Cross-charging and improper cost allocation in fixed-price and cost-plus defense contracts are some of the most common types of defense procurement fraud. Whistleblowers can expose cross-charging or improper cost allocation in defense contracts by filing a “qui tam” lawsuit and receive a whistleblower reward, if the government recovers funds as a result of the case.
What is cross-charging?
Cross-charging occurs when a company charges costs of one government contract to another contract as a way to boost profits. In United States defense contracts, cross-charging is when a government contractor charges costs to a “cost-plus” contract that should have been allocated to a “fixed-price” contract instead.
Whistleblowers can bring qui tam lawsuits against defense contractors if they are violating the terms of their government contracts by cross-charging.
In fixed-price contracts, the government and the defense contractor negotiate an agreed-to price for all of the work specified in the contract. The contractor has full responsibility for all costs and whatever profits or losses occur. The company gets paid the same no matter what the final costs are to the company – excluding performance or delivery incentives – unless the contract is renegotiated.
In a cost‑plus contract, the government pays the company for the cost of the work, plus a percentage of those costs as a profit.
When a defense contractor has both a fixed-price and a cost-plus contract with the government, the company may engage in cross-charging by charging time and materials it spends for work on the fixed‑price contract to the cost‑plus contract. By charging time and materials to the cost-plus contract, the contractor fraudulently inflates its profit margin on the fixed-price contract.
Cross-charging can take many forms, including an instruction to employees to write down on their time cards that they worked on the cost‑plus contract when they actually worked on the fixed‑price contract.
What is improper cost allocation?
Improper cost allocation is a more subtle version of the cross‑charging scheme.
If a company has both government contracts and private commercial contracts (like most large aircraft companies do), the company is supposed to allocate its costs fairly among the different jobs. With direct costs, such as time a worker spends building an engine or other part for the aircraft, this is a simple matter. If the part will go into a plane for the government, the cost of building it is charged to the government job.
When the costs are less directly tied to a particular project, such as supervisors’ time, contractors may see an opportunity to increase their profits by improperly allocating the costs to their government contracts. This type of fraud shifts costs to the government, which may pay on a cost‑plus basis, and away from private customers, who simply pay the market price for the aircraft. Such cost‑shifting allows the companies to quote lower prices to their commercial customers (gaining a competitive advantage) without having to absorb the losses for such price cuts. The government, on the other hand, is saddled with higher prices.
Another way improper cost allocation or cross-charging can occur is when a company has both government and private commercial contracts and improperly allocates certain costs shared by both contracts, such as overhead costs, to the government when it has a cost-plus contract.
Companies that deliberately allocate a disproportionate share of “indirect” or “overhead” costs to the government are committing fraud.
Improper cost allocation, a form of cross-charging, can help defense contractors get contracts with private companies by allowing them to lower their bids to get that business without the company suffering any losses from those low bids.
How can whistleblowers report cross-charging and improper cost allocation by defense contractors?
Cross-charging and improper cost allocation are usually hidden from the government, which is why whistleblowers are important.
Defense contractor employees and others who are aware of cross-charging or improper cost allocation in defense contracts may report the fraud by filing a qui tam lawsuit under the False Claims Act.
The False Claims Act empowers individuals to sue entities that are defrauding the government and to recover funds on the government’s behalf. Whistleblowers who bring qui tam cases are entitled to protection against job retaliation and rewards of 15% to 30% of the amount recovered.
The False Claims Act requires the government to investigate whistleblowers’ allegations in qui tam lawsuits and decide whether to intervene in, or join, the whistleblower’s case. If the government decides not pursue the case, whistleblowers may continue litigation on their own.
[Learn more about the False Claims Act, qui tam lawsuits and choosing a whistleblower attorney.]
Phillips & Cohen has a record of successful cases representing whistleblowers in qui tam lawsuits alleging cross-charging and improper cost allocations.
Northrop Grumman paid $111 million to settle a qui tam case filed by Phillips & Cohen that alleged a company it acquired billed the government for work done on non-government contracts.
In a separate case, a whistleblower represented by Phillips & Cohen exposed Louis Berger Group’s alleged practice of billing the government for indirect and overhead costs that were unrelated to its government contracts. Louis Berger, which had some of the biggest US contracts for rebuilding projects in Afghanistan, paid $69.3 million to the government to settle that qui tam case. The settlement was the largest recovery in a case involving war-zone contractors in Afghanistan and Iraq.
WHISTLEBLOWERS LAWYERS FOR DEFENSE CONTRACTOR FRAUD CASES
If you are aware of cross-charging or improper-cost allocation by a defense contractor or any other type of scheme that is cheating the government, you should discuss with experienced whistleblower attorneys your options and how to protect yourself before you blow the whistle. Working with experienced whistleblower counsel increases your chances of success and can help protect you while blowing the whistle. Contact Phillips & Cohen for a free, confidential review.