Sikorsky and Derco: The Price Inside the Navy’s Parts Invoice

The Sikorsky Derco Navy parts settlement required Sikorsky Support Services and Derco Aerospace to pay $70 million to resolve allegations that they concealed an affiliate’s 32% markup on vendor costs inside Navy reimbursement claims. The parts supported aircraft used to train naval aviators. A former Derco employee brought the qui tam whistleblower case, and the government joined it. For someone in purchasing or intercompany accounting, the question is familiar: whose cost does the invoice actually show?

The Justice Department announced the settlement on June 21, 2024. The court had already ruled that the subcontract’s pricing arrangement violated the prohibition on cost-plus-percentage-of-cost contracting and the Navy prime contracts. The settlement resolved the government’s further allegations that the companies knowingly submitted false vouchers without disclosing that arrangement.

How the Affiliate’s Price Reached the Navy

Sikorsky Support Services, called SSSI in the case documents, bought parts from Derco and sought Navy reimbursement for the amount it paid. The alleged affiliated-subcontractor markup entered the bill between the original vendor’s price and Derco’s invoice to SSSI. The government alleged that Derco calculated its price by adding a fixed percentage to what its vendors charged.

The settlement agreement describes the work behind those invoices. The Navy awarded SSSI a logistics support contract in 2006 and a bridge contract in 2011, both covering maintenance, logistics and parts for training aircraft. SSSI subcontracted with Derco under both contracts. The settlement covered alleged conduct from 2006 through 2012. During that period, both companies belonged to the United Technologies corporate family.

According to the whistleblower’s amended complaint, vendors shipped parts directly to naval training locations while sending their invoices to Derco. Derco then invoiced SSSI. The physical shipment and the billing path went different ways: a part could reach the Navy directly while its price passed through Derco and SSSI.

The complaint alleged that Derco supplied IFS billing software and monthly invoices covering hundreds of T-34 and T-44 replacement parts, repairs and materials. SSSI allegedly added another 2.75% to 5% in indirect costs and burdens, depending on the contract year, before submitting hundreds of monthly line items to the Defense Finance and Accounting Service. That additional charge rested on an amount already carrying the alleged affiliate markup.

The whistleblower’s complaint also challenged Derco’s accounting disclosures. It alleged a direct contradiction between the company’s certified accounting practices and the invoices:

Deleting the Markup From the Subcontract

The government alleged that the companies removed the markup from the subcontract’s wording while keeping it in their pricing. Its own complaint, filed when it joined the case described a version signed on August 30, 2006 and a second version signed the next day. The second deleted the reference to the percentage added to vendor costs. According to the government, the companies still knew they had agreed on no firm fixed prices.

We find the contrast telling: rewriting the price description allegedly left the price calculation intact. The government’s account points to a deliberate choice about what the agreement would reveal to someone reading it.

The government also alleged that a Derco employee questioned the plan’s legality and that an executive acknowledged the proposal would not comply with the solicitation. Those alleged discussions connect management’s understanding to the later payment requests. An insider who knows why wording changed may hold a different part of the case from the accountant who sees the resulting charge.

What the Court Ruled About CPPC Pricing

The district court ruled that Derco’s markup violated the federal prohibition on cost-plus-percentage-of-cost contracting, often called CPPC, and the terms of SSSI’s Navy contracts. The Justice Department’s settlement announcement explains the incentive behind the prohibition: a percentage tied to cost rewards a supplier as government costs rise.

The False Claims Act allegations concerned what the companies told the Navy when seeking reimbursement. The government alleged that they knowingly presented false vouchers by concealing that the claimed costs came from the prohibited subcontract.

What the Settlement Provided for the Whistleblower

The agreement allocated about $14 million to the relator, the party who brought the whistleblower case. It directs that payment after the United States receives the settlement money. A whistleblower case under the False Claims Act can pay 15% to 30% of what the government recovers.

What the Accounting Records Can Reveal

The alleged invoice problem carried into annual cost certifications. The government alleged that SSSI’s final indirect-cost certifications included costs from the prohibited subcontract. Alongside the whistleblower’s account of Derco’s Disclosure Statement, that allegation connects the billing formula to what both companies represented about their costs.

That is why evidence of defense contractor fraud can sit in records created for different purposes. A vendor invoice supplies the starting price. A subcontract explains the next charge, and billing-system output shows how the company presented it. The voucher and final cost certification connect those decisions to money requested from the government. Together, those records let us examine the calculation and the account of it given outside the company.

The underlying industry rule is practical: reimbursed costs need support showing that they were incurred, belonged to the contract and met its terms. An accounting entry can accurately show what SSSI paid Derco while leaving the makeup of Derco’s price out of view. Here, that hidden makeup was the heart of the government’s allegation.

Transparency International Defence and Security addressed that visibility problem in its 2022 report Hidden Costs: US Private Military and Security Companies and the Risks of Corruption and Conflict. It recommended that prime contractors report subcontractors, their ownership and the itemized value of subcontracted services when submitting invoices. For someone who knows the Navy parts billing, those are two separate things to see: who owns the supplier and what sits inside its price. A total on the prime contractor’s bill leaves those separate questions unanswered.

Sikorsky’s separate Black Hawk spare-parts settlement involved another way supplier prices could disappear from the government’s view. There, the government alleged that Sikorsky withheld lower available parts prices during price negotiations. In the Navy matter, the alleged concealment concerned a percentage added before reimbursement.

If you work with intercompany billing, you may recognize the subcontract language, the software output or the accounting certification. We bring that knowledge of the business into building your whistleblower case.

You Know How the Invoice Was Built

If you can see an affiliate’s profit inside a charge presented as supplier cost, speak to one of our Whistleblower Experts about how that invoice was built. We work beside you to build your strongest whistleblower case and bring in defense contractor fraud whistleblower lawyers who understand intercompany pricing and Navy reimbursement. We stay beside you from the first conversation through the case.