Increased Profit Under a Firm-Fixed Price Contract a False Claim? Not So Says One Federal District Court

Richard J. Conway and Justin A. Chiarodo

Justin A. ChiarodoIn a significant decision regarding the application of the False Claims Act (FCA) to firm-fixed price procurement contracts, the U.S. District Court for the Middle District of Florida recently held that a government contractor working under a fixed-price contract is not liable under the FCA for higher than expected profits and “failing to notify the Government that the work could be performed less expensively and charged a lower price” than the contract price. U.S. ex rel. Prime v. Post, Buckley, Schuh & Jernigan, Inc., 2013 WL 4506357, No. 6:10-cv-1950 (M.D. Fla. Aug. 23, 2013).

The defendant was a joint venture that had entered into a fixed price indefinite delivery/indefinite quantity (ID/IQ) contract with the government to provide architect and engineering services for an Everglades restoration project overseen by the Army Corps of Engineers. As the project was a first-of-its-kind effort, the Corps planned to reduce its cost risk by using a fixed-price contract performed through task orders. The ID/IQ contract provided negotiated fixed-price labor rates and a negotiated profit component, derived primarily from past Corps contract experience. Subsequent fixed-price task orders were lump-sum, determined in accordance with the agreed-upon labor rates multiplied by the number of days required to complete the work, and included the agreed-upon profit component. The joint venture saw its profit margin increase through the use of efficient staffing of task orders with lower-cost resources than those contemplated in the original ID/IQ formulas.

The qui tam relator claimed the joint venture submitted false claims under the “implied certification” theory by submitting invoices but not disclosing its increased profits. The court determined that although the concept of implied certification could apply in fixed-price contracts, the plaintiff was required to show clear evidence of fraud in the performance of the contract, which it failed to do. Specifically, the court held that the relator “failed to establish that [the defendants] made a ‘false’ claim or statement” under the FCA. The court emphasized that in fixed-price contracting, the risk of loss is shifted to the contractor, and therefore “if the final total costs of the agreed upon services exceed the contract price, the contractor takes the loss; conversely, he can profit if the costs are lower than the contract price.”

The decision is important to the government contracts industry because of the recent trend for plaintiffs to seek damages based on implied (as opposed to express) certification of invoices, claims, or other actions under government contracts. Courts have increasingly allowed claims on implied certifications as the basis for finding liability. The opinion provides a welcome counterpoint to this trend and sets out a well-reasoned approach to fixed-price contracting under the FCA: it limits the ability of the government to place the responsibility for any profit or loss on the contractor and then later claim that the contractor’s increased profitability constitutes a FCA violation.

 

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s