“We’re not doing enough to ensure the government isn’t getting cheated.”

— Senator Claire McCaskill (D-MO)

Sen. McCaskill, Chairman of the Ad Hoc Senate Subcommittee on Contracting Oversight, announced last week that the Subcommittee intends to submit document requests to food service contractors that buy food for the federal government.

The Subcommittee, which is part of the Senate Committee on Homeland Security and Government Affairs, has oversight jurisdiction encompassing all aspects of federal contracting. Chairman McCaskill, a former prosecutor and state auditor, has been a vocal advocate for aggressive oversight of federal contracting. Under her leadership, the Subcommittee has focused on investigating waste, fraud, and abuse in federal contracting and has now targeted food service contractors for increased scrutiny.

Food service contractors need to assess their preparedness for potential congressional scrutiny, including taking steps to:

  • Be proactive in high risk areas and respond to any allegations of possible misconduct
  • Address and resolve significant audit findings
  • Identify and address whistleblower complaints
  • Maintain appropriate communication and cooperation with key agency officials
  • Monitor Subcommittee developments and weigh the benefits and risks of communication with key Members of Congress and their staff

Focus of the Hearing

On October 5, 2011, Sen. McCaskill chaired a hearing entitled, “Food Service Management Contracts: Are Contractors Overcharging the Government?”.i The Committee heard testimony from: Department of Agriculture (USDA) Inspector General, Phyllis K. Fong; New York State Assistant Attorney General, John F. Carroll; and University of Baltimore Law School Professor, Charles Tiefer, a former Commissioner on the Commission on Wartime Contracting in Iraq and Afghanistan.

In her opening statement, Chairman McCaskill focused on volume-based rebates that food service contractors get paid from food manufacturers and distributors: “The problem is that the invoice price may not include the rebates [the food service contractor] received from the manufacturer or distributor, so that the agency then pays the full amount of the invoice and the contractor pockets the difference.”ii

Chairman McCaskill highlighted recent government reports of fraud and other abuses on food service contracts:

  • In September 2010, the Department of Justice announced a $30 million settlement with a major contractor, based on allegations that it had overcharged the government by inflating food prices on contracts with the Defense Department and the Veterans Administration.
  • The Department of Justice also has a major case pending against another company based in part on allegations that the company submitted false information, manipulated prices, and overcharged the government for food and related services under its contract to supply food to the military in Iraq.
  • In June 2010, the Office of Inspector General (OIG) for the Department of Agriculture announced that it would be auditing food service management contracts. Previously, audits conducted by the OIG in 2002 and 2005 found serious problems with companies overcharging schools by withholding rebates.

The Subcommittee identified new contractor practices that are allegedly being used to avoid passing rebates on to the government. Despite law enforcement scrutiny, Chairman McCaskill said that food service contractors have simply devised new ways to characterize such rebates on invoices, where they appear, for example, as “marketing incentives” or “vendor consideration.”

What’s Next

During the hearing, Chairman McCaskill asked the witnesses for recommendations on next steps, both in terms of investigative efforts and legislative fixes. Inspector General Fong stated the OIG would like to see increased suspension and debarment of culpable food service contractors. Professor Tiefer suggested stronger rebate and audit provisions in contracts, greater transparency for invoices, and a Subcommittee survey of contractors, both suppliers and vendors, to better understand rebate practices. Chairman McCaskill said new legislation with such measures may be necessary and announced that the Subcommittee intends to submit document requests to federal agencies and companies with food service management contracts “to get an accounting of the retention of rebates by the contractors and an understanding of the policies that are in place at the agencies that contract for food service management.”

In closing the hearing, Chairman McCaskill reiterated her commitment to rooting out waste, fraud and abuse in federal food service management contracts, stating that the Subcommittee is “going to keep going down this road because I think there’s real money here … and clean this area up once and for all.”