Affiliated Defense Subcontractors: When the Markup Becomes the Navy’s Cost

Defense contractor cost plus percentage of cost fraud can arise when a contractor knowingly bills the government for supplier costs with a prohibited percentage markup concealed inside them. In an affiliated parts chain, the amount described as cost can include another group company’s profit. If you work in purchasing, intercompany accounting or contract billing, you may see the original vendor price and the larger number that reaches the government. The difference can begin in the subcontract and survive every invoice that follows. The lease and the government charge are compared in GS Engineering: The Lease, the Charge and the Army Monitor.

How Cost-Plus-Percentage-of-Cost Changes the Bill

A cost-plus-percentage-of-cost arrangement makes the markup grow with the underlying cost. The Federal Acquisition Regulation prohibits that contracting system. In the Sikorsky Support Services and Derco Aerospace case, the government alleged that the companies concealed such an arrangement inside requests for Navy reimbursement.

Under firm-fixed-price work, the contractor receives the agreed price and bears the resulting profit or loss. Under cost reimbursement, the government pays allowable incurred costs within the contract’s limits.

A cost-plus-fixed-fee contract fixes the fee at the outset. Actual cost growth does not increase it. A percentage added to each new dollar of cost creates the opposite incentive. The bill grows, and the markup grows with it.

The Navy Affiliated Subcontractor’s 32 Percent Markup

The government alleged that Derco’s supplier costs and markup flowed through Sikorsky Support Services into Navy reimbursement requests. The settlement agreement describes its job: aircraft maintenance, logistics and parts for Navy training aircraft. Derco supplied Sikorsky Support Services under a subcontract, and both businesses belonged to the United Technologies corporate family during the relevant period.

The whistleblower’s amended complaint alleged that Derco placed orders with vendors, which shipped the parts directly to naval training locations. The vendor invoices went to Derco. That split matters: the physical part could go straight to the Navy while its price passed through another business before reaching the government’s bill.

The government’s complaint quoted the original subcontract’s invoice instruction:

The government alleged that a second version, signed the next day, deleted the reference to the markup. It also alleged that the companies kept the same pricing arrangement and knew they had agreed on no firm fixed prices. We find the contrast telling: the percentage disappeared from the agreement’s wording while, according to the complaint, it stayed in the invoices. Same markup. Fewer words.

The government also alleged that an employee questioned the plan’s legality and that an executive acknowledged it would not comply with the solicitation. Those allegations connect the formula to what management understood before the bills went out. On the government’s account, the cost plus percentage of cost intercompany parts arrangement on the Navy work was a decision about how to charge, carried into repeated payment requests.

From Vendor Invoice to Navy Voucher

The alleged markup traveled through the billing system as though it were part of the supplier’s actual cost. The whistleblower alleged that Derco provided IFS software and monthly parts invoices to Sikorsky Support Services, which submitted the charges to the Defense Finance and Accounting Service. The amended complaint described the software’s role:

The whistleblower alleged that Sikorsky Support Services then added another 2.75% to 5% in indirect costs and applicable burdens, depending on the contract year. According to that complaint, the parts line items required the actual vendor price and permitted a general and administrative allowance. Applied after the alleged markup, that allowance made the higher amount the base for another charge.

The alleged contradiction also reached Derco’s Disclosure Statement, which described its accounting practices. The whistleblower alleged that the company certified transfers at actual cost while invoicing Sikorsky Support Services at cost plus markup. The government’s complaint separately alleged that the annual final indirect-cost certifications submitted by Sikorsky Support Services included costs from the prohibited subcontract. The invoice, the description of accounting practices and the annual certification each told the government something about the same money.

For someone inside finance, that is a concrete comparison. The vendor invoice shows the starting cost, the subcontract shows how the next price was set, and the accounting output shows what the billing system called it. The voucher connects that number to the government’s payment request. Instructions and earlier warnings connect the calculation to the people who approved it.

What the Court Ruled and What the Companies Settled

The district court ruled that the subcontract arrangement violated the statutory prohibition on cost-plus-percentage-of-cost contracting and the prime contract’s terms. The False Claims Act allegations concerned the next step: knowingly presenting vouchers to the Navy without disclosing the prohibited arrangement. A former Derco employee brought the whistleblower case, and the government joined it.

