Hensel Phelps: The SDVOSB Inserted After a Kitchen Subcontract Was Negotiated

Hensel Phelps agreed to pay $2,804,110 to resolve small-business subcontracting fraud allegations involving an SDVOSB inserted after a kitchen subcontract was negotiated with a large company. In its settlement admissions, the construction prime acknowledged negotiating the entire package with that large company before signing with the veteran-owned business on the same terms. If you worked on the pricing, equipment orders or installation, the name on the subcontract may tell a different story from the work you saw.

The GSA Award and the Small-Business Promise

The General Services Administration awarded Hensel Phelps the construction contract in 2011. The project was the Armed Forces Retirement Home’s New Commons/Health Care Building in Washington, D.C., part of a facility providing retirement communities and residential facilities for veterans.

The contract required Hensel Phelps to have and implement a small-business subcontracting plan. That plan was supposed to provide contracting opportunities for service-disabled veteran-owned small businesses and other small businesses. The kitchen and food service equipment became the subject of the subcontracting case.

An SDVOSB is a small business owned, controlled and operated by a veteran disabled during military service. As the Justice Department explained, federal contracts and subcontracts can be reserved for eligible firms in that category.

That is why who actually performed the subcontract mattered. A business name could appear on the agreement while the commercial work remained somewhere else. The veteran-owned firm was supposed to receive a business opportunity with work behind it.

The Whole Kitchen Package Was Already Negotiated

Hensel Phelps admitted negotiating the entire kitchen subcontract with a large business identified in the settlement as Company 1. The negotiations covered the equipment, installation, other needed kitchen work and pricing. Company 1 was not an SDVOSB.

Only after those negotiations were complete did Hensel Phelps enter a subcontract with the veteran-owned business. The work, terms and pricing came from the arrangement already negotiated with the large company.

The work stayed with Company 1. According to the Justice Department’s account of the admissions, it provided all the subcontract work, including bonding, purchasing and installing the equipment.

Hensel Phelps further admitted that it should have known the veteran-owned business was merely a pass-through. Its role was limited to supplying its status and making it appear that an eligible small business was performing the work. For an insider, the telling comparison is the company named in the subcontract against the company handling those responsibilities.

A Fee for the Appearance of Participation

The subcontract added a 1.5% fee for the veteran-owned business to the terms and pricing already negotiated with the large company. That fee brought no additional work, according to Hensel Phelps’s admissions: the additional payment accompanied the appearance of veteran-owned participation while the large company provided all the work.

Same kitchen. Same work. An extra fee for the qualifying name.

We see the absurdity in paying for the appearance of participation in a program meant to create actual business opportunities. The eligible firms the program was designed to help lose the chance to compete for and perform that work. Taxpayers pay for a contracting promise that the arrangement defeats.

This is the practical issue behind SDVOSB and veteran-owned contract fraud: the status representation and the work have to be examined together. In this case, the negotiated scope, the named subcontractor and the actual performer told the story more clearly than the veteran-owned label alone.

Why Are Procurement Departments Particularly Vulnerable to Fraud?

Procurement departments are vulnerable when the people who negotiate, oversee the work and approve payments each see only part of the arrangement. Hensel Phelps’s admissions show the gap: the agreement named the veteran-owned business, while the large company supplied the work behind it.

We examine negotiation emails, pricing drafts and signed terms alongside equipment orders, bonding, installation and payment records. Our work connects those contract and payment records with your account of who made the decisions and did the work. An equipment buyer, installation supervisor or accounting employee may hold a different part of that story.

A construction-industry review makes a related point about insiders’ direct knowledge. The 2018 paper Review of Collusion and Bid Rigging Detection Methods in the Construction Industry, published in the Proceedings of the Creative Construction Conference, describes the particular value of insider notices in detecting collusion:

The paper studies collusion; the useful connection here is the insider who saw the kitchen package negotiated before the veteran-owned business appeared. That person can explain the sequence behind the signed agreement. We connect that account to who negotiated, whose name appeared, who performed and who was paid.

The Whistleblower Case Against Hensel Phelps

A whistleblower company brought the Hensel Phelps qui tam case in the Northern District of New York. The United States joined the case, and the Justice Department announced the settlement on May 12, 2022. The agreement allocated a share of the settlement to the whistleblower.

The joint investigation included the U.S. Attorney’s Offices for the Northern District of New York and Eastern District of Washington, the Defense Criminal Investigative Service and the General Services Administration Office of Inspector General. The other investigators were the Department of Homeland Security Office of Inspector General, Air Force Office of Special Investigations, U.S. Army Criminal Investigative Division, U.S. Department of Veterans Affairs Office of Inspector General and Naval Criminal Investigative Service.

How Much Money Can a Whistleblower Get From a Qui Tam Lawsuit?

A whistleblower case under the False Claims Act can pay 15% to 30% of what the government recovers. We assess the subcontract, the representation and your knowledge of the work with you.

TriMark Shows the Supplier’s Side

TriMark’s separate settlement covered the supplier’s role in obtaining small-business contracts. TriMark admitted identifying bids, supplying prices, ghostwriting emails and using small-business email accounts. It performed substantially all the work while eligible firms billed.

The Justice Department reported that TriMark paid $48.5 million in February 2022 to resolve allegations involving service-disabled veteran-owned small-business contracts nationwide, including the Armed Forces Retirement Home subcontract. That was a larger settlement than Hensel Phelps’s, covering a broader group of civilian and military contracts.

The cases expose the arrangement from different positions. TriMark’s admissions show how a supplier could operate behind the eligible firm’s communications and billing. Hensel Phelps’s admissions show the construction prime arranging the package with the large business before placing the veteran-owned business into the agreement. The person who saw that earlier negotiation has knowledge the final subcontract cannot convey on its own.

You Saw Who Arranged the Work

If you knew the kitchen price before the veteran-owned subcontractor appeared, tell our whistleblower experts what happened. We build your strongest government procurement fraud whistleblower case around the decisions and work you can explain, bring in government procurement fraud whistleblower lawyers who understand subcontracting arrangements, and stay beside you as the case moves forward.