This definitely happens. It's a legitimate strategy. When the customers come tour your company offices, do you want it to be a tiny little 5-man hole in the wall above a coffee shop in SF? Or do you want an entire floor of a building, with dozens of people drawing things on whiteboards? If the excess headcount will get you the customer, and the contract is worth more than those developers make in a year, then the choice is obvious.
Of course, you have to actually use all of those people, otherwise it's dishonest. And customers aren't wrong is not wanting to work with smaller suppliers. Headcount can be evidence of ability to deliver.
