In August 2024, Austal USA, a Mobile, Alabama shipbuilder, agreed to pay $811,259 to settle allegations that it supplied the Navy with valves that did not meet military specifications. Under a 2011 Navy contract, the company allegedly invoiced for military-grade butterfly valves that it installed on five Littoral Combat Ship hulls, even though it knew those valves did not qualify as military-grade. Federal investigators described the conduct as product substitution, a form of fraud that wastes taxpayer money and can put servicemembers at risk.
What Product Substitution Means in Defense Contracting
When the government buys goods for the military, it specifies exactly what it is paying for. A contract may require a particular grade of steel, a specific part from an approved manufacturer, a component that is new rather than surplus or refurbished, or materials that meet a specific performance standard. These requirements exist because the equipment must work under conditions that commercial products are not built for.
Product substitution occurs when a contractor delivers something other than what the contract requires and bills the government as if it had complied. Common examples include:
- Using cheaper or lower-grade material than the contract specifies;
- Delivering used, surplus, or refurbished parts as if they were new;
- Installing components from a manufacturer or source that the government has not approved; and
- Swapping in a different part than the one the government reviewed and accepted.
In one example, Indal Technologies paid $3.5 million in 2018 to resolve allegations that it substituted a less expensive type of steel in track plates for the helicopter landing systems on the Navy’s Arleigh Burke class destroyers. The contracts required specific high-strength steel because helicopters may need to land in rough seas and high winds. The government alleged that Indal made the switch without telling the Navy.
Why a Substituted Product Makes an Invoice False
Every time a contractor submits an invoice to the government, it is certifying that it has delivered what the contract requires. Defense contractors often also sign a certificate of conformance stating that the goods meet all contract specifications. When the contractor knows the product does not conform, those certifications are false.
The government does not need to prove that the substituted part failed. It is enough that the contractor knowingly delivered something different from what was promised and that the difference mattered to the government’s decision to pay. In defense contracting, where specifications are tied to safety and performance, that standard is often met. Under the False Claims Act, the government can recover up to three times what it paid, plus civil penalties for each false claim.
There is a legitimate way for contractors to change what they deliver. They can ask the contracting officer for a deviation or waiver. Substitution becomes fraud when the contractor skips that step and conceals the change.
How Contractors Conceal Substitution
Product substitution usually depends on false paperwork. Material certifications may be altered to show a grade that was never used. Parts may be relabeled or repackaged. Receiving and inspection records may be changed so that nonconforming items appear to have passed. In many cases, the pressure to substitute comes from a supplier shortage, a looming delivery deadline, or a contract that is losing money.
Who Is Positioned to Report Product Substitution?
The people who know about substitution are usually the ones who handle the parts or the paperwork. This includes:
- Quality assurance inspectors who are told to accept parts that do not match the specifications;
- Machinists and production workers who see different materials being used than those required by the contracts or drawings;
- Purchasing staff who are directed to buy from unapproved sources to save money or time;
- Engineers who are asked to sign off on changes without a request being submitted to the government; and
- Employees of subcontractors and suppliers who know the parts they ship do not conform.
Speak to a Whistleblower Attorney About Coming Forward
If your employer is delivering goods to the military that do not meet contract requirements, you can step forward as a whistleblower. If the government recovers money from the contractor, you may be entitled to a portion of what it receives as compensation for reporting the misconduct, and your rights as a whistleblower protect you from employer retaliation.
A whistleblower attorney at Keller Grover can help to evaluate your case and protect your rights. Contact our legal team at Keller Grover today to discuss what you have seen.