The U.S. government is the world’s largest customer. It spends over $700 billion annually on national defense, and hundreds of billions of dollars more on other federal programs. Much of that money goes to private contractors who provide goods and services to the Defense Department and other government agencies through myriad different programs.
Unfortunately, fraud by government contractors is all too common. Fortunately, those who know about such fraud can expose it and be rewarded for their actions. If you have knowledge about fraud by a government contractor, please contact us to discuss whether you might have a case that would entitle you to a whistleblower reward.
Types Of Government Procurement Fraud
Just as the government spends enormous sums on contractors, those contractors have developed numerous methods of taking more from the government than they deserve. Here are just a few examples of government procurement fraud that a whistleblower can expose:
- Cross-charging. The government uses both fixed-price contracts and cost-plus contracts to procure goods and services. With a fixed-price contract, the government pays a set price for a good or service, no matter how much it costs to produce or provide it. In a cost-plus contract, the government pays a set price for the good or service, along with a percentage of the contractor’s production costs. Cross-charging happens when a contractor illegally shifts costs and expenses from a fixed-price to a cost-plus contract to increase its profits.
- Improper product substitution. Government contracts often require contractors to use a particular grade, type, or quality of parts or materials. In many instances, those parts and materials must be made in the United States. Unscrupulous contractors may substitute cheaper materials, or foreign-made materials, to save on costs and maximize their profits.
- Substandard products or services. The government relies on its contractors to provide goods that perform as promised in the contract. With the volume of goods that the government purchases, and the complexity of many of them, the government cannot perform a quality check on everything it procures. Contractors know this, and some of them exploit the government’s trust by knowingly selling substandard products and services. In 2018, for example, contractor Toyobo Co. Ltd. paid $66 million to resolve a whistleblower’s False Claims Act qui tam claims that it sold defective Zylon fiber used in bullet proof vests that the United States purchased for federal, state, local, and tribal law enforcement agencies.
- Inflation of costs and charges. This common form of fraud involves simply misstating costs and charges to inflate the contractor’s revenue. It occurs on cost-plus contracts and takes the form of inflated materials costs, fake purchase orders, etc. In 2018, for example, Inchcape Shipping Services paid $20 million to resolve allegations that it overbilled the Navy for ship husbanding services by submitting invoices that overstated the quantity of goods and services provided, billing at rates in excess of applicable contract rates, and double-billing for some goods and services.
- Violations of Pricing Disclosure Requirements. Under certain circumstances, a contractor may be required to disclose cost information to the government when negotiating a price for products and services to be provided to the government. For example, under the Truth In Negotiations Act (TINA), single-source contractors must disclose all relevant information about costs to the government. Companies who know that no one else is bidding, due to the nature of the good, may violate TINA by inflating costs and expenses.
- ESPC Fraud. Under Energy Savings Performance Contracts (ESPCs), the government pays contractors based on the amount of energy cost savings their projects yield. In 2020, one such contractor, Schneider Electric, paid $11 million to resolve allegations that it spread costs across various line items in these federal projects so that the government would pay the amounts without knowing they were design costs that the company was prohibited from charging to the Government.
How To Report Government Contractor Fraud
Congress enacted the False Claims Act during the Civil War to provide a remedy against contractors who were cheating the government by supplying the Union army with defective goods. Since then, Congress has strengthened the False Claims Act, and it is now the government’s primary tool for recovering money from unscrupulous government contractors.
Under the False Claims Act, a whistleblower may file a “qui tam” lawsuit on behalf of the government to recover money from a contractor that has defrauded the government. If the government recovers money as a result of the whistleblower’s suit, the whistleblower is entitled to 15% to 30% of the funds recovered from the wrongdoer. Whistleblowers are also protected from retaliatory actions by their employers.
Newman & Shapiro has extensive experience with government contractor fraud. If you know about misconduct involving defense contracts, please contact us for a free consultation, and we can assess whether you might have a potential qui tam lawsuit that could result in a whistleblower award.