Newport News Shipbuilding: Commercial Tanker Costs on Navy Contracts

In the Newport News Shipbuilding commercial tanker cost settlement, the company agreed to pay $60 million to resolve allegations that it charged the Navy for design and development work required by commercial tanker contracts. For a shipyard engineer, project accountant or finance employee, the question behind that settlement is concrete: which customer’s work did the account actually contain? The government alleged that the commercial work reached Navy bills through overhead.

Commercial Tanker Costs in Navy Overhead

The Justice Department announced the settlement on August 20, 2003, covering alleged mischarging from 1994 through 1999. Newport News allegedly classified the design and development costs of double-hulled tankers for commercial customers as independent research and development on government contracts.

The government’s earlier lawsuit announcement alleged more than $72 million in commercial tanker costs charged to the Navy; Newport News agreed to settle for $60 million. According to the government, the costs passed through overhead on major Navy shipbuilding contracts. The alleged indirect-cost fraud concerned both the contents of the research account and the contracts charged through it.

Northrop Grumman had owned Newport News since November 2001. The settlement announcement’s $80 million headline combined the tanker case with a separate $20 million civil settlement over allegedly defective Navy target drones.

In the government’s account, Newport News called the work independent research even though a commercial customer had already contracted for it. We see a customer switch: the shipbuilder owed the work to a tanker buyer, but allegedly sent the costs to the Navy.

Why the Commercial Contract Mattered

The government alleged that the commercial contracts required the design and development work Newport News charged as research. As the settlement announcement explained the applicable rule, costs could be charged to government contracts as IR&D only if the effort was not required to perform a contract. That makes the design assignment itself central to the allegation.

For someone inside the yard, the connection starts with the commercial customer’s requirements and the project doing that work. Design instructions, project accounting and the research ledger can describe the same effort in different ways. We would compare the assignment with the cost classification, then follow that cost into the overhead calculation and the Navy submission. Calling a project research does not change the work the customer ordered.

The broader contract payment terms explain why the cost’s destination matters. Under cost reimbursement, allowable costs allocated to the contract affect what the government pays. Under firm-fixed-price work, the contractor bears the profit or loss from performing for the agreed price. Those different arrangements make the contract, the cost submission and the underlying project records important parts of a cost-shifting inquiry.

Warnings From Inside the Business

The government’s allegation reached beyond the choice of an accounting category to what Newport News had been told about it. The Justice Department’s lawsuit announcement described a warning from both senior staff and the company’s outside consultant:

For a finance or accounting insider, the alleged warning connects the project and its charge code to a decision made with information already inside the business. We would want to understand who received the warning, what work it addressed and how the company treated those costs afterward.

Agents from the Defense Criminal Investigative Service and the Naval Criminal Investigative Service, together with Defense Contract Audit Agency auditors, investigated the alleged mischarging. The Justice Department’s Civil Division and the U.S. Attorney’s Office for the Eastern District of Virginia handled the civil case.

What Proof Do You Need as a Whistleblower?

For alleged commercial costs charged to Navy contracts, evidence of mischarging connects the work, its accounting treatment, the government charge and what the company knew. In this case, that means the commercial tanker assignment, the IR&D classification, the overhead allocation and the warnings. We work with insiders to establish how those pieces fit together.

A project accountant may recognize the account that held the design costs. An engineer may understand which customer requirement the design work fulfilled, while a finance employee may know how the overhead calculation carried the expense into a government cost submission. Each view answers a different part of the same question about whose work the Navy was being charged for.

The original expense and the final charge need to stay connected. Cost records can show what was incurred, allocation records can show where it went, and the proposal or voucher can show what the contractor presented to the government. Warnings and the response to them add the company’s knowledge to that accounting trail. Our work with you is to connect the commercial purpose of the expense to the decision that put it on the government’s bill. A whistleblower case under the False Claims Act can pay 15% to 30% of what the government recovers.

You Know Which Customer the Work Served

If you saw commercial design work enter a government research account or overhead charge, speak to one of our whistleblower experts about whose work the Navy paid for. We build your case around that knowledge, the accounting decisions and the government’s bills, and bring in defense contractor fraud whistleblower lawyers who understand cost allocation. You have a partner beside you from the first conversation about the project through the pursuit of a recovery.