Defense Contract Fraud

Defense contract fraud costs the federal government billions. The Department of Defense depends heavily on private contractors for military equipment and services. In fact, the military’s contract spending last year was nearly $450 billion. The “Big Five” defense contractors took in more than $150 billion of this budget (Lockheed Martin, General Dynamics, Raytheon, Boeing, and Northrop Grumman). Some private contractors have a long history of abusing the system by improperly billing the military. This type of greed harms American taxpayers and often puts America’s troops and personnel stationed at home and abroad in unnecessary danger. To stop defense contractor fraud, the government allows whistleblowers to file lawsuits under the False Claims Act and to recover significant awards for alerting the government to the fraud.

What is Defense Contract Fraud?

Defense contract fraud occurs when a private company is awarded a contract from the U.S. military and then cheats the military out of money by improperly billing for goods or services.

What are the Different Types of Fraud in Defense Contracts?

Defense contract fraud can take on many forms but usually involves (1) a contractor lying about the quality of a good or service, (2) a contractor over-billing the government for a good or service, or (3) a contractor otherwise falsely certifying that it complied the terms of the contract. The following list contains some types of defense contractor fraud that we have seen over the years. This list is by no means exhaustive, and if you suspect that a defense contractor is taking advantage of the government, you should contact an whistleblower attorney to determine if the contractor is in fact committing fraud.

• Using Inferior or Defective Parts – Defense contracts often have specific part requirements that the contractor has to meet such as the grade or quality of a product. Many contracts also require that a product be new and not refurbished, that the product has been adequately tested, and that the product was made in the United States. Contractors frequently violate these terms in order to save money and maximize profits. The use of subpar or defective parts and materials which causes equipment failure can have disastrous results. Similar to inflated billing schemes, it is often impossible for the government to know if a contractor used an inferior part or material without the assistance of a whistleblower.
• Inflated Billing – Since the contractor’s payment is a percentage of the total costs the contractor incurs, the contractor is incentivized to inflate those costs. Common ways to inflate costs include falsifying time sheets and purchase orders, billing for extra time on projects that weren’t necessary, and misrepresenting the cost of materials. Whistleblowers are especially necessary when it comes to identifying and reporting inflated billing, since the federal government usually has no way of knowing which invoices are legitimate and which include inflated costs.
• Cross-charging – Defense contracts are usually fixed price contracts or “cost-plus” contracts. In cost-plus contracts, a defense contractor is paid a fee that is a percentage of the total costs the contractor incurred in performing the procurement contract. Cross-charging occurs when a defense contractor includes the cost from performing another contract into the total costs they report to the government under a cost-plus contract. The defense contractor therefore gets a higher fee for performing the cost-plus contract because they led the government to believe the cost was higher than it really was. A common example of cross-charging would be a company that shifts the costs it incurs from performing its fixed price contracts for other private companies onto its account with the U.S. government, with which it has a cost-plus contract. This leaves the contractor with a windfall that American taxpayers pick up.
• The Truth in Negotiations Act – In some cases, a weapons system or piece of equipment is so specialized that only one company can make it. Because there is no competition in these situations, the Government has no way to know if it is paying a fair price. To prevent abuse, the Truth in Negotiations Act (TINA) requires the defense contractor to reveal all relevant details about its costs to the Government. Even with TINA, however, a defense contractor with no competition may be tempted to inflate its costs in order to maximize profit.
• Falsely Certifying Rule Compliance – Defense contracts often contain requirements that the contractor comply with various rules or laws. This may include anything from wage laws to sanctions imposed by the U.S. on other countries. When a contractor is not in compliance with a law or rule and submits an invoice for payments, it may be liable under the False Claims Act.
• Falsifying Training Requirements – The U.S. military frequently depends on private contractors to provide security forces around the world. To ensure that private forces can provide adequate security, defense contracts have strict training and physical testing requirements. When private contractors fail to adequately train and test their employees, they put U.S. troops and personnel abroad at risk. Without the help of whistleblowers, however, it can be very difficult to assess whether private security forces are properly trained and physically fit to protect American troops and personnel.

How Can Whistleblowers Report Defense Contract Fraud?

