Damages Quantification/Forensic Accounting Case Studies
In a Federal False Claims case involving a pharmacy benefits manager we assisted in the development of Rule 34 production requests for electronic data involving prescription fills and refills.
The produced data involved more than 30 database tables containing over 1 billion rows of data and representing more than 100 million prescription fills and refills and related billing data.
We devised computerized techniques to audit each fill and refill for compliance with the contract terms for less than one penny a piece.
Traditional auditing methods would have been infeasible without using statistical sampling; however, statistical sampling techniques would not have resulted in as significant an outcome as our hundred percent computerized audit after correcting for sampling error, since the number of false claims was a relatively small percentage of the population.
Even with the small percentage of false claims, the recovery in this case of over $150 million was one of the ten largest healthcare recoveries under the False Claims Act. Our fees were about one fourth of the opposing expert. (back to top)
In a $60 million construction claim involving an EPA Superfund cleanup site, K&F assisted in the formulation of the owner’s Rule 34 discovery requests for the Plaintiff’s electronic data. Pursuit of this data revealed that it had not been derived from normal business systems as represented. Rather, it was a specially crafted claim quantification system.
When the data was produced we determined that the productions of electronic data were incomplete. We then assisted in obtaining orders compelling production of the missing data along with data from the corporate ERP systems used to validate the individual project based systems.
After full production of the data, including the source and object code for the software specifically developed to prepare the plaintiff's claims and quantify its damages, we examined the software logic and found certain costs claimed were based entirely on calculation and not on costs incurred as represented. So, the claims were claims for costs incurred plus amounts not actually incurred. In addition, we found that certain costs had also been claimed up to 9 different times as part of other disputes that had been settled with other parties, including subcontractors, and that the amounts included in claims against our client included the difference between total amount claimed against other parties and the amounts reached in settlement with these other parties.
When examining the produced copies of certain source documents there were frequently obvious differences in presentation of the data. When these documents were compared to the corporate electronic data, it became obvious from system metadata that the perceived presentation differences corresponded to accounting entries made years after the fact during the claim development process that attributed costs incurred to claimed changes.
We then used our own software skills to develop procedures that would perform a 100 percent audit of the plaintiff's electronic quantification data. Our audit identified costs claimed that were considered unallowable by the contract terms, reconciled costs claimed to actual costs incurred and corrected for costs that were "double counted". We also noticed that costs attributed to base contract work were administrative or other non-value added work unrelated to actual contract performance.
As a result of our computerized audit work, the plaintiff's claim was reduced from 60 to 20 million dollars before consideration of liability and causation issues, which included entitlement for costs settled as part of other claims. (back to top)
K&F quantified damages as high as $36 million for a Fortune 500 manufacturer of submarine hardware whose contracts had been impacted by numerous constructive changes including changes to requirements that moved performance beyond the current state of the art.
K&F used its knowledge of relational databases to develop a parametric approach to determine that the effect of the nearly 400 changes on the design effort was to add more than three years and 100,000 man-hours to the client's design and development process.
The parametric model was later used by the client and its customer to negotiate contract modifications for the increased engineering effort caused by the changes. Furthermore, the model was ultimately accepted for estimating the consequence of the design changes on production after K&F demonstrated that more traditional methods, such as CPM, were inappropriate in this particular circumstance.
In addition, K&F used its advanced cost modeling capabilities to replicate the company's manufacturing system and model the consequence of the engineering changes in order to quantify the delay damages to production that exceeded $24 million and were settled at $16 million after considerable customer concessions in performance requirements and acceptance testing.
Quantification issues considered the impact of extended period performance, volume offsets, mitigation and the propriety of costs claimed as fixed costs and delay damages. (back to top)
K&F prepared the termination proposal for a Defense 100 contractor after the client’s cost plus award fee contract was terminated for convenience after three years of performance but after only achieving the first milestone award.
K&F had been one of several firms selected for a presentation to management of their assessment of the best means to recover the client's profit. After all, as a cost type contract the client had received their costs but not any fee beyond the first milestone. Since the profit was backloaded on contract performance the first milestone award fee had been minimal.
K&F's approach was very different than the other presenters but then K&F was the only presenter who knew that recent court decisions on terminated award fee contracts were contrary to the approaches proposed by the other presenters, including two law firms specializing in government contracts.
K&F recognized that the project had been delayed about three years and its analysis indicated that those delays were caused by design changes and delinquent customer deliveries of design data thus entitling the client to equitable adjustments in the contract price and schedule under various contract adjustment clauses. K&F quantified the amount of delay damages under the Eichleay formula, which is currently the exclusive means for quantifying delay damaging in Federal contracts, to be about $2 million. Because of the nature of delays, these costs would not have been recovered in the client's normal cost based billings and thus represented additional revenue.
With respect to the changed work itself, while K&F’s client had received the costs for the various design changes as part of the reimbursable cost of the cost plus award fee contract, the client had not been compensated for any fee that would be part of that equitable adjustment. K&F quantified the additional fee at about another $2 million for the additional profit that was part of the "equitable adjustment" provided for under the various entitling contract clauses.
With respect to the termination itself, in keeping with accepted quantification methods, K&F identified about another $2 million of unamortized indirect fixed costs and included those as settlement expenses.
With a termination settlement proposal exceeding $6 million, including undefinitized constructive changes, the client was able to settle its proposal for several million dollars which was considerably more than the client had expected after receiving its termination notice. (back to top)
A Fortune 500 defense manufacturer had seen its fixed price production contract switch from profitable to a loss position at around the midpoint of performance.
An engineering design review for the manufactured product's development occurred shortly before the profitability in the contract started its decline.
Although the design review occurred prior to the manufacture of any equipment, the evaluation was conducted at a level for reproducible, manufactured products and resulted in over 11,000 review comments from the customer's design review team. K&F used statistically sound methods to select a sample, review the comments and project their results to the population. Through this method K&F determined that over 90 percent of review comments exceed the inspection standards applicable to that point in product development
The result of the excessive inspection increased the client's review and formal disposition of the comments. It also caused needless engineering effort since as actual production of the early prototypes occurred the results of numerous comments had to be totally redone.
The effect on engineering was not the only consequence of the excessive inspection. The customer's design review time took several months longer than allowed under the contract's performance schedule to create the 11,000 comments and even stop work order while the review results were being formulated.
After release of the comments and resumption of performance no schedule extension was issued for the months of delay while conducting the design review. In fact, the work was even resequenced by the customer so that manufacture of completed units occurred prior to design completion and qualification acceptance testing.
K&F quantified the consequence of these constructive changes and their related delays, disruptions and inefficiencies at around $13 million for which the client was able to negotiate a substantial settlement. (back to top)