Defense contractor fraud takes place when private companies mischarge the government within the parameters of procurement contracts. The United States government has a budget of half a trillion dollars per year to purchase and maintain its military systems, supplies, and services. Most of the purchases are made from private companies acting as defense contractors. In turn, these defense contractors have defrauded the government by violating the Truth In Negotiations Act (“TINA”), providing substandard or improper products or services, and up-charging the government.
TINA is a law that aims to prevent the government from paying unfair prices for products that cannot be bid on. This is because certain products are only made by a particular manufacturer. The law requires defense contractors to transparently disclose information about the costs to produce the rare products pursuant to no-bid contracts. Although these defense contractors are closely scrutinized and must submit to audits, they nonetheless have been found to inflate their costs and expenses in violation of the FCA.
Many cases of fraud involve the defense contractor not performing its services or providing the products as contracted. These substandard products or services are what historically created the FCA during the Civil War. The acts or omissions by the defense contractors go well beyond mere mistakes to reckless or intentional delivery of products or services that do not perform as promised.
Other cases involve the inflating of the charging by defense contractors. After a contract is signed, defense contractors have been found culpable in unlawfully inflating their costs through time records, purchase orders and falsification of equipment orders or material costs. Improper billing has been at the crux of most FCA claims and has resulted in billions of recoveries against defense contractors.
There have been recent cases where defense contractors have improperly substituted the type or quality of the products. They have contracted for one type of product but provided a lower grade or quality part in violation of the FCA. Cheaper products or services than those contracted for are direct violations. Other types of fraud include defense contractors that have bid at a lower price than competitors only to then deliver the products with add-on costs through “cost-plus” contractors. Then, the costs are shifted to the government when they should have been picked up by private companies.
The most common type of FCA violations by defense contractors is when they cross-charge the government. In this scenario, the private company shifts the costs and expenses from one defense contract to another by falsification of records, time-cards, and equipment costs. The price charged is not what the real price should be but is nonetheless charged to the government to increase the company’s profits. Whistleblowers, or Qui Tam Relators, have come in the form of employees at the defense contractor, contractors, or even competitors that lost the bid. Below is a very satisfied aerospace employee accepting his settlement check for reporting illegal and fraudulent billing practices against the federal government.