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Defense Contractor Fraud

The United States spends approximately $553 billion per year in national defense. A large percentage of that massive annual spending goes to the procurement of new weapons systems, facilities, equipment, supplies, logistical and technical services to be used in defense of the United States. In addition, the government spends billions of dollars to upgrade and repair current weapons systems, equipment and facilities. The overwhelming majority of this defense procurement is done through contracts with private businesses in the United States and around the world.

Defense contractor fraud remains one of the most active areas of false claims litigation under the Federal False Claims Act. Billions of dollars have already been recovered from defense contractors, largely as a result of qui tam whistleblowers acting under the Federal False Claims Act. Below is a description of some of the more common ways in which defense contractors have tried to defraud the federal government:

  • Cross-Charging: Cross-charging has been one of the most common types of defense procurement fraud. Cross-charging occurs when a defense contractor improperly shifts costs and expenses from one defense contract to another in order to boost its profits. The United States typically awards one of two types of contracts in defense procurement: (1) the “fixed-price” contract; and (2) the “cost-plus contract.” In a “fixed-price” contract, the government pays the contractor a set price for the delivery of a weapons system or other product, no matter how much it costs the contractor to produce. In a “cost-plus” contract, the government pays the contractor a set price plus a percentage of the contractor’s costs for producing the weapons system or other product. Defense contractors that have both of these types of contracts have a strong financial incentive to shift costs from the “fixed-price” contract to the “cost-plus” contract, and thereby maximize the contractor’s profits. This illegal cross-charging is frequently accomplished by altering records to shift employee hours and equipment costs from the “fixed-price” contract to the “cost-plus” contract.
  • Improper Product Substitution: Defense contracts frequently specify that the contractor use a particular grade, type or quality of product or parts. There are often additional requirements that the parts be new (as opposed to used or refurbished), and that those parts be made in the United States. Defense contractors can often save costs, and maximize profits if they substitute cheaper or substandard parts. If a defense contractor does this without the permission of the government’s contracting officer, it can violate the Federal False Claims Act.
  • Improper Cost Allocation: In many forms of business, including defense contracting, the key to getting a lucrative private or government contract is often the ability to deliver the product or service at a price less than the competition. Defense contractors that provide products and services to the United States military also sell those products, in some form or another, to government and private businesses around the world. One way that some defense contractors have attempted to secure lucrative contracts from private businesses or governments outside the United States is to improperly allocate or shift costs from those contracts onto the “cost-plus” contracts they have with the United States government. As a result of this scheme, the United States ends up paying for the costs that should be paid by these private businesses or foreign governments.
  • Worthless or Substandard Products or Services: Due to the volume and complexity of the weapons systems, equipment and products the government purchases for national defense, it is near impossible for the United States Military to perform a quality check on each item it purchases. In many cases, the government relies upon the defense contractor to provide weapons systems, equipment and products that perform as promised in the contract. Although there can be cases of honest mistakes, there also can be instances where the defense contract knew, or was reckless in not knowing, and the products they were delivering would not perform as promised. Such worthless or substandard products can have devastating impact on the men and women of the military that use these items. Moreover, delivering worthless or substandard products or services can, in certain circumstances, violate the Federal False Claims Act.
  • Inflation of Costs and Charges: In “cost-plus” contracts, the government pays the defense contractor a set price plus a percentage of the contractor’s costs for producing the weapons system or other product. One common form of fraud has been for the contractor to improperly inflate their costs and charges to increase the revenue the company earns from the government. This form of fraud is often accomplished through inflated time records, inflated equipment and materials costs and fake purchase orders. Attorneys in the national qui tam whistleblower practice of Pietragallo Gordon Alfano Bosick & Raspanti, LLP recently represented the whistleblower in a case involving the inflation of costs by The Boeing Company in connection with a contract with the United States Department of Defense for modifications to U.S. Military Chinook Helicopters. Boeing settled the case in 2012 and agreed to pay the U.S. $4.4 million and to make multiple changes to their practices to prevent improper billing on U.S. Military projects in the future. United States ex rel. Vincent A. DiMezza, Jr. v. The Boeing Company, No. 2-10-cv-000634 (E.D. Pa.).
  • Violations of the Truth-In-Negotiations Act: Many of the weapons systems and equipment used by the United States Military are highly specialized and complex. Often times, there is only one company in the world producing that particular weapons system or equipment. The government, therefore, has no choice but to purchase this weapons system or equipment from this single-source supplier. The problem with purchasing from a single-source supplier is that the government does not know if it is paying a fair price, because other competitors are not bidding for the work. The Truth In Negotiations Act (“TINA”) attempts to prevent this problem by requiring defense contractors to honestly disclose all relevant information about its costs to the government in these types of single-source, no-bid contracts. Despite the requirement of TINA, single-source defense contractor can sometimes be tempted to inflate their costs and expenses because they know that another company will not under bid them for the work, and it is difficult for the government to discover the fraud. Inflating costs and expenses however can be a violation of the Federal False Claims Act.

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