The whistleblower’s amended complaint alleged that Derco’s public $20 million figure represented profit from the markup scheme. In June 2024, the Justice Department announced that Sikorsky Support Services and Derco agreed to pay $70 million to resolve the government’s allegations about the prohibited subcontract.

The agreement set aside about $14 million for the whistleblower from the government’s settlement proceeds. A whistleblower case under the False Claims Act can pay 15% to 30% of what the government recovers.

Where the Affiliate’s Margin Disappears

An invoice showing a final price can hide the transactions that produced it. In its 2022 report Hidden Costs: US Private Military and Security Companies and the Risks of Corruption and Conflict, Transparency International Defence and Security examined gaps in subcontractor oversight. The report described government reliance on prime contractors to vet lower tiers and explained the consequence of limited visibility:

That observation helps explain the value of an intercompany accountant’s view. A prime contractor’s bill shows what it wants the government to pay. The transactions underneath it can show which business supplied the goods, which added the margin and which passed the charge onward.

A Food Supplier’s Alleged Circular Service Charge

In a whistleblower complaint against Public Warehousing Company, the alleged service charge traveled in a circle. Public Warehousing Company would provide logistical support to The Sultan Center, which shared ownership and control with it. The Sultan Center would pay for those services, then include that cost in its margin when invoicing Public Warehousing Company for goods destined for the government.

The whistleblower alleged that goods were picked up directly from suppliers while The Sultan Center provided no meaningful service beyond ordering and invoicing at inflated prices. The complaint also alleged that the government’s invoices showed only the final unit price, concealing the markup. The useful comparison is between the underlying supplier transaction, the service agreement and the final bill.

FreshPoint supplies a separate produce-markup example. It paid $4.2 million in 2013 to settle allegations that unauthorized marketing earned income markups raised prices toward perceived market value on Defense Department produce sales. The government’s allegation turned on the payment formula the contract allowed. A price chosen to resemble the market could still exceed what that formula permitted.

Airbus’s Alleged Spreadsheet Fee on Fee

Airbus fee-on-fee pricing appeared expressly in a whistleblower’s complaint about radar spare parts. The complaint alleged that Airbus Defense and Space used an arbitrary percentage in a spreadsheet’s assumed fee cell to make an affiliate’s price appear to exclude its profit before adding Airbus’s own fee. The alleged adjustment changed the presentation while hiding the affiliate’s real fee from the government.

Airbus’s defense settlement over the Orlando Factor, an allegedly unapproved rate, also addressed undisclosed affiliate fees and Navy radar storage charges allegedly passed through above what Airbus paid. Airbus U.S. Space & Defense agreed to pay $1,043,475 in 2021 to resolve those allegations. The rate, the affiliate’s fee and the storage bill give an insider different places to find the added charge.

The wider complaint also alleged that human resources, IT and compliance employees supported commercial work while their costs went into government overhead rates. That brings the question back to the underlying work: who benefited from the expense, and which customer paid it? The spreadsheet and the cost allocation can tell different parts of the billing story.

Lease Costs Start With the Actual Expense

Defense related-company lease costs were at issue in government allegations resolved in 2019 by GS Engineering, its president and a former bookkeeper for a total of $1 million. For a lease charged to government work, the federal cost principles ask whether the expense was reasonable, tied to the contract and allowed by its terms. The lease and allocation records supply that comparison, just as the supplier invoice and subcontract do for parts.

The Records Behind the Reimbursement Request

The strongest view of an affiliate markup connects the price formula to the payment request and to what management knew. In the Navy parts allegations, the subcontract versions, vendor invoices, IFS output, Disclosure Statement and final cost certifications supplied different views of that chain. Someone who worked with those records may understand a discrepancy that a final invoice conceals.

Those connections also give investigators examining contract charges something specific to follow. The central question stays concrete: how did this supplier cost become that reimbursement request?

When You Can See Both Sides of the Invoice

If you know how an affiliate’s markup became a cost on the government’s bill, speak with our whistleblower experts about that pricing chain. We work beside you to build the case around the supplier cost, the intercompany decision and the payment request, and bring in defense contractor fraud whistleblower lawyers who understand cost reimbursement. You bring the view from inside the transaction; we bring the expertise and partnership to pursue it with you.