Defense Contractor Fraud

Last Updated: April 25, 2025

What is defense contractor fraud?

Defense contractor fraud occurs when a company that provides goods or services to the U.S. Department of Defense knowingly overcharges the government, delivers substandard products, or violates the terms of its contract. This type of fraud can take many forms, including false billing, product substitution, or misrepresenting costs, and often leads to wasted taxpayer dollars and potential risks to military personnel.

The role of whistleblowers in exposing contractor fraud

Whistleblowers can play a key role in combating defense contractor fraud by filing a “qui tam” lawsuit under the False Claims Act. Whistleblowers can file qui tam lawsuits even in instances when classified military programs may be involved.

Common types of defense contractor fraud

Product Substitution

Product substitution involves providing goods or materials that differ from what was required under the government contract. In many cases, this means replacing approved parts or components with unauthorized or lower-quality alternatives, often to cut costs or boost profit margins. Knowingly substituting products without authorization or concealing the change from the government may constitute fraud under the False Claims Act.

Mischarging Labor or Materials

Mischarging refers to intentionally billing the government for costs that are not allowed under the contract terms. This can occur in various ways:

• Inflating labor hours or billing for employees who did not actually work on the government project
• Charging commercial work to a government contract
• Misallocating costs between fixed-price and cost-plus contracts

The False Claims Act may apply when a contractor intentionally submits false invoices or misrepresents how labor or materials were used.

Deceptive Pricing or Defective Pricing

Under the Truthful Cost or Pricing Data Act (formerly the Truth in Negotiations Act), contractors are required to provide accurate, complete, and current pricing data during contract negotiations for certain government contracts. Providing false or misleading cost data can lead to overpayment by the government. If a contractor knowingly withholds pricing information to secure an inflated contract, it could trigger liability under the False Claims Act.

Failure to Meet Contract Specifications

Failing to meet contract specifications involves contractors knowingly delivering goods or services that do not meet the technical or performance standards required under the contract. This could involve:

• Using substandard materials
• Failing to complete required testing or inspections
• Delivering products that don’t meet durability or safety requirements

Misrepresenting compliance with contract terms may be considered a false claim.

Cross-Charging and Improper Cost Allocation

Cross-charging occurs when contractors shift costs from fixed-price contracts (where they bear the risk of cost overruns) to cost-reimbursement contracts, where the government reimburses most expenses. This manipulation can improperly increase profits.

Contractor Fraud in Iraq and Afghanistan

U.S. military operations in Iraq and Afghanistan led to a surge in defense contracts for reconstruction, logistics, and security services. Unfortunately, some contractors took advantage of the urgency and scale of these efforts by inflating costs, billing for services not rendered, or misrepresenting performance. Whistleblowers have played a key role in uncovering defense contractor fraud in Iraq and Afghanistan, helping the government recover funds and hold contractors accountable for misconduct in war zones.

Protections for whistleblowers of defense contractor fraud

Whistleblowers who report defense contractor fraud under the False Claims Act are protected from retaliation, including firing, demotion, or harassment. If retaliation occurs, they may be entitled to reinstatement, double back pay, and other damages.

Although whistleblowers cannot remain anonymous under the False Claims Act, cases are filed under seal, keeping the whistleblower’s identity confidential during the government’s initial investigation. Successful whistleblowers may also receive 15% to 30% of any funds recovered by the government.

Successful defense contractor fraud whistleblower cases 

Some of the defense contractors that Phillips & Cohen has filed whistleblower lawsuits against and won settlements include Northrop Grumman, Science Applications International Corp. (SAIC), Alliant Techsystems, Louis Berger Group and American Systems.

Northrop Grumman – $325 Million Settlement

The whistleblower case against Northrop Grumman set a record. Northrop paid $325 million to the government to settle the whistleblower lawsuit, which alleged the company had suppressed information about faulty components in military satellites. It was the largest qui tam settlement ever paid by a defense contractor and the second largest settlement of any kind involving defense contracting fraud. The whistleblower received a reward of $48 million.

KBR – $108.75 Million Settlement 

Phillips & Cohen represented two whistleblowers who brought a False Claims Act lawsuit against KBR that alleged the company defrauded the United States Army in connection with the contract to supply troops in the Iraq War with property and materials. The lawsuit alleges KBR defrauded the Army under the multi-billion dollar LOGCAP III contract when it routinely ordered new materials when excess quantities of the same items were sitting in warehouses in Iraq. The case settled in 2023 for $108.75 million, the largest cash settlement ever obtained in connection with Iraq War fraud.

Louis Berger Group – $69.3 Million Settlement

Louis Berger Group agreed to pay $69.3 million to resolve allegations of overbilling the U.S. government for overhead costs unrelated to its contracts in Afghanistan and Iraq. This settlement is one of the largest involving war-zone contractors. ​Corporate Crime Reporter+8Wikipedia+8PR Newswire+8Truthout+4Phillips & Cohen+4PR Newswire+4

Alliant Techsystems (ATK) – $37 Million Settlement

ATK settled for $37 million following allegations that it sold defective illumination flares to the U.S. military, posing safety risks. The settlement included funds to retrofit the remaining flares in the government’s inventory. ​Phillips & Cohen+5MarketScreener+5FinanzNachrichten.de+5Phillips & Cohen+1Phillips & Cohen+1

Science Applications International Corp. (SAIC) – $11.75 Million Settlement

SAIC paid $11.75 million to settle claims that it inflated costs under a government-funded program designed to train first responders for emergencies involving explosives and incendiaries. ​PR Newswire+8Phillips & Cohen+8Corporate Crime Reporter+8

American Systems, Anixter, and Corning – $3 Million Settlement

These companies collectively paid $3 million to resolve allegations of providing gratuities to CIA employees and consultants to influence contract awards, violating the False Claims Act and the Anti-Kickback Act.

How to report defense contractor fraud