Government Contracts and Cross-Charging
Fraud against the government is ever-changing and, it seems, ever-increasing, especially in the rather specialized areas that involve accounting frauds. One corner of accounting fraud that is frequently exploited is the problem of cross-charging. While cross-charging sometimes requires a partner, it is not necessarily a complicated scam to execute and the fraud can be challenging for an outside auditor to detect. Cross-charging is often a violation of the False Claims Act. When the fraud is not discovered by outside auditors, it needs to be found by whistleblowers, as the government has a limited number of investigators.
What is Cross-Charging?
Cross-charging is one of many kinds of government procurement fraud, and is often seen in defense contractor fraud. Briefly, cross-charging, also called commingling (or “co-mingling”) of contracts, involves illegally charging for something more than once by employing more than one contract as a reference. Contractors commit fraud by submitting more than one invoice, using different contracts or work orders, for any work accomplished or expense incurred.
Thus the government is falsely billed.
For the fraud scheme to function properly, often another person helps by creating fake but similar work orders under the various contracts so that multiple invoices can be seen as acceptable. This person then shares in the profits for taking the risk.
Understanding Government Contracts
To fully understand cross-charging, it helps to know a little about government contracts. Our federal government usually awards one of two basic varieties of contracts:
- Fixed-price: The contractor gets paid set amounts for services or products, regardless of what these items cost the contractor.
- Cost-plus: The contractor gets paid whatever the services or products cost, plus a certain percentage of the costs to cover the contractor’s overhead and profit.
When a contractor has secured both types of contracts, the temptation can be strong to shift services and products from the fixed-price contract to the cost-plus contract. Other records, such as time cards, may need to be falsified so that the contracts match supporting documentation.
As noted, sometimes doing these tasks requires the assistance of another person.
Another kind of cross-charging occurs when the contractor has both government and private contracts. The contractor may improperly allocate the overhead costs between the contracts so that the government pays more than it should for such costs, even while properly charging the actual costs of the service performed to the government.
An example of cross-charging could be a situation in which a contractor has both government and private cost-plus contracts that are similar or related. Say, the contractor’s employee creates a piece of software for one of our armed services. The time the employee spends working on the software may need to be properly allocated, depending on the situation, between the private contract and the government contract. However, if overhead costs are shifted, or cross-charged, from the private contract to the government contract, then the government is overpaying, and this situation could result in a violation of the False Claims Act.
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Detecting Cross-Charging and Contract Commingling
Often someone on the inside, if they know what to look for, can spot these frauds. The following indicators can be red flags that cross-charging/commingling of contracts is possible, likely, or has occurred:
- The contractor receives a number of contract awards for similar services, especially if the contracts cover the same time periods.
- The contractor turns in bills for similar services or products under different contracts.
- The contractor turns in similar supporting documentation for different contracts.
- The contractor receives similar work orders under multiple contracts.
- The contractor has both fixed-price and cost-plus contracts, with the fixed-price costs set unusually low, while the cost-plus costs exceed expectations or budgets.
- Numerous errors on invoices and supporting documents which often need to be corrected.
- The contractor invoices the same employee over the same time period to more than one job.
FCA Cases Involving Cross-Charging
Cross-charging is not always specified explicitly in the Department of Justice’s press releases for False Claims Act government procurement cases.
However, two past cases are noteworthy:
- In a whistleblower case, Northrop Grumman agreed to settle for $111.2 million. It was alleged that TRW, Inc., which had been recently acquired by Northrop Grumman, had inflated invoices it submitted under government contracts. The whistleblower received $27.2 million.
- Parker Hannifin Corporation agreed to settle a False Claims Act case for $7.8 million, resolving allegations that it had improperly allocated charges to government contracts.
What Does This Have to Do with Me?
If your job involves the examination of government contracts and supporting documentation, or you regularly handle such contracts, you are in a unique position to detect fraud and blow the whistle. Whether you are on the inside, perhaps in an accounting job, or you work as an outside auditor or in a similar capacity, you could well have an opportunity to gather evidence and file a qui tam suit under the provisions of the False Claims Act.