Cost Mischarging: Moving Commercial Work and Overruns Onto Defense Contracts

Defense contractor cost mischarging puts an expense on a government contract that should not bear it. The crew may have worked the hours and the company bought the materials and paid the supplier. Cross-charging puts that real work on the wrong job’s bill. If you know which customer the work served and which charge number it ended up under, you may know the part of the story the government’s bill leaves out. The same costs could be billed twice or moved past a contract limit in Navmar Applied Sciences: Navy Costs Billed Twice or Shifted Past Ceilings and L3 Technologies: Double Charging on ROVER and VORTEX.

What Makes a Cost Belong to a Defense Contract?

A cost belongs to a contract through the work it benefits and the contract’s payment terms. The government’s cost-allocation rule connects an expense to that benefit or another fair relationship. An invoice proving the company bought something answers one question. The job assignment, work records and charge history answer who should pay for it. Defective pricing instead concerns the facts used to negotiate the price.

The incentive to move a cost follows the contract. Under firm-fixed-price terms, the contractor bears the profit or loss from its actual costs. Cost reimbursement pays allowable incurred costs within the contract’s authorization and ceilings. Moving an expense from fixed-price work into reimbursable work can move its burden from the contractor to taxpayers.

The destination still matters. A cost-plus-fixed-fee contract pays allowable costs and a fee fixed at the outset. A time-and-materials contract pays qualifying labor hours at fixed category rates. Those hourly rates include overhead and profit.

Fixed-Price Contract Labor Shifted to a Navy Cost-Plus Contract

Fixed-price contract labor shifted to a Navy cost-plus contract was the central allegation against AEPTEC Microsystems, doing business as 3e Technologies. The Justice Department alleged that hours spent on commercial work and other government fixed-price work were charged to four Navy cost-plus-fixed-fee contracts. Those Navy contracts covered shipboard wireless monitoring and food-service automation.

AEPTEC agreed to pay $1,662,500 in a settlement announced in April 2006. The alleged shift moved the cost of serving other customers onto the Navy’s bill. We see the unfairness in the government’s account: taxpayers were being asked to fund work bought by someone else.

For the employee who knows the original assignment, the time entry carries more information than an hour count. It identifies whose work the employee performed and which account absorbed it. Connecting that assignment to the charge and the Navy payment request is how we examine the alleged transfer. The work can be real while the billing tells a different story about its customer.

Costs Moved to Avoid a Funding Ceiling or Charged Twice

A cost transfer to avoid a defense contract funding ceiling moves an expense away from the job whose limit would otherwise constrain payment. The Justice Department alleged that Navmar Applied Sciences double charged costs and transferred them between Navy contracts, including to avoid contract ceilings. Its $4.4 million civil settlement in September 2023 resolved allegations covering 2010 through 2012.

For an accountant or program manager, the original job, its funding limit and the destination contract belong in the same comparison. A transfer journal may explain when the expense changed accounts, while the work record explains why it belonged to the original job. The approval and resulting voucher connect the accounting decision to the amount sought from the government.

Materials Can Move With the Charge

For an insider tracing defense contractor material costs billed on two contracts, the question is which charges refer back to the same materials. Purchase records, contract assignments and transfer entries can connect that history to the government bills.

A whistleblower’s complaint against Raytheon described excess materials moving between contracts to change their reported costs and earnings. Its allegation puts the accounting purpose directly:

The complaint pointed to estimates at completion identifying excess materials and transfers to other contracts. That gives a program-finance insider a concrete comparison: the material history, the estimate and the contract that ultimately carried the cost. We follow those connections to understand both where a cost moved and whether the government was charged for it again.

Fixed-Price Supervisory Hours Billed as Time and Materials

Fixed-price supervisory hours billed as time and materials on Navy work were the issue in the Fairbanks Morse Engine case. The government alleged that supervisory hours included in a fixed-price engine-repair subcontract for USS Ashland were shifted to a separate time-and-materials subcontract on the same ship. The vessel stayed the same. The agreement carrying the hours changed.

Fairbanks Morse agreed to an additional $142,500 civil settlement in August 2016. According to the Justice Department’s announcement, the company had already disclosed the billing, corrected it and repaid the government. The additional payment resolved the False Claims Act allegations over that allocation.

