Submitting a low bid to secure a federal contract knowing that the contract will cost the government more when fulfilled is a violation of federal law confirmed the U.S. Court of Appeals for the Ninth Circuit in an Aug. 2, 2012, decision.
The court’s ruling permits The Cullen Law Firm, PLLC, to proceed to trial in a case brought under the False Claims Act alleging that the Lockheed Martin Corporation submitted false underbids to secure contracts related to the Range Standardization and Automation IIA program administered by the Air Force.
The case was filed on behalf of Nyle Hooper, who worked for Lockheed for six years before being involuntarily terminated after investigating Lockheed’s fraud and threatening to report the fraud to the government.
The Ninth Circuit is the first appellate court to hold that an underbid can be a false claim under the FCA. Most other decisions regarding false bidding have involved collusive overbids for fixed-price contracts. The RSA contract was a cost-plus contract in which payment from the government was made not on the contract price but instead on the actual cost of producing the product. Many military contracts are cost-plus contracts and many of them are underbid. Underbidding and cost overruns are common in defense contracting, because contractors like Lockheed know they can go back to the government and ask for more money to cover their actual costs.
The harm caused by this practice is that the military and Congress have no way of knowing what the actual cost of a proposed program will be. The budget committees of Congress are lured into approving a program without knowing the true costs and then several years later are stuck with the “cost-overruns.”
This decision should encourage more whistle-blowers to come forward who know and have documentation to prove that the bids for cost-plus contracts were knowingly underbid. If more whistle-blowers come forward, taxpayers could save hundreds of millions of dollars by changing the industry practice of systematically underbidding cost-plus contracts.
The Court of Appeals also reinstated Hooper’s wrongful discharge claim that had been dismissed by the district court.