Contractors See Rise in Fraud Counterclaims

By D'agostino, L. James; Connolly, Sean M. | National Defense, September 2007 | Go to article overview

Contractors See Rise in Fraud Counterclaims


D'agostino, L. James, Connolly, Sean M., National Defense


Government contract fraud counterclaims are on the rise, and court decisions increasingly are recognizing fraud liability.

The government may assert counterclaims seeking setoffs based on a special pleas in fraud, under the False Claims Act or the Contract Disputes Act. Fraud counterclaims at the Court of Federal Claims do not require a contracting officer's final decision and monetary relief owed to the government may exceed a contractor's original claim. Filed in response to contractor claims or requests for other financial relief, government fraud claims can ravage a company's bottom-line. Given this power and potential impact, clearly, the ethical and legal considerations surrounding contract claims submissions are paramount.

There are several recent Court of Federal Claims decisions involving government counterclaims for fraud. Contractor claims and appealing contracting officer denials have always been significant business decisions, for customer relationship reasons, and also given the time and money costs of preparation and prosecution. The courts' increasing receptiveness to government fraud claims adds a new dimension that must now be considered.

During the last fiscal year, successful government fraud counterclaims severely impacted several companies in fines and claims forfeitures. For example, in Daewoo Engineering and Construction Ltd., the court assessed $50 million in damages under the Contract Disputes Act for knowingly false claims. The court, charging "gamesmanship," pointed out that Daewoo "did not expect to find itself in court trying to justify its case" and instead went for simple payment of a negotiated amount of its claim, and concluded that this "shoot first" approach to claims submission deserved a $50 million message. The court found that Daewoo violated the False Claims Act and the Contract Disputes Act.

In another case, Morse Diesel International, Inc., a government counterclaim alleged that Morse Diesel was apparently "floating" payments for bonds and submitted "paid" invoices before they were actually paid, under a contract requiring progress payment applications and certifications, but only after the company had made the payments itself. The court found that Morse Diesel payment applications were false, and that some claims were inflated to include rebate amounts for which the government was entitled to credit. Under its fixed-price contracts, while Morse Diesel may not have netted more in government payments than it otherwise would have, premature submittals cost the company more than $53 million in potential claims against the government, which the Court deemed to have been forfeited.

A third example, M.A. DeAtley Construction Inc., finds the government accusing M.A. DeAtley of submitting a false certified claim with the Department of Transportation for "added work" that should not have been considered additional work under the contract. There, the contract required M.A. DeAtley to lay a specific type of rock as a foundation. While laying rock from a government-designated source, M.A. DeAtley found that the rock failed to satisfy contract standards. The government would not accept a credit and allow the company to leave the rock already laid, and required the company to replace the rock. …

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