The U.S. Court of Appeals for the Federal Circuit recently affirmed a U.S. Court of Federal Claims assessment of more than $50 million in penalties and forfeiture of claims against a government contractor for violation of the certification provision of the Contracts Disputes Act and the False Claims Act. The case highlights the harsh penalties contractors can face if all claims to the government are not submitted in good faith, or if overestimated claims are used as negotiating tactics.

In 1998, the U.S. Army Corps of Engineers solicited bids for the construction of a 53-mile road in Babeldaob in the Republic of Palau and estimated the cost of construction to be between $100 million and $250 million, and required completion within 1,080 days. Daewoo Engineering and Construction Co., Ltd. submitted a $73 million bid, $27 million lower than the next-lowest bid. After the government questioned the bid, Daewoo revised it to $88.6 million and was awarded the contract.

Daewoo encountered delays in construction, and attributed them to rainy weather and moist soil. Daewoo convinced the government to reduce the amount of required soil compaction. It then submitted a certified claim under the Contract Disputes Act for an adjustment of the contract price and performance time, alleging defective specifications and breach of duties to cooperate and disclose superior knowledge. Daewoo sought approximately $13.3 million in additional costs incurred and $50.6 million in projected costs for a total of $64 million. The request was eventually denied, and Daewoo filed a complaint with the U.S. Court of Federal Claims for the money. The government counterclaimed and sought $64 million under the Contract Disputes Act and $10,000 under the False Claims Act. Daewoo Eng’g & Constr. Co. v. United States, 73 Fed. Cl. 547 (2006).

The Court of Federal Claims found— and the U.S. Court of Appeals for the Federal Circuit upheld its decision—that Daewoo’s $64 million claim with the government was filed in bad faith, with the expectation of using the $50.6 million projected costs portion as a “negotiating ploy.” The courts reviewed the base calculations and methodologies underlying Daewoo’s claim, and found that the claim was based on erroneous assumptions, such as the assumption that the government was responsible for then-current daily expenditure costs, and also did not consider basic facts such as what portion of the expected delays were the fault of the government. The Court of Federal Claims further found, “Whether Daweoo wanted the money or wanted the government’s attention, $64 million was not the amount the government owed the plaintiff at the time of certification, and plaintiff knew it.” Id.

The courts then assessed Daewoo a penalty equal to the fraudulent claim—$50.6 million—for violating the fraud provisions of the Contracts Disputes Act, plus a statutory $10,000 penalty for violating the False Claims Act. Daewoo’s certification of the $64 million claim was a certification that it was made in good faith. However, because its claim was baseless, the court found, the claim was fraudulent. The courts further found that Daewoo’s entire $64 million claim was forfeited under 28 U.S.C. § 2514 (Forfeiture of False Claims), despite the fact that a $13.3 million portion of the claim was not fraudulent. The penalties assessed to Daewoo amounted to approximately 57 percent of the total contract award, not including the forfeited $13.3 million of costs incurred.

The decisions in Daewoo highlight the dangers of submitting claims to the government that are not well-calculated or that are over-cost with the expectation of negotiating the claim to reach a settlement for a lesser amount. Contractors should remember that claims are certified and must be made in “good faith.” Convincing explanations for the basis and underlying assumptions used when calculating a claim should be available. Contractors should be aware that when a claim is found to be fraudulent, even good faith portions can be forfeited. Daewoo demonstrates the danger of relying on claims negotiations during a contract to cover costs—over-estimating costs could lead to losing all claims and facing severe penalties.