Click here to print:  Beware of Federal False Claim Act on State and Local Projects

by Joe Meuleman

(as published in the Idaho Construction Review, April 2011

Most contractors with experience on federal construction projects are familiar with the federal False Claim Act (“FCA”) which provides for civil and administrative penalties for anyone who knowingly submits or causes the submission of a false or fraudulent claim to the United States.  The civil penalties range from $5,500 to $11,000 for each false claim submitted to the federal government, plus three times the amount of damages sustained by the government.  The administrative remedies include suspension or debarment from work on future federal projects. 

 The FCA has evolved since it was introduced in 1863 to reflect a growing concern about fraud against the federal government.  It was amended in 1986 to encourage private citizens known as whistleblowers to bring lawsuits against alleged violators of the FCA on behalf of the United States.  In addition to providing financial incentives to whistleblowers, the FCA protects these individuals from retaliation if they bring a lawsuit against their employer.  Recoveries under these lawsuits have dramatically increased over the years from less than $400,000 in 1986 to approximately $3,000,000,000 in 2010.   The trend is a result of increased education to potential whistleblowers and the expanding scope of the FCA provided by the courts and statutory amendments.

 Many states, including Montana, Nevada and California, have false claim statutes that address claims made to state governments based on the FCA model.  Contractors should determine whether these statutes exist and what potential liabilities they provide when performing state and local government work in other states.

 Although Idaho has not enacted a state false claims statute, a recent revision to the FCA has expanded its applicability to contractors performing state and local government work in Idaho.  The number of contractors performing government work in Idaho has also increased due to the economic downtown over the last several years.   Many contractors who previously bid primarily private construction projects are now bidding government projects.  Contractors must be more mindful than ever of FCA and its reach.

 The FCA was significantly expanded in 2009 to cover all projects funded at least in part by federal funds.  A large number of state and local projects in Idaho are at least partially funded by federal money.  These projects now fall within the scope of the FCA even without federal agency involvement.

Another expansion of the FCA impacts subcontractors and suppliers.  Federal courts were historically divided on whether subcontractors, sub-tier contractors, and sub-tier suppliers were subject to FCA liability.   In a 2008 decision, the Supreme Court found that the FCA applied to a subcontractor who makes a false statement to the prime contractor intending that it be passed through to the federal government.  The Court rejected the notion that the FCA extended liability to any entity receiving federal funds directly or indirectly.  In response to the decision, the 2009 revision expands the scope of the FCA to cover subcontractors and suppliers at all tiers.

FCA liability can arise in a number of situations at every stage of the project.  Although each phase of a project presents different potential false claims, several bases for FCA liability are worth noting. 

False statements in bids or negotiations often result in FCA liability.  These statements can include everything from knowingly identifying an unavailable employee as the project manager or superintendant to identifying a sham disadvantaged business enterprise subcontractor for the project.  

Certifications of payment and compliance with laws and regulations are also common bases for liability.  Contractors must be vigilant to ensure that subcontractors comply with environmental regulations, the Davis-Bacon Act, and Buy America Act.  Certification can also lead to FCA liability when a prime contractor withholds funds from a subcontractor or supplier due to an alleged breach of contract.  A contractor should notify the government agency in writing anytime it requests payment that it does not intend to pass through to the party performing the work or supplying the material or equipment.  Similarly, a prime contractor should never hold retention from a subcontractor when it has received full payment from the government.    

Probably the most recognized act giving rise to FCA liability is false or inflated pricing which typically arises during the change order process.  Contractors should avoid using the word “cost” when submitting pricing to perform extra work on government projects.  If the contract requires that change order requests are based on cost estimates, contractors should carefully analyze all costs to ensure accuracy and retain supporting documentation.  If a cost-based change order results in overpayment by the government, a contractor’s failure to refund the overpayment may result in FCA liability.

Given the expansion of the FCA, the steep liability for violations, and a substantially more aggressive attitude by the federal government toward enforcement, contractors that perform government work at any level should establish an internal education and compliance system to reduce potential liability under the FCA. 

