The U.S. Department of Justice announced on Friday that the Boeing Company (“Boeing”) has agreed to pay $23 million to the federal government to settle allegations made by a number of relators that the aerospace and defense industry giant submitted false claims for labor charges in connection with its contracts with the U.S. Air Force to maintain, repair, and modify the C-17 Globemaster aircraft. Boeing is the world’s largest combined manufacturer of commercial jetliners and military aircraft and the world’s second largest defense company. The C-17 Globemaster aircraft, which is both manufactured and maintained by Boeing, is one of the military’s major systems for transporting troops and cargo throughout the world. The whistleblowers will collectively receive $3.9 million for their role in the litigation. The settlement came as a result of the unsealing of the complaint and the government’s election to intervene in the case.
The complaint was filed in 2007 by several experienced aircraft mechanics and technicians working at Boeing Support Systems – San Antonio. At that location, a significant percentage of work is devoted to U.S. Air Force programs. Before work on an aircraft covered by one of the contracts can proceed, the government contracting officer responsible for administering the contract sends a Letter of Authority to Boeing. The letter authorizes an estimated amount of funding and defines the scope of the work. Most of the work is pre-funded and can therefore begin as soon as the aircraft arrives for service. Planned aircraft work is typically paid for under a firm-fixed price contract or an incentive contract. Alternatively, work labeled “Over-and-Above” or “RED-X” refers to unplanned work discovered in the course of performing planned work. The government anticipates that 25% of the total labor hours on an aircraft will be for RED-X work and often plans accordingly. RED-X work is paid by the government on the under a times and materials contract providing for the acquisition of supplies and services on the basis of direct labor hours at specified fixed hourly rates (that include wages, overhead, administrative expenses, and a profit) and the actual cost of materials. But because a times and materials contract can fail to incentivize the contractor to control costs or maximize labor efficiency, such contracts are often limited to circumstances where it is not possible to accurately estimate the extent or duration of the work or to reasonably anticipate costs. Although Boeing internally manages the costs and charges imputed to the performance of work on each task, the costs and charges of all tasks are reported to the government in the aggregate for each aircraft.
The qui tam complaint specifically alleged that Boeing has taken advantage of the differing contract structures to systematically misrepresent costs and charges incurred as RED-X work when they were in fact the costs and charges incurred as part of planned work. This cost shifting allegedly allowed Boeing to maximize its profits by avoiding the risk of bearing unanticipated costs on planned work performed pursuant to a firm-fixed price contract or an incentive contract. It also allegedly allowed the company to meet or exceed cost targets on which incentive fees and awards are based. The complaint details several e-mails from a senior manager stating, for example, “We ALL know this is what is happening and someday somewhere somebody will have to answer to an auditor for it…!” Another e-mail from a project manager indicated that he had “long suspected that we have been negligent in our labor accounting responsibilities” and warned that “many of these infractions could not be justified during a DCAA audit, which means they could be deemed ILLEGAL.” Employees were also allegedly instructed to charge time to aircraft tasks when they were engaged in off-aircraft activities such as medical visits or human resource visits.
Boeing employs over 150,000 people in 48 states of the U.S. and across 67 countries. Boeing is party to many contracts with the federal government, including all branches of the U.S. military, NASA, and the Department of Homeland Security. Boeing and its subsidiaries are organized based on the products and services that they offer and operate in six principal segments: Boeing Capital Corporation, Commercial Airplanes, and four segments comprising its Integrated Defense System (“IDS”) business; Aircraft and Weapon Systems, Network Systems, Support Systems, and Launch and Orbital Systems. Boeing’s IDS business is responsible for the development, modification, production, research, and support of aerospace and defense products and their related systems and services. IDS’s primary customer is the U.S. Department of Defense (“DOD”)—at times accounting for over 90% of the revenue received by IDS.