Contractors beware: the U.S. Postal Service Office of Inspector General (OIG) thinks that $1 out of every $20 spent by USPS on its contractors is fraudulent, and OIG is itching to find it. According to a July 18, 2011 OIG blog article, “conservative business estimates project up to 5 percent of contracted dollars are lost to fraud, meaning $1.45 billion of Postal Service funds are potentially at risk.” While these numbers are fanciful, there is no doubt that the OIG is taking this seriously. Read on for more details.

The OIG article notes that “[d]etecting, stopping, and preventing fraud is a core mission” and its Major Fraud Investigations Division is ramping up efforts to do just that. But will it find much?  And is there really that much to find?

Government projections of fraud under government contracts are regularly overblown. For example, in a previous blog article, Brian Waagner examined the federal government’s report that it collected over $3 billion in judgments and settlements in False Claims Act cases resolved through the end of Fiscal Year 2010. He found that 83% of these cases involved health care fraud, not traditional government contracts. Fraud cases involving the Department of Defense represented a puny 8 percent of the total announced recovery:  $261 million. While that’s a big number, it’s tiny when put it in the context of nearly $700 billion in annual DoD spending.

The nasty little secret in False Claims Act (FCA) cases is that too many of them, when reduced to their merits, are simply contract disputes. Based on your author’s experience, there are relatively few FCA cases these days where a contractor is alleged to have intentionally falsified documents or concocted fabrications for purposes of cheating the government. Most FCA cases settle because they have to — the government has tremendous leverage and contractors have too much to lose. Government overreaching is the norm.

Of course, contract fraud is bad, and it should be investigated and prosecuted when it occurs. But it doesn’t really happen all that much, particularly under Postal Service contracts. There is nothing that suggests that the amount of fraud under USPS contracts is even in the universe of OIG’s alleged 5% of contract spending. Given aggressive USPS cost-cutting and contractor givebacks, you would be hard-pressed to find 5% of profit under USPS contracts — let alone fraud.

But perception frequently overpowers reality, and beefed up fraud investigation staffs are incentivized to find fraud — regardless of whether it actually exists. So postal contractors should not be surprised if they find themselves the subject of a fraud investigation over an issue that turns out to be a contract dispute.