By Joe Meuleman
(Published in the Idaho Construction Review, July 2010)

With few exceptions, the Idaho Contractor Registration Act (“Act”) requires registration of anyone who engages in construction work or holds themselves out as capable of performing construction work for others.  Contractors in Idaho are well aware that failure to comply with the Act has serious consequences. 

The Act contains several non-criminal penalties for failure to register.  Idaho Code § 54-5208 provides, in pertinent part, that “[a] contractor who is not registered as set forth in this chapter, unless otherwise exempt, shall be denied and shall be deemed to have conclusively waived any right to place a lien upon real property. . .”  Additionally, under Idaho Code § 54-5217(2), a contractor, unless otherwise exempt, cannot file a lawsuit to collect “for the performance of any act or contract for which registration is required by this chapter without alleging and proving that he was a duly registered contractor. . . at all times during the performance of such act or contract.”

Although the Act has been effective since January 2006, Idaho appellate courts have only recently interpreted these provisions.  A recent Idaho Supreme Court opinion, Parkwest Homes LLC v. Barnson, clarifies the Act’s penalty provisions as they relate to a contractor’s right to a mechanic’s lien.

In Barnson, the contactor, ParkWest, negotiated and executed a contract to construct a home before it registered under the Act but did not commence construction work until it was properly registered.  ParkWest sought full compensation for its work by recording a claim of lien against the property and filing a lawsuit to foreclose its lien. 

A dispute arose regarding the validity of ParkWest’s lien.  The owner argued that the lien was void because ParkWest was not registered under the Act when it entered the contract. 

The Idaho Supreme Court did not find such a harsh reading of the Act persuasive.  It held that the Act only denies the right to lien “for work or labor done or materials furnished in the construction during the period that the contractor is not registered.”  The Court found that “to hold otherwise would mean that a contractor who violated the Act would be forever barred from obtaining a mechanic’s lien.”

The Barnson decision shows that the Idaho Supreme Court will liberally construe the Act to allow recovery for the contractor.  It is clear, however, that a contractor is only entitled to lien for work performed while duly registered under the Act.  This raises several issues with Idaho’s lien statutes.

Idaho’s courts are currently full of priority disputes between mechanic’s lien claimants and beneficiaries under deeds of trust.  The priority date for a deed of trust is the date that it was properly recorded.  As contractors are well aware, the priority date for a mechanic’s lien is the date of commencement of the work. 

Under the Barnson decision, the priority date for a mechanic’s lien is probably when a contractor begins work on a project as a duly registered contractor under the Act.  Thus, a contractor who begins construction on a project before it registers under the Act risks losing its lien priority.  Moreover, a contractor who fails to timely renew its registration may lose its lien priority on any work performed after the period in which it was unregistered.  Given the deflated property values in this economic downturn, a loss in lien priority often results in no recovery for the contractor.

Another important consideration is that a mechanic’s lien is invalid unless recorded within 90 days after last performing work.  The 90 day period typically starts to run when the project is substantially complete.  Under Barnson, however, the 90 days will likely run from the last day the contractor performed work as a duly registered contractor under the Act.  Thus, a contractor may lose its lien rights if it begins a project as a registered contractor under the Act but fails to renew its registration more than 90 days prior to recording a claim of lien.

In Barnson, the Idaho Supreme Court liberally construed the Act’s penalty provisions in favor of compensating contractors for work performed while registered.  As this recovery is based only upon the contractor’s lien rights, it is imperative that contractors timely register under the Act and continuously maintain their registration status to take full advantage of Idaho’s lien laws.

 Joe Meuleman is an attorney with the law firm Meuleman Mollerup LLP, practicing in the areas of construction law and commercial litigation.  Mr. Meuleman is serving a three-year term in the Construction Leadership Council Steering Committee for the national Associated General Contractors of America.  Locally he is an active member of the Idaho Associated General Contractors and Idaho Chapter of the U.S. Green Building Council.  He can be contacted by telephone at 208.342.6066 or via email: This e-mail address is being protected from spambots. You need JavaScript enabled to view it . More information is available at www.lawidaho.com.

