Internal Investigations in Government Contracting: Key Risks and Strategic Considerations

Lesley Brovner & Mark Peters
January 21, 2025

Companies that contract with federal, state, or local governments operate in a heightened enforcement environment. When potential misconduct arises in connection with a government procurement contract, the decision to conduct an internal investigation can carry serious legal and business consequences.

Violations involving government contracts may expose contractors to civil penalties, criminal liability, and suspension or debarment from future government work. Understanding when to investigate, when to disclose, and how to respond strategically is critical to protecting both compliance posture and long-term viability.

Why Government Contract Investigations Require Special Care

Government contracts involve public funds and strict regulatory oversight. Issues that might be manageable in a private commercial setting—such as apparent billing discrepancies or documentation errors—can quickly escalate when government agencies are involved.

In addition to financial penalties, contractors face the risk of exclusion from future government contracts, which can disrupt operations, strain credit relationships, and damage reputation.

Common Government Contract Issues That Might Trigger Internal Investigations

Internal investigations often arise from allegations involving what may appear to be:

  • Inaccurate pricing or cost data
  • Improper, duplicative, or false invoicing
  • Failure to meet testing or quality requirements
  • Product or service substitution
  • Improper payments or kickbacks involving subcontractors

Because each invoice or certification may be treated as a separate violation, exposure can increase rapidly if issues are not addressed early.

Federal Laws That Increase Contractor Exposure

False Statements Act

The False Statements Act makes it a crime to knowingly submit or maintain materially false statements or documents within the jurisdiction of the federal government. Liability may arise even if false records are never formally submitted but are kept in files subject to government inspection.

False Claims Act

The False Claims Act (FCA) is a primary enforcement tool in government contracting matters. Civil penalties can include substantial per-claim fines and treble damages, while criminal provisions may apply in more serious cases.

The FCA also allows whistleblowers to bring qui tam lawsuits on behalf of the government, creating additional risk for contractors.

Major Fraud Act

The Major Fraud Act applies to procurement contracts valued at $1 million or more and targets schemes intended to defraud the United States or obtain money through false representations. This statute is frequently implicated in large construction, defense, and infrastructure projects.

Anti-Kickback Enforcement Act

The Anti-Kickback Act prohibits offering, soliciting, or accepting anything of value to obtain favorable treatment in connection with a government contract. Contractors may be held responsible for improper conduct by employees or subcontractors.

The Benefits of Voluntary Disclosure

Government agencies often reward contractors who identify potential misconduct, conduct internal investigations, and voluntarily disclose violations. Strategic disclosure can:

  • Reduce civil and criminal penalties
  • Limit False Claims Act exposure
  • Avoid or mitigate suspension and debarment
  • Prevent or weaken whistleblower lawsuits

Even when disclosure occurs after a government inquiry has begun, cooperation may still result in more favorable outcomes.

Suspension and Debarment Risks for Government Contractors

Suspension and debarment are administrative remedies designed to protect the government from contractors deemed not “presently responsible.” These actions can exclude contractors from government work for months or years.

Agencies consider several mitigating factors, including:

  • Whether the contractor conducted a thorough internal investigation
  • Timely disclosure of misconduct
  • Cooperation with government authorities
  • Disciplinary action against responsible individuals
  • Implementation of remedial compliance measures

A prompt and well-documented response can significantly reduce exclusion risk.

Managing Whistleblower and Qui Tam Exposure

Qui tam lawsuits under the False Claims Act are often filed by current or former employees and initially remain under seal. Voluntary disclosure and early engagement with the government may limit or eliminate exposure to these claims, particularly when the government has already investigated and resolved the matter.

Remediation and Compliance Going Forward

An effective response does not end with disclosure. Contractors must also remediate past issues and strengthen compliance programs to prevent recurrence. Common remedial steps include:

  • Employee discipline or termination
  • Updated internal controls and compliance policies
  • Targeted government-contracting training
  • Enhanced reporting and supervision procedures

Demonstrating a strong culture of compliance is often critical to maintaining eligibility for future government contracts.

How Peters Brovner Assists Government Contractors

Internal investigations involving government contracts require careful legal strategy and regulatory insight. Peters Brovner advises contractors on conducting privileged investigations, evaluating disclosure obligations, managing enforcement risk, and implementing effective compliance solutions.

Early legal guidance can be essential to protecting both immediate interests and long-term contracting opportunities. Contact us today!