Procurement & Government Contract Fraud & Termination for Default

Government procurement fraud can arise in a variety of situations. A common example occurs during the bidding phase when offerors submit untruthful information in efforts to secure a government contract, or in other situations, to get admitted into a program administered by the Small Business Administration.

In the case of  Vertex Construction & Engineering (VCE) , the Armed Services Board of Contract Appeals agreed with the government’s termination for default that resulted from VCE submitting a false electrician’s certification at the bidding stage. The certification came from the subcontractor but the court ruled that since VCE submitted the proposal, it was liable under government contract fraud laws.

The certification came from the subcontractor but the court ruled that since VCE submitted the proposal, it was liable under government procurement fraud laws.

What is Government Contract Fraud?

Government contract fraud is an intentional act or failure to act by a contractor, subcontractor, or government agency that subverts the intent of the laws and regulations governing government contracts. This includes any attempt to defraud the government through false claims, bribery, kickbacks, double billing, costing discrepancies and other acts of deception.

The impact of government contractor fraud can be severe, and a breach of the contract can result in termination for default. If this occurs, it is important to seek advice from qualified government contract fraud lawyers who will be able to explain the full range of potential legal options available. These experienced professionals are best placed to ensure that your rights as a contractor or subcontractor are respected.

Types of Government Contract Fraud Cases

1. False Claims:
False claims refer to instances where individuals or companies knowingly submit fraudulent or false claims to the government for payment. This can involve inflating costs, misrepresenting services rendered, or billing for goods or services not provided. False claims can occur in various government contract contexts, such as defense contracts, healthcare contracts, or infrastructure projects.

2. Bid-Rigging and Collusion:
Bid-rigging and collusion occur when multiple companies conspire to manipulate the competitive bidding process for government contracts. This involves agreements or arrangements among competitors to eliminate or reduce competition, allowing a particular company to secure the contract at an inflated price. Bid-rigging and collusion undermine fair competition and can lead to inflated costs for the government.

3. Kickbacks and Bribery:
Kickbacks and bribery involve offering, giving, receiving, or soliciting something of value to influence the awarding of government contracts. Contractors may provide kickbacks, such as cash, gifts, or other benefits, to government officials or employees in exchange for favorable treatment, contract awards, or confidential information. These practices undermine the integrity of the procurement process and can result in unjust enrichment.

4. Cross-Charging and Overbilling:
Cross-charging occurs when costs or expenses that are not related to a specific government contract are improperly charged to that contract. This can involve shifting costs from one project to another or allocating unrelated expenses to increase the value of the contract. Overbilling, on the other hand, involves deliberately inflating costs or billing for services at higher rates than agreed upon in the contract.

5. Substandard or Nonconforming Products or Services:
Contractors may engage in fraud by providing substandard or nonconforming products or services that do not meet the specifications outlined in the contract. This can include using inferior materials, providing inadequate workmanship, or delivering products that do not meet quality standards. Such actions not only defraud the government but can also compromise the effectiveness or safety of government-funded projects.

6. Phantom Employees or Ghost Contractors:
Phantom employees or ghost contractors refer to situations where contractors create fictitious individuals or companies and bill the government for work that was never performed. This can involve the creation of false payroll records, invoices, or other documentation to falsely claim payment for nonexistent employees or subcontractors. Phantom employee schemes can result in significant financial losses for the government.

7. Conflict of Interest:
Conflict of interest occurs when government officials or employees involved in the procurement process have personal or financial interests that may improperly influence their decision-making. This can include situations where government personnel have financial ties or ownership interests in companies bidding for contracts, creating a biased or unfair advantage.

8. Cost Misrepresentation and Accounting Fraud:
Cost misrepresentation and accounting fraud involve manipulating financial records and statements to deceive the government regarding the true costs incurred or the financial condition of the contracting company. This can include inflating costs, misallocating expenses, or hiding financial liabilities to make the company appear more profitable or financially stable than it actually is.

In sum, Government contract fraud encompasses a range of deceptive practices aimed at defrauding the government and obtaining financial benefits through illegal means. These fraudulent activities undermine the fairness, transparency, and integrity of government procurement processes. Detecting and prosecuting government contract fraud is crucial for protecting taxpayer funds, ensuring fair competition, and maintaining trust in government institutions.

The government’s Failure to Discover False Information Does Not Avoid Government Contract Fraud

In the VCE case, it claimed that the contracting officer’s termination for default should be overturned because the government had a duty to discover the false information and its failure should excuse the default termination. The court did not agree.

Instead, the government filed a motion for summary judgment on the grounds of fraud in the inducement, asserting the misrepresentation rendered the contract void ab initio. The court agreed.

• The government’s duty to verify information in a bid is for its own protection.
• Contractors cannot benefit from the agency’s failure to catch false information in bids.

Prime Contractors Must Validate Information Submitted By Subcontractors

Government contract fraud carries harsh penalties. Submitting a technical proposal where such information is false makes the awarded contract tainted with false information and therefore void. Government contracts, and those tainted by procurement fraud impacts the integrity of the federal contracting process and to protect the public from the corruption which might lie undetectable beneath the surface of a contract conceived in a tainted transaction.” Mississippi Valley, 364 U.S. at 564-65; see also Godley, 5 F.3d at 1475 (citing Mississippi Valley in stating that “general rule [of a government contract tainted by fraud or wrong-doing is void ab initio] protects the integrity of the federal contracting process and safeguards the public from undetectable threats to the public …”).

• Procurement crime can come into play in situations where the contractor has been convicted of a criminal action stemming from the misrepresentation.
• Misrepresentations in government bids can result in acquisition fraud violations due to misrepresentations.

How Do Charges of Indictment for Government Contract Fraud Trigger a Termination for Default?

When the government believes that a contractor or subcontractor is in breach of its contract, it may take action to protect its interests and rights. This can result in immediate termination for default (T4D). If this occurs, the contractor or subcontractor must be given an opportunity to make an adequate response before any final decision is made by the government body.

Government fraud charges can lead to termination for default, and it is important that the contractor or subcontractor understands their rights and obligations in this situation. Qualified government contract fraud lawyers will be able to advise on the best course of action and ensure that any decisions made are fair and reasonable. They can also help to reduce the impact of the termination for default and negotiate appropriate terms to resolve any issues.

What Can You Do to Mitigate Procurement Fraud and Terminations for Default?

To avoid procurement fraud penalties, and given the decision in the VCE case, bidders on government contracts should make sure that they can give evidence that they did in fact conduct due diligence on their subcontractors.

• Defenses to government contract fraud would not include the expense of performing due diligence and background investigations.
• Contractors should make sure that they have a Federal Contractor Code of Business Ethics and Conduct policies in place, and a means to confirm and investigate bidding information.
• Have contractors certify that all information provided in truthful.

When the agency finds out that you have submitted false information in your bid, the contracting officer would have no other choice than to issue a termination for default notice and refer the matter for possible procurement fraud proceedings.

The burden will be up to you to offer defenses and evidence about why the default termination should not stand on appeal. See more information about government contract fraud and re-procurement costs. 

For help with allegations of government procurement fraud, call our white collar crime defense attorney at 1-866-601-5518.