The False Claims Boomerang

Daewoo Engineering & Construction Company versus United States, 73 Fed. Ct. 547 (2006) involved a claim for excess costs on an Army Corps of Engineers project. A lengthy trial resulted in an award of $50 million against Daewoo for fraud.

Daewoo won a job for, among other things, building a road in a rainy area of the world. The theory of recovery Daewoo presented to the corps was based on the effects of rain. Under the standard weather clause covering “abnormally severe weather conditions,” Daewoo would have lost. Even if abnormal rainfall had been proven, and it was not, the remedy would have been a no-cost time extension. Instead, Daewoo argued that the corps, by including projected rain days in the contract, misled Daewoo about the amount of rain (and the resulting saturated soil).

Then, the case got interesting. After Daewoo presented all of its evidence and was almost assured of a resounding defeat, the government, represented by attorneys from the Department of Justice, asked the court for permission to add a fraud claim against Daewoo. The court permitted it.

During construction, Daewoo submitted a claim for excess costs of $13 million. Based on the then-current conditions, Daewoo added a second part to its claim, another $50 million, as a projection of its final losses. As required by the Contract Disputes Act (CDA), Daewoo certified these claims as truthful to the contracting officer for the corps.

Testimony at trial established that the projected claim was a negotiation ploy. According to Daewoo’s witnesses, the company did not expect to be paid that amount for this part of the claim. Rather, they wanted to get the corps’ attention, so the corps would change the job specifications and performance parameters.

At this point, the court was presented with a large claim (more than $65 million), which had a very shaky legal foundation, and which was admittedly made for horse-trading purposes (a phrase used by the court to describe the “ploy”). And the claim had been “certified” by Daewoo as valid. Could the situation get worse? After certification, Daewoo obtained an expert report from a consultant who found that the claim was overstated by $20 million.

Hammer of the law

The Justice Department raised three significant legal attacks against Daewoo for filing a false claim. Any company facing any of these laws has reason for concern.

There is a claims forfeiture law (28 U.S.C. §2514) for fraud. Anyone who knowingly presents a false claim to the government showing an intention to be paid forfeits its claim. Here, Daewoo won nothing, so there was nothing to forfeit.

Under the Contract Dispute Act (41 U.S.C. § 604), there is a separate fraud provision that covers false or fraudulent statements in a claim that are made with the intent to mislead or deceive. The act also covers false items and false calculations. This statute is aimed, in part, at “horse trading,” which is claims inflated as a negotiation tool.

Third, there is the False Claims Act (31 U.S.C. §3729). This act does not require proof of fraud in the classical sense. It is enough that Daewoo submitted a false claim, even where the government knew it was false, and the government was not misled. Deliberate ignorance of the truth and knowingly using false records are only two of the bases for running afoul of this law.

Daewoo was found to have violated all of these statutes.

A litany of questionable claims

Cases can be lost when a party loses credibility. Once that line is crossed, otherwise innocuous statements become suspect, everyday business decisions carry the taint of bad motives, and attempts at regaining credibility backfire.

These observations do not diminish Daewoo’s wrongs. But other companies and consultants without the devastation that occurred in this case have used tactics and approaches similar to Daewoo’s.

A partial listing of the false claims and frauds found by the court is instructive:

1. The bid proposal listed key personnel who would manage the project. The corps testified that it relied on these people doing the project. Daewoo, however, used very different staffing and appears not to have intended to employ those it said it would.

2. The proposal noted a schedule of two shifts and concurrent work that would improve the schedule. Daewoo never used two shifts and may never have intended to do so.

3. Daewoo represented that it would self-perform many crucial parts of the work, whereas it always planned to use subcontractors instead.

4. Subcontractors listed in Daewoo’s proposal were not employed, and Daewoo used subcontractors who were not listed. The court found the combined effects of No. 1 through 4 were tantamount to a “bait and switch.” This fraud was not eliminated by the corps’ acquiescence to the “switch” after the contract was awarded.

5. Daewoo’s expert used an entirely different approach to calculating damages than Daewoo originally used. Although, by itself, using a new approach does not create a false claim, it underscored the falsity of the original claim, which the expert reduced by $20 million.

6. Daewoo did not recertify its claims after the expert had reduced them. By itself, failure to recertify may not have been an error, but the court said Daewoo presented a different, repriced claim, and Daewoo distanced itself entirely from its original claim. The attorneys for Daewoo argued, unsuccessfully, that failure to amend the complaint was unnecessary and, at most, a procedural error.

7. Daewoo used a unit cost rate to calculate the effects of lost productivity, but that rate was not based on Daewoo’s actual costs.

8. Daewoo reinvented its planned production rate. Its proposal projected 1,800 cubic meters per day (900 per shift, two shifts). As only one shift was used, the planned quantities number was unworkable for the claim. The consultant devised a new number, which the court found was of questionable validity.

9. The projected future losses were not based on actual cost records, and the consultant was not given access to, and apparently did not ask for, the actual cost records.

10. Daewoo used published rates for equipment usage, not actual costs, although those records existed. Some of the equipment in the claim did not exist, as it had been scrapped.

11. The claims did not take into account delays and losses caused by Daewoo’s subcontractors, delays which Daewoo had documented in correspondence with those subcontractors.

Underlying these individual examples of fraud was the court’s finding that the whole legal theory of rain delay was a sham that no witness could support. The death knell was the negotiation ploy purpose of the inflated claim.

A cautionary tale

Only a reading of the entire opinion of the court can show where the witnesses, individually and collectively, lost credibility, even without any findings of perjury. For that purpose alone, the effort is worthwhile.

Of equal significance are what types of claims can be characterized as false or fraudulent and what a weak legal theory can do to color how the claims are perceived by a judge. EC

ITTIG, of Ittig & Ittig, P.C., in Washington, D.C., specializes in construction law. He can be contacted at 202.387.5508, or


About the Author

Gerard W. Ittig

Legal Columnist
Gerard Ittig, of Ittig & Ittig, P.C., in Washington, D.C., specializes in construction law. He can be contacted at 202.387.5508, or .

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