(Published in the Idaho Construction Review, February 2009)

The current economic downturn and credit crisis is causing significant problems for the construction industry.  As new projects become scarce, competition for the limited work increases as companies seek to keep their employees working.  This sounds like a “good” deal for owners but it comes with some added risks.  Owners must balance the desire to accept the lowest bids received with the risk that the contractors submitting those bids are under-estimating costs and may default before the project is complete.  This is also a risk to general contractors who rely upon low bids from subcontractors desperate to get new work.  As such, owners and contractors on both public works and private construction projects must implement risk management strategies to minimize the risk of default.  

Performance bonds are almost always required for public works projects as a way to protect the public while accepting the lowest bids through an open, competitive bidding system. Performance bonds are agreements among and between at least three parties: (1) the principal – the primary party who will be performing the underlying contractual obligation; (2) the obligee – the party who is the recipient of the principal’s obligation; and (3) the surety – the party who guarantees that the principal’s obligations will be performed.  Under these agreements, the surety guarantees to the obligee that the principal will fully perform the underlying construction contract between the principal and obligee.  In the public works context, the obligee is the government entity, the principal is the general contractor, and the surety is the bonding company.  The bonding company guarantees to the government entity that the contractor shall perform in accordance with the terms and conditions of its underlying contract.  If the contractor fails to meet its obligations, the surety becomes liable to the amount of the bond.

As in the public works arena, owners and contractors can also protect private construction projects by requiring performance bonds.  The decision generally depends on two factors: the added cost of requiring the bonds, and the financial stability of the contractor or subcontractor submitting the bid.  In times of economic hardship, the second factor becomes more important for several reasons.  First, the cost of replacing a defaulting contractor or subcontractor is often much higher than the original bid.  This is even more pronounced when the original bid was submitted at or below the actual cost to perform the contract.  Second, the party who absorbs the cost of hiring the replacement contractor or subcontractor may have little or no luck collecting from a defaulting party who files for bankruptcy or closes its doors. 

The increased cost on a project due to performance bond requirements is another important factor to consider.  The cost is a premium based on the amount of the underlying contract and is adjusted as the contract amount changes.  The owner generally pays this additional cost because it passes through the contractor’s bid and change orders.  

Owners typically contract only with one prime contractor on a project.  They must decide whether to incur the additional costs of requiring a performance bond to protect against the failure of the prime contractor to fully perform the work.  Prime contractors, on the other hand, have multiple subcontracts with many different trade contractors on each project.  Thus, in addition to evaluating the financial stability of each subcontractor, they must decide whether to incur the added cost of bonding each subcontractor or whether to bond on certain portions of a project.  At the very least, contractors should take the time to identify which portions of a project, if abandoned by the subcontractor, would cause the most serious financial problems for the overall performance of the contract with the owner. 

Owners and contractors can reduce the potential financial risk arising from a defaulting contractor or subcontractor by requiring performance bonds on a project.  The rights arising under a performance bond may be lost, however, if the claimant does not comply with the bond’s technical claim requirements.  As claim requirements are defined by the bond itself, owners and contractors should become familiar with its terms and conditions.  Great care must be taken in providing all required notices to the appropriate parties in a timely manner.  Additionally, bond claimants should retain detailed documentation regarding the defaulting party for the bonding company’s review.  Finally, a lawsuit to enforce bond rights must be filed within the deadlines established by the bond. 

Hard economic times create more competition in the construction industry.  Thus, owners have the opportunity to contract for construction projects at a discount.  By understanding and preparing for the risks that accompany this increased competition, owners and contractors can avoid turning a potential bargain into a substantial loss.

Joe Meuleman is an associate with the law firm Meuleman Mollerup LLP, practicing in the areas of construction law and commercial litigation.  Mr. Meuleman is the 2008/2009 Secretary for the Construction Leadership Council of the Idaho Associated General Contractors.  He can be contacted via email at This e-mail address is being protected from spambots. You need JavaScript enabled to view it .

 
Contractors pride themselves on building projects that will stand the test of time.  Unfortunately, however, claims often arise after final completion of a project.  In these instances it is important to know that the Idaho Legislature has enacted statutory limitation periods which set a maximum period of time in which a contractor is liable for these claims.

A statute of limitations sets the maximum period for which a claim may be brought after a cause of action has accrued.  A cause of action generally accrues when the person knows, or reasonably should know, that he or she has a claim against another party.  A statute of repose, on the other hand, bars any claim brought after a specified period of time, regardless of the when the action accrued. 

