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 Michael S. Bigin or Laurence J. Hasson.