False Claims Act: What Federal Contractors Must Know to Stay Out of Trouble

The False Claims Act (31 U.S.C. §§ 3729-3733) is the federal government's primary anti-fraud statute, and it is one of the most dangerous legal pitfalls for government contractors. Unlike criminal fraud statutes, the FCA is a civil law — which means the standard of proof is lower, and private individuals (not just the government) can bring claims on the government's behalf.

In FY2024, the Department of Justice recovered over $2.9 billion through False Claims Act actions. A significant portion of that involved government contractors.

Understanding what constitutes a "false claim" — and what your company must do to avoid inadvertent violations — is essential risk management for any federal contractor.

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What the False Claims Act Covers

The FCA imposes civil liability on any person who:

• Knowingly submits a false or fraudulent claim for payment to the government
• Knowingly makes or uses a false record or statement material to a false claim
• Conspires with another to submit a false claim
• Knowingly makes or uses a false record material to an obligation to pay the government
• Knowingly conceals or improperly avoids an obligation to pay the government

Key terms:

• Knowingly: Includes actual knowledge, deliberate ignorance, OR reckless disregard for the truth. You do not need to have intended fraud — reckless indifference to whether your claim is accurate is enough.
• Material: The false statement must be capable of influencing the government's decision to pay. A minor clerical error immaterial to the payment decision does not trigger FCA liability.
• False: Can include express misrepresentations (billing for work not done) and implied misrepresentations (certifying compliance when you are not compliant).

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Penalties: Why This Matters

FCA penalties are severe:

• Treble damages: The government receives three times the actual damages from the false claim
• Per-claim penalty: $13,946 to $27,894 (inflation-adjusted) per false claim — and each invoice or certification can be a separate "claim"
• Exclusion from federal programs (often accompanies FCA settlement)

Example: A contractor submits 24 monthly invoices over two years that each overstate costs by $10,000. If found liable:

• Actual damages: $240,000
• Treble damages: $720,000
• Per-claim penalties: 24 × ~$20,000 = $480,000
• Total potential liability: $1.2 million on a $240,000 fraud

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Common FCA Violations in Federal Contracting

1. Submitting Invoices for Work Not Performed

Billing for labor hours not actually worked, services not delivered, or products not delivered. This is the most straightforward FCA violation.

Prevention: Rigorous timekeeping, supervisor approval of timesheets, independent reconciliation of billed hours to actual payroll.

2. False Certifications of Small Business Status

Certifying that your firm qualifies as a small business (or as 8(a), HUBZone, WOSB, SDVOSB) to win a set-aside contract when you know you do not qualify.

This is extremely common and actively prosecuted. The SBA and DOJ actively investigate false small business claims.

Prevention: Verify your size status against the applicable NAICS size standard before every set-aside proposal. Never certify status you cannot support.

3. Certifying CMMC/NIST 800-171 Compliance Without Actually Being Compliant

A particularly active enforcement area post-2024. Contractors who self-attest NIST 800-171 compliance in SPRS.mil or in contract reps/certs, while knowing they are significantly non-compliant, are exposed to FCA claims.

The DOJ has launched a Cyber Fraud Initiative specifically targeting contractors who misrepresent their cybersecurity posture. The first major settlements occurred in 2022–2024.

Prevention: Conduct an honest self-assessment before submitting your SPRS score. Develop a POA&M for non-compliant controls. Do not check "compliant" if you have major gaps.

4. Billing Unallowable Costs

Charging costs to a government contract that are expressly unallowable under FAR Part 31 — entertainment, lobbying, advertising, penalties, certain executive compensation. If done knowingly, this is an FCA violation.

Prevention: Identify all potentially unallowable costs at the time of entry in your accounting system. Never include them in government billings without a clear legal basis.

5. Product Substitution

Delivering a product that does not meet contract specifications while certifying acceptance. In defense contracting, this has included delivering components that failed to meet military specifications while certifying compliance.

6. Bid Rigging

Coordinating with competitors to artificially inflate bids or allocate contracts. This is both an FCA violation and an antitrust violation under the Sherman Act.

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Qui Tam Provisions: Your Employees Can Sue You

One of the most powerful features of the FCA is the qui tam provision — it allows private individuals ("relators") to file FCA lawsuits on the government's behalf. If the government intervenes and recovers, the relator receives 15–30% of the recovery.

Who brings qui tam suits?

• Current or former employees who witnessed fraud
• Subcontractors who know the prime is billing for unperformed work
• Competitors who have knowledge of fraudulent certifications
• Accountants, auditors, or consultants who discovered fraud during engagements

Whistleblower protection: The FCA specifically protects relators from retaliation. An employer cannot fire, demote, harass, or threaten an employee for reporting FCA violations. Retaliation itself creates additional liability.

Implication for small businesses: If you have disgruntled former employees who know your billing practices, billing inaccuracies, or certification misrepresentations, you have qui tam exposure. This is not hypothetical — qui tam suits regularly target small government contractors.

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Building an FCA-Compliant Operation

Accurate Timekeeping

• Daily timesheets, employee-certified, supervisor-approved
• No estimating, retroactive entries without documented corrections, or bulk entries
• Reconcile labor charges to payroll regularly

Invoice Review Process

• Every invoice must be reviewed by someone not involved in generating the charges
• Verify each line item is supported by underlying documentation
• Certify only what is true

Small Business Status Verification

• Before every proposal or certification, verify current size status under the applicable NAICS code
• Document the verification (pull the SBA table, calculate your revenue, date the analysis)
• If you grow above the size standard, update your certifications and notify the SBA

Cybersecurity Compliance (Post-2024)

• Conduct honest SPRS self-assessments; do not round up
• Maintain a POA&M documenting open items
• Never attest to compliance you cannot demonstrate

Ethics and Compliance Training

• Annual training on FCA requirements for all employees
• A clear "no retaliation" policy for reporting concerns
• A designated ethics hotline or compliance officer

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What to Do If You Discover a Problem

If you discover that your company has submitted false claims — even inadvertently — you face a difficult choice.

Voluntary disclosure: The DOJ and agency inspector generals have programs for voluntary disclosure of FCA violations. Voluntary disclosure can significantly reduce penalties (potentially from treble damages to single damages) and avoid criminal referral.

Do not continue submitting false claims after discovering the error. Each new false claim increases your penalty exposure.

Consult a GovCon attorney immediately before taking any action. The disclosure decision is legally consequential.

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Key Takeaways

• The FCA imposes treble damages plus per-claim penalties — even a small invoicing error, multiplied across monthly invoices, creates massive exposure.
• "Knowingly" includes reckless disregard — you do not need fraudulent intent for FCA liability.
• False small business certifications are actively prosecuted — verify your size status before every certification.
• CMMC/cybersecurity misrepresentation is an active DOJ enforcement area — do not self-attest compliance you cannot support.
• Qui tam suits can be brought by your employees — disgruntled insiders have financial incentive to report billing irregularities.
• Voluntary disclosure reduces penalties — if you discover a problem, consult a GovCon attorney before continuing.

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