Defense procurement fraud: Cross Charging
Cross charging is one of the most common types of defense procurement fraud. Cross-charging occurs when a defense contractor improperly shifts costs and expenses from one defense contract to another in order to boost its profits. (Another form of this fraud involves improper cost allocation where a contractor shifts costs between government and commercial contracts.) The United States typically awards one of two types of contracts in defense procurement: (1) the “fixed-price” contract; and (2) the “cost-plus contract.” In a “fixed-price” contract, the government pays the contractor a set price for the delivery of a weapons system or other product, no matter how much it costs the contractor to produce. In a “cost-plus” contract, the government pays the contractor a set price plus a percentage of the contractor’s costs for producing the weapons system or other product.
In a cross-charging scheme, a contractor might have both fixed price contracts and cost-plus contracts. In this situation, the contractor improperly records the costs of labor, materials and overhead from its “fixed price” contract (i.e., where the company receives a fixed price for a certain number of weapons no matter how much it costs to produce them), to its “cost-plus” contract (i.e., where the government pays the company for the cost of making the weapons, plus a percentage of its costs as a profit). Through this scheme, the contractor will still receive the full fixed price on one contract, but defraud the government into paying an inflated amount on its cost-plus contract, by paying for costs that should not have been allocated to the cost-plus contract.
If you are aware of cross charging or other defense contract fraud and would like to blow the whistle, contact Jeffrey M. Haber, Rebecca M. Katz or Christian Siebott.
