Additional Thoughts on Intentional Underbidding as a Violation of the False Claims Act

Handling Whistleblower Cases Nationwide from Newport News, Virginia

We wrote on this topic once bofore, but thought it was worth another looks.It is somewhat counter-intuitive to think of underbidding a contract as fraud, and as a violation of the False Claims Act (the “FCA”).  Indeed, the FCA was enacted during the Civil War in response to overcharges and other abuses by defense contractors. United States ex rel. Harrison v. Westinghouse Savannah River Co., 176 F.3d 776, 784 (4th Cir.1999). The purpose of the FCA was to combat widespread fraud by government contractors that were submitting inflated invoices and shipping faulty goods to the government. United States ex rel. Hopper v. Anton, 91 F.3d 1261, 1265–66 (9th Cir.1996).  Consequently, a person would generally not think of underbidding a contract as a of a violation of the FCA inasmuch as the government would be getting a windfall in the case of a fixed price contract.  Nevertheless, underbidding can fall within the scope of the FCA in the context of cost-plus contracts.  In fact, the FCA’s broad scope imposes liability on a party that:

(A) knowingly presents, or causes to be presented, a false or fraudulent claim for payment or approval; or,

(B) knowingly makes, uses, or causes to be made or used, a false record or statement material to a false or fraudulent claim.” 31 U.S.C. § 3729(a)(1).

 Now, consider this this statute in the context of a cost-plus contract, which is also sometimes referred to as a cost reimbursement contract.  A cost-plus contract is a contract (often a construction contract) whereby the parties reach an agreement for the contractor to be reimbursed for all expenses (materials, labor, subcontractors, etc.) in addition to a certain amount of profit.  This type of contract is typically used when there is significant risk on a project such that contractors may be reluctant to bid on a fixed price basis.  However, there is also only limited incentives for a contractor under a cost-plus contract to maintain price controls.

In Hooper v. Lockheed Martin, 688 F.3d 1037 (9th Cir. 2012), the United States Air Force awarded a contract to Lockheed.  The contract was a cost reimbursement plus award fee contract, under which the contractor was not paid a fixed price, but instead was reimbursed for its actual costs and received periodic award fees based on its overall performance. The Air Force concluded that the contract would be a cost-reimbursement contract because “uncertainties inherent in the requirements render attempts to establish a fixed-price unrealistic.”  The Relator, Hooper, asserted that Lockheed violated the FCA by submitting a fraudulently low bid, based on knowing underestimates of its costs, to improve its chances of winning the contract. Lockheed asserted that allegedly “false” estimates could not be the basis for liability under the FCA, because an estimate is a type of opinion or prediction, and thus cannot be said to be a “false statement” within the meaning of the FCA. Specifically, Lockheed argued that “estimates of what costs might be in the future are based on inherently judgmental information, and a piece of purely judgmental information is not actionable as a false statement.”

The court noted that Hooper had demonstrated that Lockheed employees were instructed to lower their bids without regard to actual cost and that an employee with Lockheed testified that the Air Force did not accept Lockheed's initial bid because it was too high.  Moreover, management for Lockheed instructed Lockheed employees to lower costs even though the change in cost was not based on any engineering judgment.  Based upon this and other evidence, the court determined that the Relator had demonstrated sufficient facts to remand the matter to the trial court, which had earlier ruled against the Relator.

There are several other circumstances that come to mind where intentional underbidding may result in False Claims Act liability.  For instance, a contractor may intentionally underbid a job with the intent to substitute sub-standard materials that do not comply with government specifications.  In fact, this may constitute more than one violation (a violation for underbidding and a violation for fraudulently providing non-specified materials.)  Likewise, a government contractor may intentionally underbid a govenment contract with the intent to submit inappropriate change orders to ultimately increase profits.  

If you have information about a violation of the False Claims Act, contact the lawyers at the Whistleblower Practice Group and Patten, Wornom, Hatten & Diamonstein.  You may be entitled to a substantial award as a Whistleblower is entitled to share in the government’s recovery. Please contact us online or call our Newport News office at (757) 223-4536 to schedule a free case evaluation and learn more about your rights.