U.S.A.: Contractor Strikes Settlement on Accusations of Illegal Profits

Ending a case that has been closely watched by companies involved in federal contracting, one of the Pentagon's largest contractors has agreed to pay the government $2.5 million to settle accusations that it illegally overcharged the Air Force for environmental cleanup work in Texas.

The agreement, by the Science Applications International Corporation, based in San Diego, was announced yesterday by the western Texas office of the Justice Department.

"This is a victory in the ongoing battle against contractor fraud," United States Attorney Johnny Sutton said in statement.

The company was accused, in a whistle-blower lawsuit joined by the government, of intentionally padding its estimated expenses during negotiations, then taking illegally high profits when it completed the work more cheaply.

Experts in contract law say that such techniques are used in varying degrees by many federal contractors and that a government victory in the case will send an important signal to corporations.

Science Applications, known as S.A.I.C., has denied wrongdoing and said yesterday that the case "turned on complex legal issues which were hotly contested."

"S.A.I.C. is pleased that this matter has been resolved," a company spokesman, Ronald M. Zollars, said in an e-mailed statement.

The fraud suit involved work that the company performed at Kelly Air Force Base in San Antonio. The contracts, awarded without competitive bidding, paid the company a negotiated price of $24 million. But the company reaped profits of 30 percent, the Justice Department asserted, when it was legally entitled to profits of 10 percent.

In a suit filed in 2002 under the False Claims Act, Michael D. Woodlee, a former project manager for the company, described a systematic pattern of exaggerating costs. Under that law, whistle-blowers who successfully expose corporate fraud are entitled to a share of any money recovered. Mr. Woodlee will receive $500,000 of the $2.5 million that the company will pay the government, the Justice Department said.

In joining the case in 2004, the department said the company had violated one law that requires federal contractors to provide accurate data during pricing negotiations and to reduce fees if costs prove lower than projected, and another law requiring them to explain their estimating methods fully.

In one example cited by the Justice Department, S.A.I.C., while negotiating a $2 million hazardous-waste project, described to the Air Force a pattern of expenses giving it a profit of 10 percent. Yet internal company documents at the time, government lawyers said, put the "actual profitability" at 23 percent.

The government said company documents showed that four months into the one-year project, the profit had risen to 29 percent. By the end of 2000, when the work was completed, the company found - and did not disclose to the Air Force - that its profit had jumped to 54 percent, the Justice Department said.

Last December the Air Force, which at the time had $513 million in contracts with S.A.I.C., told contract officers to give special scrutiny to the company's cost estimates.

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