In a case of "first impression" the U.S. Court of Appeals for the Ninth Circuit (9th Circuit) has just held that underbidding on a contract can constitute a violation of the False Claims Act. The case arose in the context of a whistle blower suit involving Lockheed Martin. The was the first time the 9th Circuit had addressed the issue and it is the first opinion we are aware of in which any court has said low ball pricing can be a violation of the False Claims Act.
The 9th Circuit defined a violation as the fraudulent underbidding of a contract in which the "bid is not what the defendant actually intends to charge." The contractor has to know it is bidding below costs and in the case against the contractor the plaintiff would also have to show an intention not to actually end up charging those costs. It's this latter point that we think is crucial in the analysis.
If indeed an element of proof is that the contractor fully intended not to charge the underbid amount, we see a difficult row to hoe in proving a contractor's violation of the False Claims Act. Proving the knowing underbid of costs is one thing but proving the intention not to end up charging the quoted amount is quite another.
As we have pointed out before, buying in is not illegal under the Federal Acquisition Regulation (FAR). However, there is a legal obligation on the contracting officer not to let the contractor get away with recovering from the underbid by changes claims or on follow on contracts. With that burden on the contracting officer, perhaps it would be wise also to turn over to the Department of Justice (DOJ) any suspicions of underbidding.
The lesson for contractors is that underbidding has just become dangerous. In these tough times, the temptation to underbid costs to win contracts is greater than ever. The 9th Circuit has sent a warning to contractors that intentional underbidding (meaning not what the contractor actually intends to charge) is a violation of the False Claims Act. That's serious. One would think the result would be fewer cases of buying in or underbidding.