“There’s a huge amount of money flowing out of this package, and in this environment, any company would be happy to get the work and be willing to do what’s necessary,” says Mary Beth Bosco, a Patton Boggs partner who counsels new and experienced contractors on compliance.

But this tsunami of public spending has been accompanied by an unprecedented degree of government and public scrutiny. If they’re not careful, executives who receive these stimulus dollars may end up trading them for reduced compensation or even jail time—or at least public humiliation.

“When companies look at spending the money, they need to think about how this will look in the newspaper,” adds Bosco. “There’s a political aspect that’s harder to calculate, but we have some idea because we can see how this public outrage has played out so far.”
Criticism of insurers, banks, automakers and others has set a tone that has many executives fearful of making the wrong move. Patton Boggs partner Carol Van Cleef saw this in action when she joined bankers and regulators at a recent anti-money-laundering conference at Miami’s Westin Diplomat Resort and Spa. “At one point, they told us the hotel would drop the ‘resort and spa’ from the name for billing purposes. I know of other groups that have canceled meetings because they were scheduled to go to a resort.”

 

Public image aside, the stimulus plan requires significant changes in the way contractors do business, Bosco notes. Companies now will have to file quarterly reports detailing where they’re spending the money, how projects are progressing and how many jobs have been created. Those reports will be made public on the government’s stimulus-tracking website, Recovery.gov, Bosco says.

Contractors also must certify that the information is correct. If falsely certified, they could expose their company and its executives to criminal and civil liability under the False Claims Act. Under the act, whistleblowers can sue on behalf of the government—and share in the damages, Bosco says.

Too much, too fast?

The risks of distributing too much federal money, too quickly were evident during the Iraq war. The Special Inspector General on Iraq Reconstruction has testified that as much as $5 billion was wasted in that effort. Although there is bound to be much more scrutiny of federal spending in the stimulus package, problems will still occur, says Robert Tompkins, a Patton Boggs partner who routinely works with both small and large businesses on their contract compliance programs.

In the case of the federal stimulus package, there simply are not enough contracting professionals and procurement officers to distribute what is “basically a doubling up of annual spending,” Tompkins says. That’s true though the federal government is trying to hire more procurement officers, and even rehire retired ones, he says.

At the Department of Energy, for example, contract specialists are at risk of becoming overwhelmed by the unprecedented requirements of the stimulus plan, according to the inspector general of the department, which is responsible for about $40 billion in stimulus funds. Such concerns aren’t limited to doe. President Obama recently issued a memo urging all federal agencies to beef up their workforces to “ensure taxpayer funds are spent wisely and are not subject to excessive risk.”

Some of the block grant funding that is part of the stimulus package is being given out by agencies that lack experience in such grants, says Mike Dino, public policy advisor in Patton Boggs’ Denver office. “They may have trouble explaining to the recipients what the expectations are,” he says.

 

What can contractors do to prepare for the new climate of scrutiny?

First, Tompkins says, they must be proactive in designing their own internal compliance systems to provide adequate oversight. Some other recommendations from Tompkins:

 

• Contractors must report credible evidence of fraud within their own companies, thanks to recent changes in the Federal Acquisition Regulation. “One of the scary things about this new law is that it applies retroactively,” Tompkins says. Even if a violation is discovered two or three years after contract completion, the company is still on the hook. Officers and directors could be barred from bidding on future projects, and criminal charges are a possibility, he adds. So it is imperative that companies report potential cases of fraud as they arise. “You want to be on record as doing things right,” he says. “You don’t want to be viewed as complicit.”
  
  
• Make sure that all work is within the scope of existing contracts. “If you have an IT contract, for example, you generally can’t use that contract vehicle for a construction project,” Tompkins says.
  
  
• Keep abreast of labor requirements. For example, the Davis-Bacon Act of 1931, which requires companies to pay prevailing wage rates, applies to many projects that are even partially funded by stimulus funds. There are lesser labor provisions as well. For example, contractors’ costs associated with unionization campaigns and collective bargaining are now “unallowable,” meaning the contractor cannot seek reimbursement from the government for those costs either as a direct cost or as part of the overhead. “The influence of organized labor over the contracting process has been bubbling along but hasn’t received much media attention,” Tompkins says.
  
  
• Stay plugged in to professional organizations and networks, and to attorneys and accountants, to keep abreast of how the federal government is interpreting and applying these new compliance requirements. “I do expect the government will provide more details regarding compliance, but it will come in dribs and drabs as the government critiques what businesses are doing,” Tompkins says.
  
  With the stimulus plan, as with most federal legislation, the rules of the game will keep changing, says Stephen McHale, a Patton Boggs partner with extensive experience working with the White House, senior administration officials and Congress. “This is Washington finance, instead of the more traditional means of finance, and in Washington, negotiations go on forever,” he says.
  
  “The government expects such a tremendous amount of information about these projects, and so much information will be available to the public,” McHale adds. “We are in a climate of intense interest on the part of the public, Congress and the media. Any misstep, however innocent, could have very damaging repercussions.”