This is why the subcontract and its scope belong beside the supervisor’s time record. In the government’s account, the fixed-price agreement already covered those supervisory hours, while the time-and-materials agreement supplied a separate way to bill them. Someone reviewing only the ship name would miss the distinction that made the charge matter.

What Are the Red Flags in Procurement Fraud?

For cost mischarging, red flags include work charged to a different job, transfers around a funding ceiling and charge numbers that conceal hours above an incentive target. Military contract overruns moved to another charge number can disappear from the report used to calculate payment. The useful comparison is between what the crew did and what the billing records say it did.

In a complaint against Huntington Ingalls Industries, a former employee alleged that a supervisor directed a crew’s hours onto a destroyer’s hull number even though the crew was working on a different Navy ship. The complaint described daily time logs carrying hull numbers without regard to where the work occurred. It also alleged that the resulting Force Reports supplied hours used to prepare government invoices.

The alleged purpose went beyond making a job look better. The complaint said accurate allocations would have exposed exceeded hourly targets and reduced incentive payments to the company, along with manager bonuses. We find that a revealing incentive: by the whistleblower’s account, the reward for staying within the target depended on putting the excess hours somewhere else.

Huntington Ingalls agreed to a $7.9 million new payment in August 2017, following earlier repayments. The civil resolution covered alleged labor mischarging and false dive-operation bills. For a shipyard insider, the daily assignment and the number entered on the report can connect a supervisor’s instruction to the government’s payment.

What Evidence Is Needed to Prove Fraud?

Evidence of cost mischarging connects the original work, the changed charge, the government payment request and what the people directing it knew. We work with insiders to trace that connection through original job codes, time or material records, transfer journals, approvals, contract ceilings and cost vouchers. Each answers a different question about the same expense.

The original record identifies the customer or job that benefited. The transfer or override shows how another account received the cost, and an approval or instruction can identify who chose that treatment. The contract explains the payment consequence. The voucher or invoice shows how the changed charge reached the government.

The payment document depends on the line item. Under the defense electronic payment instructions, cost-type, labor-hour and time-and-materials items use cost vouchers, while fixed-price deliveries use the specified invoice and receiving report. That connects an internal accounting entry to the particular request for government money.

The Defense Contract Audit Agency audits contractor accounting and advises on which costs are reasonable, allowable and properly assigned. A shipyard worker can identify the hull the crew actually worked on, even when the time log names another.

Compliance also has to reach the charge itself. In its sample of 49 defense contractors, a 2022 study in the International Journal of Management and Humanities found higher penalties and penalty ratios among firms with compliance and ethics programs. We want to know what happened when someone assigned, approved or challenged the expense.

When the Cost Enters an Indirect Pool

An indirect pool spreads costs across contracts through an allocation, while a direct transfer changes the job charged for a particular expense. Indirect-cost fraud therefore follows the expense into the pool and the rates used to bill government work. The original customer and benefit still matter, but the accounting trail has another stage.

Vector Planning and Services agreed to a $6.5 million settlement in February 2014. The Justice Department alleged that direct costs paid once were included again in indirect pools allocated across Navy contracts. In that account, the second payment came through the pool.

The commercial-work connection appears in a whistleblower’s amended complaint against Booz Allen Hamilton. It alleged that government work and commercial and international operations were mixed in cost centers and cost bands, passing excess commercial and international costs to federal customers. A complaint against Airbus Defense and Space alleged that program managers charged whichever project had billable time left. It separately alleged that staff supporting commercial affiliate work had their costs allocated entirely to government indirect rates.

What the Person Behind the Charge Number Knows

An accountant may know when the charge moved and who approved it. A supervisor may know which job the crew actually worked on, while program staff know which contract’s budget or incentive target was affected. We bring those views together around the government bill and the decision that produced it.

That knowledge can support a whistleblower case built around the company’s own work and payment records. A whistleblower case under the False Claims Act can pay 15% to 30% of what the government recovers.

When You Know Where the Cost Started

If you can explain why the work belonged to one job and the bill went to another, speak to one of our Whistleblower Experts about where that cost went. We build your strongest cost-mischarging whistleblower case with you, from the original assignment through the payment decision, and bring in defense contractor fraud whistleblower lawyers who understand cost allocation and contract billing. You bring the knowledge of what happened inside the business; we bring the judgment and partnership to pursue it with you.