Veridyne Corp., an 8(a) small business concern, was subject to fraud and false statement claims by the U.S. Department of Transportation (UDOT) for undervaluing an estimate to perform a task order contract extension.  The Federal Circuit recently denied Veridyne’s request for payment of approximately $1 million claimed owed under the task order.  See Veridyne Corp. v. U.S., Case No. 13-5011.  UDOT was aware of, and encouraged the undervalued estimate from the contractor, and the contractor was still held liable for its actions.

Veridyne obtained the task order by convincing UDOT to award it a $3 million task order extension that would cover several years after it was due to graduate from the 8(a) program.  A contract award larger than $3 million would have required that the procurement be opened for full and fair competition, which would have delayed an award to Veridyne to the point it was no longer eligible for small-business set-asides.  Both Veridyne and UDOT were aware that the $3 million estimated task order price was artificially low to fit under the $ 3 million threshold.  This was apparent to the Court because the work covered by the extension ultimately ended up costing more than $31 million.

When the UDOT Inspector General concluded that the contract was obtained through fraud, the contract was canceled, and both Veridyne and UDOT sought additional funds from the other under the contract – with Veridyne seeking the unpaid balance of the contract and UDOT seeking repayment of alleged false invoices submitted to UDOT by Veridyne.  The Federal Circuit denied Veridyne the remaining contract balance sought based on the finding that Veridyne’s estimate for the work was intentionally undervalued.  The Court also upheld the award of $1.9 million in statutory penalties against Veridyne under the False Claims Act and Contract Disputes Act issued by the Court of Federal Claims.

The most troubling aspect of this case is that the Court of Federal Claims determined that UDOT was “fully aware” of the undervalued estimate from Veridyne and encouraged the company to undervalue the estimate so that it would not have to hold a new contract competition for the work.  The arrangement was mutually beneficial for both UDOT and Veridyne, the incumbent contractor for UDOT.  However, incumbent contractors must be wary of following the government’s encouragement to undervalue estimates for work.  Regardless of whether the government approves or requests faulty estimates from contractors, they can still be held liable for False Claims Act and other fraud violations for submitting intentionally undervalued cost and pricing data to the government.  Just because the government says its so doesn’t make it so.  Contractors should never blindly rely on the goverment’s direction without first independenlty analyzing whether the directive is legitimate under the federal procurement rules.

Doug Hibshman is a partner in Fox Rothschild LLP’s Federal Government Contracts and Procurement, Construction, and Infrastructure Practice Groups in Washington, DC, and routinely represents federal contractors in fraud matters.