation of a complicated construction claim is inherently unfair, but that is far from the only potential problem.  In jurisdictions with a False Claims Act, the government has the ability to threaten civil liability as a negotiation tactic.   Whenever I have presented a claim which was subject to a False Claims Act, the government has always used the statute’s existence as a cudgel.  Politicians will tell people that they need civil penalties under a False Claims Act to prevent fraud and abuse, but that is not the case.

If someone is attempting to steal taxpayer money through fraud, then that is a criminal act for which the government can apply criminal statutes, but a statute with a civil penalty provides the government with a much stronger weapon to wield.  Everyone is familiar with the criminal statute where the government is required to prove its case “beyond any reasonable doubt,” but a civil claim substantially lowers the government’s burden.  In a civil case, the government only has to prove its case by a “preponderance of the evidence.”  To put that in perspective, you should think of the “beyond any reasonable doubt standard” as being about 95% certain and you should think of the “preponderance of the evidence standard” as being 51% certain.  Thus, the creation of a civil penalty substantially reduces the government’s burden and increases its power.

In my state, an attempt to apply a False Claims Act to construction was recently defeated, but that was only because of a procedural issue.  The proposal will most likely resurface during the next legislative session.  The key point for the legislature in my state or any state which is considering False Claims Act legislation must consider is whether it wants to promote or stifle economic growth.

The imposition of a False Claims Act in any state will produce the unintended consequence of harming honest construction companies.  In doing research for a presentation to the office of the state attorney general in opposition to the proposed “false claims” legislation, I came across a payment bond claim where a subcontractor’s claim was not properly presented by a general contractor, because the state had repeatedly stated its opinion that the subcontractor’s claim was without merit.  Under that state’s law, a general contractor had to certify a subcontractor’s claim before it would be considered by the state.  In that case, the general contractor would not dare certify a subcontractor’s claim that the state dismissed as not credible when the existence of a False Claims Act created substantial risk for the general contractor.  However, public owners are often dismissive of valid claims.  Thus, the government’s reaction should not have been dispositive, but it ended up being dispositive because of the chilling effect the False Claims Act had on the contractor’s ability to assert a claim.  As a result of similar situations False Claims Acts unintentionally create, which fly under the radar, many good, honest contractors will face unfair challenges to their ability to remain in business.

The bottom line is as follows:

  1. Jurisdictions that have False Claims Acts or are considering them must decide whether they want to promote economic growth, or have the ability to unfairly impose punitive penalties;


  1. If you are submitting a claim on a public project in a jurisdiction that has a False Claims Act, you need to be careful not to make a mistake that will subject you to civil liability or allow yourself to be bullied into significantly lowering your claim amount.

In light of the foregoing, if you need advice fighting the imposition of a False Claims Act or you need assistance with a claim in a jurisdiction that already has one, please give me a call at (203) 640-8825.

Scott Orenstein