Contractors and Grant Recipients Face False Claims Act Risks in Termination Settlements

Federal Contract Terminations Surge Under Cost Efficiency Initiative, Raising False Claims Act Concerns

A wave of government contract and grant terminations has swept through federal agencies following the U.S. Department of Government Efficiency’s (DOGE) recent cost efficiency initiative. The initiative, outlined in an executive order implementing the President’s efficiency program, has created a complex landscape for contractors and grant recipients who now find themselves scrambling to recover costs and mitigate losses.

The terminations have triggered a substantial increase in settlement proposals and grant closeout packages as affected parties seek reimbursement for work completed prior to termination. However, this process comes with significant legal risks, particularly regarding the False Claims Act (FCA).

The FCA imposes liability on individuals and companies that knowingly submit false claims for government funds. With settlement proposals now flooding federal agencies, contractors face heightened scrutiny and potential penalties if their submissions contain inaccuracies or misrepresentations.

“The stakes are extraordinarily high in these situations,” explains a government contracts expert familiar with the initiative. “What might seem like routine paperwork can quickly escalate into a major legal issue if claims aren’t meticulously documented and verified.”

The government’s enforcement of the FCA remains robust, with recoveries exceeding $2.9 billion in fiscal year 2024 alone. Most concerning for contractors, the vast majority of FCA cases originate from whistleblowers—often current or former employees—who can file qui tam lawsuits on behalf of the government and receive a portion of recovered funds.

Last year saw 979 new FCA cases filed by such whistleblowers, highlighting the importance of internal compliance programs and transparent reporting practices.

When the government terminates contracts for convenience—the primary justification being cited in most recent terminations—contractors are typically entitled to compensation for work performed up to the termination date, along with reasonable costs incurred due to the termination. For fixed-price contracts, the settlement process effectively converts to a cost-type analysis to capture recoverable expenses.

Similarly, grant recipients must close out their grants with the relevant federal agency according to specific regulations and agency supplements when terminated for “no longer effectuating program goals or agency priorities,” as specified in federal regulations like 2 C.F.R. § 200.340(a)(4).

The settlement process itself presents multiple risk areas for FCA liability. Misrepresentation of costs tops the list, as contractors might include unallowable or non-allocable expenses in their proposals. Inaccurate information, inflated claims, and the ever-present threat of whistleblowers create a minefield of potential liabilities.

Industry analysts note that false information in a settlement proposal can result in liability under the FCA’s false statements provision or be considered fraudulent inducement of the resulting modification or termination settlement. Under the Act, damages can be trebled, potentially turning a six-figure settlement into a multi-million-dollar penalty.

“The combination of mass terminations and the government’s budget-conscious stance creates a perfect storm for heightened FCA enforcement,” notes a legal specialist in government procurement. “Contractors need to approach settlement proposals with unprecedented diligence.”

To mitigate these risks, experts recommend several best practices. Accurate recordkeeping forms the foundation, with comprehensive documentation of all costs, work performed, and communications related to the contract. A thorough review process involving legal and financial experts should verify the accuracy of all claims before submission.

Regular training on FCA requirements, engagement with experienced legal counsel, robust internal controls, and clear whistleblower policies are also essential safeguards. By implementing these practices, contractors can reduce their exposure while ensuring their settlement proposals maintain the highest standards of integrity.

The current wave of terminations serves as a reminder of the government’s dual role as both business partner and enforcement authority. As federal agencies continue implementing the cost efficiency initiative, contractors and grant recipients must balance their legitimate recovery efforts with strict compliance to avoid turning a contract termination into a much costlier legal battle.