The FCA in Defense Contracting

The Department of Defense is the largest single procurement organization in the world, awarding hundreds of billions of dollars in contracts annually to a defense industrial base of more than 100,000 companies. Where there is procurement, there is procurement fraud. Where there is procurement fraud, the False Claims Act provides a remedy — and rewards the insiders who report it.

This paper sets out the principal theories of FCA liability in defense contracting, the categories of conduct that most frequently give rise to qui tam suits, and the practical considerations relators should weigh before filing.

The False Claims Act — Statutory Framework

The FCA imposes liability on any person who:

• Knowingly presents, or causes to be presented, a false or fraudulent claim for payment to the United States;
• Knowingly makes, uses, or causes to be made or used, a false record or statement material to a false or fraudulent claim;
• Conspires to commit any FCA violation; or
• Knowingly conceals or knowingly and improperly avoids or decreases an obligation to pay money to the United States ("reverse false claims").

Liability is treble damages plus a per-claim civil penalty (currently between approximately $14,000 and $28,000 per claim, adjusted annually for inflation). Relators receive 15–25% of the government's net recovery if DOJ intervenes, or 25–30% if the relator litigates without intervention.

Defective Pricing and Cost Mischarging

The Truth in Negotiations Act (TINA)

Under TINA, now codified at 10 U.S.C. § 3702, defense contractors must submit certified cost or pricing data when negotiating contracts above the statutory threshold. The data must be "current, accurate, and complete." Failure to disclose known cost reductions, vendor quotes, or labor-rate changes that would have reduced the negotiated price gives rise to a defective pricing claim — and FCA liability where the nondisclosure was knowing.

Cost Mischarging on Cost-Reimbursement Contracts

Under cost-plus contracts, the contractor bills the government for actual incurred costs. Mischarging occurs when:

• Time is shifted from a fixed-price contract or commercial work to a cost-reimbursement government contract (labor mischarging);
• Indirect costs are misallocated across contracts to inflate government billings;
• Unallowable costs (lobbying, entertainment, certain executive compensation) are billed as allowable;
• Costs that should be capitalized are expensed against current contracts to accelerate recovery.

Labor mischarging cases are among the most common FCA cases against defense contractors. Service members and contractor employees who observe systematic time-charging irregularities are well-positioned to bring these cases.

Counterfeit and Substandard Parts

The defense supply chain is global, multi-tiered, and difficult to audit. Counterfeit parts — particularly electronic components reclaimed from scrap, relabeled, and resold as new — have repeatedly entered military systems. Where a contractor knowingly delivers counterfeit or non-conforming parts, or fails to perform contractually-required testing, the FCA provides a remedy.

Common patterns include:

• Substitution of counterfeit electronic components in mission-critical systems;
• Use of unqualified materials (steel, aluminum, composites) that fail military specifications;
• Falsification of test data, inspection records, or chain-of-custody documentation;
• Failure to comply with the DFARS 252.246-7007 counterfeit-part-detection requirements.

Set-Aside Fraud

The federal government sets aside a portion of contract dollars for small businesses, service-disabled veteran-owned small businesses (SDVOSB), women-owned small businesses (WOSB), HUBZone businesses, and 8(a) program participants. Where a company falsely certifies eligibility for one of these programs, every claim submitted under the resulting contract is potentially a false claim under the FCA.

Common set-aside fraud patterns:

• Rent-a-vet schemes — non-veteran-owned companies that nominally place a service-disabled veteran in a controlling position to qualify for SDVOSB set-asides, while the veteran exercises no actual control;
• Affiliation violations — small businesses that are in fact controlled by, or operate as alter egos of, large businesses;
• Pass-through arrangements — small businesses that win set-aside contracts and immediately subcontract substantially all the work to large-business "partners";
• 8(a) front companies — non-disadvantaged businesses operating through nominal disadvantaged ownership.

Buy American, Berry Amendment, and Trade Agreements Act

Federal procurement law imposes domestic-content and country-of-origin requirements:

• Buy American Act — domestic preference for federal civilian and defense procurement;
• Berry Amendment (10 U.S.C. § 4862) — domestic-source requirement for textiles, food, hand tools, and certain materials procured by DoD;
• Trade Agreements Act — country-of-origin restrictions for designated-country and prohibited-country sourcing;
• Specialty Metals clause (DFARS 252.225-7008/7009) — domestic-source requirement for certain titanium, zirconium, and specialty steel.

Knowing falsification of country-of-origin certifications, or knowing delivery of non-conforming foreign-source materials, gives rise to FCA liability.

Practical Considerations for Defense FCA Relators

The First-to-File Bar

Under 31 U.S.C. § 3730(b)(5), only the first relator to file a qui tam complaint based on the same underlying facts may proceed. Defense contractors that have been investigated for similar conduct may have prior public disclosures or earlier-filed cases. Pre-filing investigation is essential.

The Public Disclosure Bar

Under § 3730(e)(4), claims based on substantially the same allegations as those publicly disclosed in government reports, hearings, audits, or news media are barred unless the relator is an "original source." Relators with direct, independent knowledge from inside the company generally qualify; relators basing claims on publicly-available information generally do not.

Retaliation Protection

The FCA's anti-retaliation provision, 31 U.S.C. § 3730(h), protects employees, contractors, and agents from retaliation for FCA-related conduct. Remedies include reinstatement, double back pay, and attorney's fees.

Defense Contractor Whistleblower Protection

Defense-contractor employees also have parallel retaliation protections under 10 U.S.C. § 2409 and 41 U.S.C. § 4712. These statutes are filed first with the agency IG and then potentially in federal court.

This paper is one of six on the principal issues facing service-member and defense-contractor whistleblowers. See the full series at the Military Whistleblower Project.