A recent settlement by a construction company highlights the need for government contractors to ensure compliance with small business subcontracting requirements. Federal contractors with contracts over a certain size have long been required to put in place and implement a plan to subcontract a certain percentage of work to small and disadvantaged businesses. While the procurement regulations provide for liquidated damages where a company fails to make a good-faith effort to comply with its approved plan at FAR 19.705-7, the government has, until now, not focused its enforcement efforts on small business subcontracting compliance. This recent settlement (see press release), which has not yet been filed with the court, suggests that may change (the U.S. Attorney’s Office for the Eastern District of New York has said a civil complaint that mirrors the non-prosecution agreement will be filed next week) .

According to public reports, between 2002 and 2007 former employees of Schiavone Construction Company falsely certified they were using minority subcontractors on major public works projects in New York City. Those federally-funded public works contracts required Schiavone to use good-faith efforts to retain a certain percentage of disadvantaged and women or minority-owned subcontractors. Some former employees reportedly filed false reports with the Metropolitan Transit Authority and New York City’s Department of Environmental Protection claiming a certain percentage of that work had been performed by qualified subcontractors.

The government launched both criminal and civil probes. The investigations were resolved by a nonprosecution agreement, which reportedly requires Schiavone to pay $20 million, hire an ethics and compliance officer, designate a dedicated minority contractor compliance employee, assist the government in its continuing investigation, and discharge employees involved in the false reporting. The contractor was also required to reimburse the MTA’s Inspector General and the New York City Department of Investigation for investigation costs of $2.4 million.

Combined with the federal Small Business Administration’s increased scrutiny of prime contractor compliance with limitations on subcontracting requirements and willingness to suspend or debar non-compliant contractors, matters previously discussed on this blog, the investigation into Schiavone’s small business subcontracting practices provides further confirmation that government entities, both state and federal, are paying increased attention to compliance with small business contracting requirements. We will continue to monitor and report on these developments in the coming weeks.