Mischarging Costs: Another Form of Procurement Fraud

With this week’s topic on the subject of mischarging costs, we’ll continue to explore the different types of procurement fraud that occur in government contracting. Cost mischarging is when a contractor charges the United States government — and, by extension, the taxpayers — for costs which “are not allowable, reasonable, or allocated directly or indirectly to the contract.”

As this important case illustrates yet again, whistleblowers are a critical link in ferreting out procurement fraud and mischarging costs that can, and do, occur in government contracting.

In these schemes, a contractor will purposely charge costs that are not allowed by the contract by hiding them in accounts that are not closely watched by auditors, such as general supplies, or misclassifying them as allowable costs. Another type of mischarging cost scheme is when a government contractor intentionally shifts costs and expenses between different contracts. This is typically seen when the contractor incurs expenses related to a firm fixed priced (FFP) contract but charges those expenses under a time and materials (T&M) contract or other non-FFP contract.

Here’s a quick explanation of how each contract works:

FFP: A firm fixed price contract shifts all of the potential risk to the government contractor. In this type of contract, the government pays an agreed-upon, set price for goods and services regardless of what it costs the contractor to provide. The government agency overseeing the contract is not required to pay for any inefficiencies or delays on the part of the contractor. The FFP contract encourages a contractor to be efficient in its operations in order to make a profit. If the contractor provides the good or service for less than the agreed-upon price, the difference is profit. Conversely, if the government contractor has unnecessary delays or expenses that cause their costs to go over the agreed-upon price, the contractor will bear the loss.

T&M: In a time and materials contract, the government contractor is reimbursed by the government for the time spent and materials used to produce a good or service. As opposed to a FFP contract, the price of a good or service cannot usually be estimated at the time the contract is agreed to. As the government contractor incurs additional costs in executing the contract, they are entitled to reimbursement by the government. T&M contracts do not generally encourage government contractor efficiency and cause the government to bear much more risk than a FFP contract.

In a scheme to increase their profit, government contractors holding both FFP and T&M contracts have a very strong financial incentive to shift costs to assure reimbursement for items for which they’re not entitled to reimbursement. This can be accomplished by the altering of records to shift costs from the FFP to the T&M contract. Another type of scheme involves the government contractor winning a contract by submitting an extremely low bid relative to other contractors’ bids. Upon winning the contract, the government contractor will typically shift costs from the underbid contract to another federal contract. In fact, it’s not unusual to see a government contractor shift costs from a non-federal contract to a federal contract. Yet another scheme that is used by government contractors is the intentional inflation of incurred costs under a T&M contract, which are then submitted to the government for reimbursement. These are especially hard for an investigator to discover and almost always require a whistleblower to bring the information forward.

The following signs often constitute evidence of mischarging costs:

  • Delivery documents show different addresses than the job site as agreed to in the contract.
  • Documents (such as timecards, purchase orders, work orders) are altered.
  • Employees rarely, if ever, take leave or vacation time.
  • There is no variation in start and finish time among laborers. Employees would not generally start and stop at the exact same time as one another every day.
  • Documentation submitted to the government for reimbursement/payment is of poor quality or purposely illegible.
  • Costs that are submitted for reimbursement under a T&M contract are much greater than was estimated in the contract proposal.

These are just a few examples of how a government contractor can scheme to defraud the government and, ultimately, the taxpayer. All of the aforementioned schemes cause the submission of false claims for reimbursement to the U.S. government, which triggers coverage under the False Claims Act.

A Successful Prosecution

How did the government learn of these schemes? A brave whistleblower by the name of Jerry H. Brown II, a former industry insider, came forward and provided the information to his attorneys.

In January 2012, the U.S. Department of Justice settled a False Claims Act case against Maersk Line Limited for $31.9 million to resolve allegations that the company submitted false claims to the government in a mischarging costs case involving the transport of cargo to support our soldiers in Afghanistan and Iraq. In this case Maersk used a variety of mischarging cost schemes, including billing in excess of an agreed upon price, billing excessive late fees, billing for delays that were improperly attributed to the U.S. government, billing for GPS-tracking and security services that either weren’t provided or were only partially provided, and failing to credit the government for rebates Maersk received from a subcontractor that should have been passed on to the government. How did the government learn of these schemes? A brave whistleblower by the name of Jerry H. Brown II, a former industry insider, came forward and provided the information to his attorneys. They, in turn, filed a lawsuit under the qui tam, or whistleblower, provisions of the False Claims Act, which permits an individual or individuals, called “relators,” to bring lawsuits on behalf of the United States and receive a portion of the proceeds of a settlement or judgment awarded against the defendant. For his assistance in helping the government recoup the $31.9 million, Brown received $3.6 million.

As this important case illustrates yet again, whistleblowers are a critical link in ferreting out procurement fraud and mischarging costs that can, and do, occur in government contracting. If you have witnessed any form of government procurement fraud, including fraud in defense contracting or fraud tied to government healthcare programs, coming forward can provide both peace of mind and potential financial rewards. Partnering with our investigative team and attorneys who have significant knowledge of the False Claims Act (including its whistleblower protections and potential rewards) is a necessity in today’s crowded legal environment. Call us today to discuss in greater detail how we can work together to put a stop to cost mischarging by government contractors.

Next week, we’ll examine procurement fraud and how defective pricing and price reductions are used to make false claims against the federal government.