Aug 9, 2012

Thomas Marcinko

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Is “Bid to Win – Manage to Profit” Still a Viable Strategy?

It won’t be if a recent Court of Appeals ruling is any indication.  The 9th Circuit Court of Appeals recently held that  a contractor could conceivably be subject to the False Claims Act for invoices submitted under a cost reimbursement contract that was based on a proposal that was “fraudulently underbid.”   Significantly, the case was brought by a qui tam relator, an ex-employee of the contractor who had personal knowledge of how the estimate was developed.  Consequently, this could happen to any contractor, even if the government was not originally involved. 

The Truth in Negotiations Act (TINA) requires contractors on most large proposals to disclose all facts that might affect the price negotiation.  However, TINA’s focus is on proposing higher costs than one legitimately expects to incur.  Purposely underbidding, or “buying-in” as it is known, has always been discouraged by the FAR (See FAR 3.501-2), but heretofore, the only remedy was for the Contracting Officer to prevent the contractor from “getting well” on change orders.  This remedy is ineffective on cost reimbursement contracts where the contractor can stop work if the government doesn’t pay them.   According to the legal theory adopted by the Court, a contractor “fraudulently induces” the government to award a contract when the proposed costs are intentionally understated.  As a result, any invoices submitted under this fraudulently obtained contract are false claims and subject the contractor, at a minimum, to a double penalty (2 X the invoice amount) and interest.

The potential ramifications of this ruling are as alarming as they are obvious.  While “buying in” is not a new strategy, the upcoming budget cuts and the possibility of sequestration may provide even more incentive to bid below costs.  The best way for contractors to protect themselves is to adopt a formal estimating system as contemplated by the new DFARS business systems rule.  If for no other reason, it is widely anticipated that DCAA is going to increase the number and intensity of estimating system reviews.  All proposed costs should be estimated and documented in accordance with the estimating system.

The actual court ruling can be found at U.S. ex rel. Hooper v. Lockheed Martin Corp.  For more information on estimating systems, please see Aronson’s recent webinar which can be found on our website.  Please contact Hope Lane at hlane@aronsonllc.com if you have questions regarding estimating systems.