The act of deliberately underbidding on projects in order to win federal government contracts is not an uncommon practice. Contractors submit extremely low bids for certain projects, knowing that the contract will cost the government much more in the end. Contractors underbid on these government projects for several reasons, such as hoping to gain access to a lucrative federal marketplace or the belief that contract modifications will result in a higher revenue for the company. Industry insiders know the practice of underbidding as “buying in” and, according to the U.S. Court of Appeals for the Ninth Circuit, underbidding and/or giving false estimates in the context of a cost reimbursement contract violates the False Claims Act.
The Whistleblower Lawsuit
The case of United States ex rel. Hooper v. Lockheed Martin Corporation (No. 11-55278 9th. Cir. 2012) alleged that the Lockheed Martin Corporation submitted false and gross underbids in order to ensure the company won federal contracts related to the Range Standardization and Automation IIA (“RSA”) program, which is overseen by the United States Air Force.
Under the qui tam provisions of the False Claims Act, a former Lockheed project engineer originally filed suit against Lockheed in 2005 alleging, among other things, that the company defrauded the government by underbidding on projects involving the development of satellite and missile launch software under the RSA program. The whistleblower, Nyle Hooper, worked for Lockheed more than six years. He voiced concerns to supervisors and was later involuntarily terminated after the company discovered he was investigating the fraudulent activity and threatening to provide information to the government.
The contract obtained by Lockheed was a result of an Air Force solicitation for a cost reimbursement plus award fee contract for the development of satellite and missile launch software. Under this type of contract, a company is not paid a fixed price. Instead, they are reimbursed for actual costs and also receive award fees that are based on performance. For instance, if a contractor finishes the project ahead of schedule, this would generally warrant a performance award fee.
The Consequences of Fraudulent Activity
The Air Force contract solicitation asked for a best value estimate that included price and other factors within the analysis. Lockheed submitted a contract bid of $432.7 million in estimated costs and was subsequently awarded the contract based on that estimate. In the end, Lockheed was paid more than $900 million under the contract, which was more than two times the amount of its original bid.
The alleged underbidding by Lockheed Martin in this case brought about multiple consequences for the Air Force project. These include several overcharges on the contract, delays in meeting deadlines and the late development/delivery of satellite and missile launch software.
The ultimate danger to the practice of “buying in” is that the government and military cannot know what the actual cost of a project will be. Congress budgets a certain amount of money for each program and is lured into approving certain contracts without knowing the final cost. Years later, once the project is complete, the government is stuck with a bill that is much more than initially agreed upon due to “cost overruns.”
The False Claims Act lawsuit filed by Hooper alleged that Lockheed knowingly and willingly underestimated the total cost of the project when they submitted the bid. In response, Lockheed argued that an estimate is nothing more than an opinion or prediction and, therefore, it cannot qualify as a “false statement” under the False Claims Act. Asserting this argument, Lockheed moved the court to dismiss Hooper’s claim.
The Ninth Circuit disagreed with Lockheed, stating that, “we conclude that false estimates, defined to include fraudulent underbidding in which the bid is not what the defendant actually intends to charge, can be a source of liability under the FCA, assuming that the other elements of an FCA claim are met.” The Ninth Circuit reversed the lower court’s dismissal of the case and ruled that the False Claims Act lawsuit should proceed.