Government Contracts and Procurement Fraud
The False Claims Act allows the federal government to recoup payments made to contractors as a result of false statements in the acquisition or performance of a government contract. Whistleblowers have been instrumental in pointing the Department of Justice in the right direction.
Historically, government contracting has been one of the largest areas of fraud, second only to the health care industry. This type of fraud dates back to the origin of the False Claims Act–Congress passed the legislation to combat fraud by unscrupulous contractors selling inferior and defective goods to the Union Army during the Civil War. More than 150 years later, it is still a cost-effective strategy for the government to identify companies that perpetrate fraud at the expense of American taxpayers.
Fraud arises throughout the procurement process as companies strive to increase their revenues and profits. The federal government spends about $500 billion every year on contracts. It isn’t possible for government officials to police every provision in each government contract. By rewarding informants who identify misconduct, the government can focus its limited resources on recovering funds from the worst offenders.
Types of Government Contract Fraud
The government employs a complex system to select contractors that supply goods and services. Prospective contractors must comply with a number of laws during the process and certify compliance with others. If a contractor makes material misstatements or violates the law in order to earn a contract, the government is entitled to recover damages.
Competition is essential to ensure that the government pays a fair price for goods and services. Bid rigging can take many forms; one of the most prevalent types is when competitors agree in advance which company will win the bid. For example, competitors can collude by taking turns as the low bidder or provide deficient bids to cover up a bid-rigging scheme. Another type of bid rigging involves subcontracting part of the main contract to the losing bidders, or forming a joint venture to submit a single bid. The False Claims Act allows the government to recover damages from companies that employ techniques to circumvent fair competition.
The United States has laws that require companies to provide truthful information during the contracting process. The Truth in Negotiations Act requires that contractors furnish cost or pricing data before an agreement on price for most negotiated procurements of more than $750,000. Failure to provide accurate, current and complete cost or pricing data can lead to serious consequences. Whistleblowers have received awards for reporting violations of these laws.
Representations and Warranties
Government contracts typically contain language requiring compliance with various laws, including anti-corruption and export control laws. If a company violates any of these conditions, the request for payment under the contract typically contains a false statement. For example, the government gives special preference to small businesses. These “set asides” include incentives for small disadvantaged businesses, women-owned small businesses and service-disabled veteran-owned business. If a company does not actually qualify for special treatment, it is not entitled to payment under the contract.
Another required certification is compliance with the Byrd Amendment which requires disclosure of certain types of lobbying activity and certification that no payment has been made for any prohibited lobbying activity. The use of registrants under the Lobbying Disclosure Act of 1995 must also be disclosed. Reports of failure to comply with these requirements can lead to litigation that may entitle an informant to a reward.
Federal contractors must deliver what they promise in accordance with their agreement. Unscrupulous actors sometimes try to defraud the government by delivering defective goods, overbilling, or failing to follow the specifications set forth in the contract. Whistleblowers can help the government identify situations where a contractor’s non-performance isn’t obvious.
Certain government contracts are not set at a fixed price. Under a time-and-materials contract, a company bills the government for its time and costs. Since there is no incentive for the contractor to control costs or labor efficiency, there is ample opportunity for waste and fraud. Violations of time-and-materials contracts include double billing for costs, improper reimbursement for unallowable costs, and submission of fraudulent employee timesheets.
Whistleblowers have helped identify a number of products purchased by the government that did not actually perform as intended. Even when the government has assumed responsibility for inspection, a contractor is usually still responsible to furnish conforming goods and services and correct any deficiencies.
Failure to Test
The burden to quality test products following manufacturing is often placed on the supplier rather than the government. The method of testing is frequently specified in the agreement. Companies sometimes cut corners when performing tests, or skip testing altogether. These violations can give rise to whistleblower claims.
In most cases, a company must certify that its product and/or its performance complies with the specifications set out in the agreement. A company is not entitled to payment if it has not performed in accordance with its certification.
Product Substitution or Nonconforming Goods
A company is not allowed to make changes to the terms of a government contract without approval. For example, contractors have used unqualified personnel, unauthorized subcontractors, substitute parts, or different suppliers. When a contractor certifies compliance with a government contract, despite having made material changes, its certification constitutes a false claim for payment under the contract. For example, some contracts require compliance with the Buy American Act which requires that certain products be sourced from the United States. If a company has difficulty meeting the requirement, it should request a waiver from the appropriate government agency. If the company nonetheless substitutes a nonconforming product and bills the government as if it complied with the contract requirement, the company has violated the law.