Deliberate underbidding on federal government contracts–known in industry parlance as “buying in”–is not a terribly unusual practice.  Contractors may buy in for several reasons, such as an effort to gain a toehold in the federal marketplace or the belief that modifications to the contract will result in a higher actual price.

However, contractors thinking of underbidding, for whatever reason, should proceed with caution in light of a new federal court case.  In United States ex rel. Hooper v. Lockheed Martin Corp., No. 11-55278 (9th. Cir. 2012), the U.S. Court of Appeals for the Ninth Circuit held that underbidding and/or giving false estimates, at least in the context of a cost reimbursement contract, may be violations of the False Claims Act.

The Hooper case involved a so-called “qui tam” False Claims Act suit against Lockheed Martin by a former employee, Nyle Hooper.  Hooper contended, among other things, that while he was employed at Lockheed, the company deliberately underbid an Air Force contract.

The contract in question resulted from an Air Force solicitation for a cost reimbursement plus award fee contract.  Under such contracts, the contractor is not paid a fixed price, but instead is reimbursed its actual costs and receives award fees based on performance.

The solicitation called for a best value evaluation scheme, with price and other factors included in the Air Force’s analysis.  Lockheed submitted a bid of $432.7 million in estimated costs and was subsequently named the best value awardee.  Ultimately, Lockheed was paid more than $900 million under the contract–more than twice the amount of its bid.

Hooper’s False Claims Act complaint alleged that Lockheed knowingly underestimated its costs when submitting its bid.  Lockheed argued that an estimate is an opinion or prediction, and cannot qualify as a “false statement” necessary for liability under the False Claims Act.  Lockheed asked the court to dismiss Hooper’s claim.

The Ninth Circuit disagreed with Lockheed, holding, “we conclude that false estimates, defined to include fraudulent underbidding in which the bid is not what the defendant actually intends to charge, can be a source of liability under the FCA, assuming that the other elements of an FCA claim are met.”  The court held that a lower court had erred by dismissing Hooper’s complaint, and ruled that his complaint should be decided on its merits.

The court did not address whether the same rationale would apply in the context of a fixed-price contract.  One could argue that Hooper would be inapposite, because the cost to the government should not change, regardless of whether the contractor deliberately underbid.  But what if the contractor intended to obtain modifications to make up the price difference?  These questions will have to await future cases for resolution.  For now, no matter what type of contract is involved, contractors should be careful when it comes to deliberate underbidding.