Is It Fraud? BACKGROUND Paul was a project management consultant and often helpe

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Is It Fraud? BACKGROUND Paul was a project management consultant and often helped the Judge Advocate General's office (JAG) by acting as an expert witness in lawsuits ied by the U.S. government against defense e by the contractors, this lawsuit was different; it was based upon supposedly superior performance contractors. While most lawsuits were based upon unacceptable p MEETING WITH COLONEL JENSEN Paul sat in the office of Army colonel Jensen listening to the colonel's description of the history behind this contract. Colonel Jensen stated: We have been working with the Welton Company for almost ten years. This contract was one of several contracts we have had with them over the years. It was a one year contract to produce 1500o units for the Department of the Navy. Welton told us during contract negotiations that they needed two quarters to develop their manufacturing plans and conduct procurement. They would then ship the Navy 750 units at the end of the third quarter and the remaining 750 units at the end of the fourth quarter. On some other contracts, manufacturing planning and procurement was done in less than one quarter. On other contracts similar to this one, the Navy would negotiate a firm-fixed-price contract because the risk to both the buyer and seller was quite low. The government's proposal stateent of work also slaled thal this would be a firm-lixed-price contrac. But during final contract negolialions, Wellon became adamant in wanting this contract lo be an incenlive-lype contract with a bonus for coming in under budget and/or ahead of schedule. We were somewhat perplexed about why they wanted an incentive contract. Current economic conditions in the United States were poor during the time we did the bidding and companies like Welton were struggling to get government contracts and keep their people employed. Under these conditions, we believed that they would want to take as long as possible to finish the contract just to keep their people working. Their request for an incentive contract made no sense to us, but we reluctantly agreed to it. We often change the type of contract based on special circumstances. We issued a fixed-price-incentive-fee contract with a special incentive clause for a large bonus should they finish the work early and ship all 1,500 units to the Navy. The target cost for the contract, including S1o million in procurement, was $35 million with a sharing ratio of 90%-10% and a profit target of $4 million. The point of total assumption was at a contract price of $43.5 million.

Explanation / Answer

The proposal that was obtained by Paul provided supporting evidence that Welton manipulated the contract in their favour.welton emphasized that they have done projects for navy before also.biut the main thing to notice here is that they took 6 months to develop their manufacturing and procurement plans, but on other plans these were done in just 3 months. Welton was adamant about changing the contract type. Welton took advantage of the incentive-based contract by spending an additional $5 million in labor to complete the contract one quarter ahead of schedule. The early delivery earned Welton a $6 million bonus. There is much evidence for the Navy to recover part of the incentive bonus but they are unlikely. There were times when they could have questioned welt on such as why they were spending twice the time to develop their manufacturing plans. Navy should have monitored their expense reports and purchase orders. Welton knowingly completed the work in less time to qualify for the bonus. Welton would have to prove in court why they estimated that this project would take so much longer than the other, similar projects they had previously completed. Also welton has started overcharging labor cost. The Navy needs to prove that Walton used defective pricing strategies in order to increase their profits

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