Northrop Grumman: Deferred Compensation and the Earlier DCMA Agreement

In the Northrop Grumman deferred-compensation settlement, the company paid $11.4 million to resolve a government cost-penalty claim and allegations that it billed compensation costs it had agreed to limit. The government alleged that Northrop’s knowing misrepresentations had caused it to pay more than $1.9 million in unallowable costs. For an accountant or contract administrator, the telling detail is the earlier agreement: the government already had Northrop’s commitment to limit those charges.

The Justice Department announced the resolution on December 9, 2013. The alleged payment path ran from deferred-compensation awards for key employees through indirect rates and into government vouchers and invoices. An insider who knows the compensation account, the agreement or the rate calculation can see a part of that path that the final bill alone does not explain.

What the Earlier DCMA Agreement Limited

Northrop’s 2002 settlement with the Defense Contract Management Agency limited the amount of deferred compensation the company would include in proposals for subsequent contracts. The government later alleged that Northrop charged certain compensation costs to federal contracts despite that commitment. The earlier agreement supplied a specific comparison with what the company later asked taxpayers to pay.

The Justice Department alleged that Northrop passed the unallowable costs through indirect rates applicable to hundreds of 2004 contracts. It said knowing misrepresentations induced the government to pay those costs in thousands of vouchers and invoices. That is the reach of an indirect-cost allegation: the disputed expense can spread across contracts through a shared rate.

We find it remarkable that the government had secured a limit, then alleged that it paid charges violating that very commitment. The promise concerned what Northrop would include in later proposals, placing the company’s treatment of the compensation costs at the center of the dispute.

The Contractor’s Challenge Brought Government Counterclaims

The government contracting officer found that Northrop had failed to honor its commitment and assessed a penalty equal to twice the unallowable costs claimed. Northrop challenged that decision by filing a complaint in the U.S. Court of Federal Claims. The Justice Department responded with counterclaims alleging that the company also violated the False Claims Act by passing the costs to the government.

The settlement covered both the government’s penalty claim under the Federal Acquisition Regulation and its False Claims Act allegations. The Justice Department led the settlement effort with the Defense Contract Management Agency and the Defense Contract Audit Agency.

What Proof Do You Need as a Whistleblower?

For a case involving compensation costs and an earlier cost agreement, the useful evidence connects the expense, the agreed limit, the indirect rate and the government’s payment. We work with insiders to understand those connections and the decisions behind them. A compensation record can identify the expense, while the cost proposal and billing records show how the contractor presented it to its government customer.

An employee award and a government reimbursement answer different questions: what the company paid and what it charged the public. The Federal Acquisition Regulation’s cost principles make contract terms and cost limitations part of whether an expense can be reimbursed. In Northrop’s case, the government’s allegation turned on the earlier promise to limit the compensation included in subsequent proposals. That gives an insider a concrete agreement to discuss with us alongside the accounting entries.

The pool reconciliation, cost proposal and vouchers are familiar records to someone inside accounting or finance. They connect the original expense to the amount submitted for government payment. If those are the records you know, that is where we start with you: the cost treatment, the commitment it had to meet and the decisions that put it into the bill.

The allegation of knowing misrepresentations also matters to that conversation. We examine the decisions behind a charge alongside the numbers, because this case concerned both a prior commitment and what the contractor subsequently told its government customer. Your knowledge of how a cost was treated can give the accounting trail the context a final invoice leaves out.

In a separate matter involving TRW and Northrop Grumman, the government alleged that the private Odyssey satellite proposal was charged to general and administrative accounts. The Justice Department alleged that Vector Planning and Services included already-paid direct costs again in indirect pools allocated across Navy contracts. In Northrop’s deferred-compensation matter, the comparison was with the earlier agreement limiting what the company would include in subsequent proposals.

You Know What the Agreement Was Supposed to Change

If your work shows a gap between an agreed cost limit and what reached government bills, speak to our whistleblower experts about how those costs reached the bill. A whistleblower case under the False Claims Act can pay 15% to 30% of what the government recovers. We develop your strongest defense contractor whistleblower case with you, bring in defense contractor fraud whistleblower lawyers who understand compensation costs and indirect rates, and stay alongside you as the case develops.