If a whistleblower wants to report defense contract fraud, there are a number of steps that the whistleblower should take. We have found that the following steps are helpful in evaluating and preparing defense contract fraud cases.

1. Identify the fraud – The first step is to determine the type of fraud that the contractor is committing. Is the equipment that the contractor sent to the government somehow defective? Is the contractor inflating its billing? Is the government getting what it’s paying for?
2. Identify the breach of contract – The next step is to identify the portion of the contract that the contractor is violating, or in the alternative, identify the false certification that the contractor has made. Every bill sent by a contractor to the government requires the contractor to certify that it is in compliance with the contract.
3. Gather documents and evidence – The foundation of any good False Claims Act lawsuit is documentation showing the fraud. In defense contractor cases, documentation may include the bid application, the contract itself, or invoices and certifications sent to the government. Documentation may also include emails or correspondence between employees discussing the fraud. In many cases, a whistleblower will also have access to company databases which store a host of information including spreadsheets, self-certifications, and detailed notes. All of this information can be helpful in building a case against a defense contractor.
4. Contact a whistleblower attorney experienced in defense contractor fraud – The next step is to contact an experienced False Claims Act attorney. Your attorney will want to get a detailed accounting of the fraud that you witnessed and review any evidence that you may have in your possession. After conducting his or her own investigation, your attorney will advise you about whether filing a False Claims Act lawsuit is in your best interest. There are pros and cons to filing any whistleblower lawsuit and your attorney should be able to explain these to you so that you can make an informed decision.
5. Meet with the Government – Before filing a False Claims Act lawsuit, your attorney will meet with the government to alert them to the fraud and to inform them that you will be filing a lawsuit. These meetings are important, because at these meetings, your attorney will be trying to convince the government that it should intervene in your case. In our experience, the government is most likely to intervene in cases where 1) there is a large amount of fraud, 2) there is a wealth of documentation showing the fraud, and 3) there is some kind of harm. In defense contractor cases, harm can be either the loss of money by the U.S. taxpayer or U.S. troops and personnel being put in greater danger.
6. File your whistleblower lawsuit: The next step is to file your False Claims Act lawsuit in federal court. From there, the government will begin an investigation into the fraud and decide if it wants to intervene in the case. It is extremely important that you do not discuss the case with anyone other than your lawyer because these lawsuits are filed under seal. Discussing the lawsuit with others can violate the court’s sealing order and hamper the government’s investigation. If your lawsuit is ultimately successful, you will receive between 15% and 30% of the total amount of money recovered by the government.

Recent Developments in Defense Contract Fraud Litigation

False Claims Act cases involving defense contractor fraud remain a top priority for the Department of Justice.  While defense contractor cases are normally dwarfed by the number and size of healthcare fraud cases, the Department of Justice takes a keen interest in these cases due to the potential impact on national security and the safety of American troops. 

Last year saw several significant defense contractor fraud cases.  In one case, Unitrans International agreed to pay $27 million to resolve allegations that it induced the U.S. Army into awarding contracts for food by falsely certifying that it was complying with sanctions against Iran.  In another case, Bradken Inc., agreed to pay $10.8 million to settle allegations that it used substandard steel in U.S. Navy vessels.  The Navy contracts specifically required that Bradken use grades of high yield steel.  The government alleged that Bradken engineers falsified the results of tests designed to ensure that the steel was adequate.   

As the Bradken case demonstrates, it is very easy for contractors to get away with selling the government inferior products unless a whistleblower steps forward.  For that reason, this type of defense contractor fraud will unfortunately remain common.  This type of fraud also accounts for one of the largest defense contractor fraud cases in history, which involved Northrop Grumman Corp.  In 2009, Northrop Grumman agreed to pay $325 million for allegations that it sold the government defective satellite parts.  The whistleblower who filed that False Claims Act lawsuit walked away with nearly $50 million for alerting the government to the fraud.

In the coming years, we expect to see an increasing number of cases involving cybersecurity.  Due to the increasing number of cyberattacks, federal agencies are placing a great deal of importance on contracts that demand certain security certifications and specifications.  If a contractor is non-compliance with cybersecurity terms of a contract, this could give way to liability under the False Claims Act.  Time will tell if this theory of liability proves to be the next big wave of cases in defense contractor fraud.