Defense Contract Fraud

The False Claims Act contains the original qui tam provision, instated during the U.S. Civil War. Defense contract fraud is the sale of goods to the U.S. military of either terribly low quality or at ridiculously marked up prices. The False Claim Act was originally created because numerous manufacturers began ripping off the Union Army with low quality products sold to the U.S. for exorbitant prices. The most defining of these cheap products was a fabric used to make Union uniforms. Since the South had a monopoly on cotton, and trade relations between the two were tense at the very least, manufacturers made a cheap fabric from scraps of old fabric. The scraps were shredded and then pressed together with an adhesive to make a sheet of fabric. These uniforms would fall apart at the slightest stress or contact with water, turning into an oatmeal consistency. These and other Civil War examples were the first cases of defense contract fraud.

There are many possible schemes when it comes to defense contract fraud:

Cross Charging – This is a very common deceptive technique amongst fraudulent defense contractors. The defense contractor starts with one fixed price contract. The fixed price refers to an order that will always have the same price no matter how much money it takes to produce the order. The contractor also has a “cost-plus” contract. According to this contract the government pays for the materials and manufacturing fees, then an extra percentage for the profit. In this scheme, a contractor tells workers to always report their hours onto the cost-plus project, since they will get paid the same amount on the fixed price contract even if they technically work almost zero hours.

Product Substitution – The government will often require a contractor to use certain types of material or build with a certain quality of material. On top of this, it will sometimes be required that materials be bought from U.S. companies. Companies will buy cheaper, lower quality, non-U.S. made parts in order to save money while reporting to the government that all the requirements are met. 

Improper Cost Allocation – If a company is working both private and government contracts, they should distribute costs evenly throughout the different jobs. With a chunk of time, like the amount of time it requires to build a ship’s engine, it is a pretty simple calculation since the time will be directly allocated to whichever contract the engine is for. However, when the time billed is more vague, like a manager’s time, the correct distribution is more difficult. This time is more profitable if it is all billed as government time. Essentially, billing at government time reduces that project to a cost-plus project. The company then can reduce the private contract’s price without losing any profit.

Failure to comply with contract specifications – The Defense Department, due to the life and death nature of its needs, always has detailed instructions regarding the specifications of the product. The details cover both type of materials and modes of testing quality insurance. If a company exceeds its budget, often it will be tempted to ignore some or all details of the specific DoD document. Failure to comply with these specifications does count as fraud.

Violations of the Truth-in-Negotiations – The government often must regularly purchase products that are highly secretive. These contracts are often given to one company. Companies struggle with the truth, understanding the great profit they stand to gain if they withhold information.