Thinking of Underbidding a Project in Order to Get the Work? Don’t.

It’s been a tough few years in the construction industry. Many contractors, faced with fewer jobs and more competition, are tempted to underbid projects in order to get the work and then try to make up the difference through change orders and extra work claims. This is particularly true on public works projects where government agencies are often required by law to select the lowest qualified bidder (which always reminds me of a quote by Steve Buschemi‘s character in the movie Armageddon – “You know we’re sitting on four million pounds of fuel, one nuclear weapon and a thing that has 270,000 moving parts built by the lowest bidder. Makes you feel good, doesn’t it?”). But not only is low bidding a project a risky business plan that even a circa 2000 Silicon Valley startup couldn’t sell to investors, it may be illegal as well.

In a recent 9th Circuit case, Hooper v. Lockheed Martin Corporation, 688 F.3d 1037 (August 2, 2012), the 9th Circuit Court of Appeals held that a contractor who knowingly underbids a project may be liable for filing a false or fraudulent claim under the federal False Claims Act (“FCA”). The FCA, which was enacted during the Civil War in response to overcharges and other abuses by defense contractors, provides for statutory penalties against any person who ” (A) knowingly presents, or causes to be presented, a false or fraudulent claim for payment or approval; [or] (B) knowingly makes, uses or causes to be made or used, a false record or statement material to a false or fraudulent claim to a federal agency.” 31 U.S.C. §3729(a)(1).

In Hooper, Lockheed Martin Corporation (“Lockheed”) submitted the low bid on a contract with the U.S. Air Force to modernize software and hardware used for U.S. space launch operations. The contract was structured as a cost plus “award fee” contract, in which the contractor would be paid for its actual costs for performing the work, plus “award fees” at periodic intervals based on overall performance. Because the amount of work required for the project was uncertain, bidders were required to submit estimated costs for performing the work, and Lockheed submitted an initial bid of $439.2 million. After the government rejected Lockheed’s bid, Lockheed resubmitted another bid for $432.7 million, and won.

Lockheed was later sued on the ground that it had knowingly underbid the project, and by doing so, violated the FCA. In response, Lockheed filed a motion for summary judgment, arguing that because its bid was merely an estimate, and “because an estimate is a type of opinion or prediction” it “cannot be said to be a ‘false statement’ within the meaning of the FCA.” The U.S. District Court agreed and granted Lockheed’s motion. The 9th Circuit, however, disagreed. Because “an opinion or estimate carries with it ‘an implied assertion, not only that the speaker knows no facts which preclude such an opinion, but that he does know facts which would justify it,'” explained the 9th Circuit, if a contractor knowingly underbids a project, even if its bid is in the form of an estimate, the contractor may be liable under the FCA. And, held the 9th Circuit, because there was evidence that Lockheed employees were instructed to lower their bid without regard to actual costs the district court should not have granted summary judgment in favor of Lockheed.

So watch those bids folks. Underbidding a project may get you the job but cost you in the end.