Defense Progress-Payment Fraud: Getting Paid Too Soon, Keeping It Too Long

Defense contractor progress payment fraud uses false financing claims to obtain government money before it is due or keep earlier financing from being properly cleared at delivery. The government can release money while the contractor is still doing the work. If you work in accounting, purchasing or contract administration, you may see the cost calculation, supplier payment or delivery record that contradicts the request. The finished product is only part of this story. When the money moved matters too. The advance payment went toward other obligations in NP Precision: Army Money for Other Bills.

A whistleblower case under the False Claims Act can pay 15% to 30% of what the government recovers. We work with insiders to connect the financing request, the underlying records and the decisions that put government money into the contractor’s hands.

What a Cost-Based Progress Payment Represents

Cost-based progress payments finance work before delivery and acceptance. Under the Federal Acquisition Regulation’s progress-payment clause, the calculation rests on eligible incurred costs and qualifying subcontract financing, less previous payments.

The financing rate applies to the eligible base. The contract also limits costs, payments, property and the balance of earlier financing still outstanding. A cost included in the books, a payment made to a supplier and a cost eligible for financing each answer a different part of the request.

Contract terms matter down to the particular award. Defense financing changes have treated new awards differently from previously awarded contracts, so the same business can have contracts with different financing rates. We connect the requested amount to that contract’s financing terms and changes, alongside the records supporting the cost base. That is where a finance employee’s knowledge of how the calculation changed becomes useful.

What Does SF 1443 Tell the Government?

SF 1443 tells the government which costs support a progress-payment request and certifies the conditions behind it. Its October 2023 revision requires certifications reaching into the books, the work, payments, title, financial condition, first-article limitations and unliquidated balances. A person signing the request is making representations that reach well beyond the number at the bottom.

Those records can sit with different people. Purchasing may know the supplier transaction, accounting may know the payment history, and the property team may know who holds rights in the goods. The request brings those facts together into a representation that releases government cash.

We connect a cost concern to the request or certification that put it before the government. That may be SF 1443 during the work or the final indirect-cost certification at final settlement.

Earlier Financing Has to Come Off the Delivery Payment

A defense progress payment liquidation rate manipulated in the contractor’s favor can leave less of the earlier financing cleared at delivery. The liquidation rate determines how much the government withholds from the delivery payment to repay those progress payments. The unliquidated balance is the financing still outstanding. We follow both the request that released the cash and the later calculation that was supposed to credit it back.

Titan IV and the Cost of Premature Payments

Lockheed Martin Space Systems agreed to a $10.5 million civil settlement over allegations that it obtained progress payments it was not entitled to receive on the Titan IV space launch vehicle program. The Justice Department’s May 2008 announcement described the settlement as approximately double the interest Lockheed would have received from holding the premature payments. We’d call that the price of a loan the government never agreed to make.

The Justice Department described two ways the billings allegedly produced excess financing. First, the government alleged that Lockheed changed its method for calculating the cost of delivered items on progress-payment requests without notifying the government. The government alleged that this produced excessive progress payments from October 1998 through December 2001.

Second, an August 2000 invoice allegedly claimed that lowering the contract’s liquidation rate entitled Lockheed to millions of dollars in extra progress payments. The rate governed how much the government would withhold upon delivery to repay the financing already provided. The government alleged that the claimed adjustment was improper. A changed rate on an invoice could move cash just as surely as a changed cost figure.

An October 2004 Defense Contract Audit Agency audit preceded Lockheed’s internal audit and disclosure that it should not have requested certain payments. The U.S. Attorney’s Office in Los Angeles coordinated the investigation, with agents and auditors from the Air Force Office of Special Investigations and the Defense Contract Audit Agency.

We see a basic unfairness in the alleged arrangement: taxpayers finance the work, then a billing change gives the contractor more of their money sooner. The cost-method change and the liquidation-rate adjustment put that advantage inside the payment calculation.

NP Precision and Unearned Army Progress Payments

In his guilty plea, the owner of NP Precision admitted diverting unearned progress payments on two Army contracts for Chinook helicopter couplings. For someone who sees the contract ledger and the movement of cash, that is the connection we examine: what the government financed and where its money went.

Performance-Based Financing Depends on the Event

Performance-based financing pays against defined, verifiable events or performance criteria. The performance-based-payment rules require more than signing the contract or letting time pass. When an event depends on earlier events, those prerequisites must be completed too.

The payment request therefore turns on the event the contract identifies and the records showing it occurred. Engineering or production staff may understand that event more directly than the person preparing the request. We connect what they saw to the event description and the financing claimed for it.

Under the performance-based-payment clause, an authorized official also certifies the request’s accuracy, supplier and subcontractor payment status, property encumbrances, financial condition and payment limits. Encumbrances concern other claims against the property. These conditions connect the request to the supplier ledger and the property records as well as the work itself.

Paying for an event does not mean the government accepted the work, and it can still check the performance and records. For this financing method, we follow the promised event, the supporting records and the official’s certification through to the payment.

What Evidence Is Needed to Prove Fraud?

For progress-payment fraud, the useful evidence connects what the contractor claimed to the cost, payment, property or delivery record that contradicts it. The financing terms explain what the request had to represent. The underlying records show what happened, while instructions and changes to the calculation can show who understood the difference.

The supplier’s part of that story deserves attention. Qualifying subcontract financing can enter the prime’s cost-based request, and supplier-payment status is part of the performance-based certification. A subcontract administrator may know what was requested and paid downstream while government billing sees only the amount carried into the prime’s request. We bring those parts of the transaction together.

Transparency International Defence and Security addressed that visibility problem in its 2022 report, Hidden Costs: US Private Military and Security Companies and the Risks of Corruption and Conflict. It recommended reporting subcontractors, their ownership and the itemized value of subcontracted services with invoices:

The connection to a financing inquiry is practical: the prime’s request is easier to understand when the supplier, the work and the payment are visible together. Your knowledge of that downstream transaction can explain a contradiction the government-facing total conceals.

When You Know Why the Payment Was Wrong

If you know why a financing request outran the eligible costs, misstated supplier payments or left earlier financing uncleared, talk with our whistleblower experts about the payment you saw. We work beside you to build the case around the request, the money and the people who chose the calculation. We bring in defense contractor whistleblower lawyers who understand contract financing and stay with you through the process.