Claims against contractors arising after final completion of the project generally fall into two categories: (1) breach of contract actions by a party to the contract seeking economic damages; and (2) negligence actions by third parties seeking damages for personal injury or injury to property.  The application of Idaho's statute of limitations and statute of repose differ depending on which cause of action is sought by the claimant.

The majority of claims against contractors are founded on breach of contract.  Generally, the rights and obligations of parties to construction contracts are memorialized by executing a written contract.  Any action for breach of contract which is founded upon an instrument in writing must be brought within five years of the time of accrual.  The statute of repose provides, however, that a contract action arising out of supervision or construction of improvements to real property accrues at the time of final completion of the project.  As a result, claims founded on breach of a written construction contract are generally barred if not asserted within five years from the project's final completion date. 

The Idaho Supreme Court has even upheld this statute of repose where a contractor discouraged an owner from filing suit until the limitation period had lapsed.  The contractor and owner unsuccessfully attempted to remedy the defects throughout the five year limitation period.  Eventually, the owner remedied the construction defects for $3.4 million and brought suit against the contractor for breach of contract.  The Court barred the owner's claim for breach of contract because it was brought five years and four months after the parties executed the acceptance certificate for the project. 

The Idaho statute of limitations for negligence claims accrues at the time the act or omission complained of occurs, and runs for a period of two years.  Idaho courts distinguish between latent defects and patent defects when determining the time of accrual for negligence claims. 

Patent defects are project defects that are apparent to a normally observant person upon its final completion.  A negligence cause of action based on a patent defect accrues at the final completion of the project because it should have been discovered at that time.  Therefore, the statute of repose for a negligence claim based on a patent defect is two years from the project's final completion date.

Latent defects, on the other hand, are project imperfections that are not discoverable by reasonable inspection at final completion.  A negligence cause of action based on a latent defect generally accrues when the party bringing the claim discovers the defect.  Under Idaho's statute of repose, however, any negligence cause of action against a contractor for damages resulting from latent defects in an improvement to real property accrues six years from final completion of the project if it has not previously accrued.  Consequently, a negligence claim arising out of construction of improvements to real property must be brought within two years of discovery and in no event later than eight years following project completion.  This eight year statute of repose is generally the longest period of time for which a contractor may be held liable for claims based on construction of a project under Idaho statute.

The Idaho statute of repose is helpful to contractors in two ways.  First, it defines the minimum time period for which a contractor should preserve evidence related to a project.  This can be vital for a contractor's defense in the event a claim arises for either breach of contract or negligence.  It also allows contractors to focus on current and future obligations without the threat of incurring liability from projects that have been complete for a reasonable period of time.  Although these are the general principles related to the time in which a lawsuit can be filed against a contractor, an attorney should be consulted for particular circumstances.

Published by the Idaho Business Review, July 2007

Who is liable for a construction project's on-site safety: the construction manager (CM), the various contractors, or the owner?  Idaho's general rule is that that party having control of the premises may be liable for failure to keep the premises in safe condition. 

Whether a CM is in "control" of a construction site is governed by the contractual relationship between the owner and the CM and the contracts with the contractors performing work on the project.  Specific contractual language concerning the CM's responsibilities for "safety" on a project may put a CM in control of a construction site and subject the CM to potential liability for any on-site injuries.

A CM acts as a "project constructor" when it contracts directly with both the owner and contractors on a project.  Typically this type of contractual relationship is governed by either: (1) the AIA-A121/AGC 565 document for project with a guaranteed maximum price; or (2) the AIA-A131/AGC 566 document for a cost plus fee project with no guaranteed maximum price.  Both documents define the CM as a "Contractor" and incorporate the AIA-A201 document as general conditions.

The following A201, Article 10 provisions give an example of express contractual language that gives rise to CM control over a construction site.

1.  
   1. 10.1.1 - The Contractor shall be responsible for initiating,

maintaining and supervising all safety precautions and programs in connection with the performance of the Contract.

1.  
   1. 10.2.1 - The Contractor shall take reasonable precautions for safety

of, and shall provide reasonable protection to prevent . . . injury . . .  to employees on the Work and other persons who may be affected thereby.

1.  
   1. 10.2.6 - The Contractor shall designate a responsible member of the Contractor's organization at the site whose duty shall be the prevention of accidents.

A CM who contracts with an owner as a project constructor and uses the AIA/AGC documents will probably be deemed to have control of the construction site and thus could be liable for any injuries that occur on the site until the project is turned over to the owner.

A CM acts as a "project advisor" when it contracts directly with the owner and the owner contracts directly with the contractors on a project.  Generally this type of contractual relationship is governed by the AIA-B801document.  The B801 does not define the CM as a "Contractor" and incorporates the AIA-A201/CMa as general conditions.  The following B801, Article 2 contract provision gives an example of express contractual language that protects a CM from taking control of the construction site.

1.  
   1. 2.3.12 - The Construction Manager shall review the safety programs developed by each of the Contractors for purposes of coordinating the safety programs with those of the other Contractors.  The Construction Manager's responsibilities for coordination of safety programs shall not extend to direct control over or charge of the acts or omissions of the Contractors, Subcontractors, agents or employees of the Contractors, or any other persons performing portions of the Work and not directly employed by the Construction Manager.

          A CM who serves only as a project advisor under the AIA-B801 documents will likely be deemed to not be in control of the project site and thus not liable for on-site injuries.  However, the CM may incur liability for construction site injuries if its role as an advisor is expanded to include direct control over site safety.

         Recently, the Pennsylvania Supreme Court held that a CM was liable for injury to a general contractor's ("GC") employee even though the prime contract stated that the GC was solely responsible for safety on the project.  The court looked beyond the prime contract and focused on the contract between the CM and owner to determine whether the CM had control of the construction site for safety purposes.

          The Pennsylvania court distinguished a prior case in which an engineering firm with safety obligations on a project was not held liable for an on-site injury.  The court drew a distinction between implementing a plan and monitoring the contractors' safety plan.  The CM was held liable for on-site safety because its contractual obligation included creating, implementing and monitoring a construction site safety plan.  The engineering firm who was obligated only to monitor the contractors on the project to ensure that they submitted their own safety programs was not held liable for on-site injuries. 

          Although Idaho courts have not specifically addressed this issue, both the project owner and the CM should carefully review the contract language to ensure each party understands the scope of responsibility undertaken. 

         A CM may limit the scope of its on-site safety responsibilities by taking the passive role of monitoring the safety programs of the performing contractors.  On the other hand, assuming an active role in the creation and implementation of a safety program would justify an increase in the fees charged to the owner because it could open the door to liability for the CM. 

AREAS OF EXPERTISE

CONSTRUCTION LAW / LITIGATION

• Representing general contractors, subcontractors, suppliers, sureties, and owners in all phases of litigation
• Drafting and negotiating construction contracts, collections and liens
• Advising contractors and owners on legal issues throughout all phases of construction projects

BUSINESS LITIGATION

• Representing businesses in significant and contested debt collection

PROFESSIONAL EXPERIENCE 

2008 - Present:  Associate, Meuleman Mollerup LLP

2008 - Spring Semester Legal Externship, Honorable Mikel H. Williams, Magistrate Judge, United States District Court / District of Idaho

2006 - Summer internship with the Associated General Contractors of America in Arlington, Virginia
[Reviewing and drafting construction industry standard term contract documents, and performed various legal projects concerning employment and risk management issues.]

10+ years experience in the construction industry including general construction, project management and cost controls

BUSINESS AND INDUSTRY ACTIVITIES

• Idaho State Bar
• Associated General Contractors of America:
  Construction Leadership Council, Steering Committee Member 2010-2013
Contract Documents Committee Member
ConsensusDOCS Working Group Member
• Idaho Associated General Contractors:
  Construction Leadership Council, Executive Committee Member 2009-2011
  Community Service and Events Committee, Co-Chair 2010 
• U.S. Green Building Council, Idaho Chapter

PUBLICATIONS

• Co-Author, AGC of America Guide to Employee Travel Expense Reimbursement

EDUCATION

• University of Idaho College of Law, J.D., 2008
• University of Idaho, B.S. Finance, 2001