By McCabe Law Firm Healthcare & Defense Procurement Fraud

Cross Charging: An Insidious Form of Defense Contractor Fraud

Defense contracting is crucial for national security, providing essential goods and services to the military. However, the significant amounts of money involved make these contracts a prime target for fraud. One particularly insidious form of fraud is cross charging. This practice not only drains taxpayer money but also compromises military operations.

Understanding how cross charges work, how to spot them, and how to prevent them is essential for maintaining the integrity of government contracts and ensuring the safety of military personnel.

What Is Cross Charging?

Cross charging, also known as cost shifting, is a deceptive practice where a contractor reallocates costs from one contract to another, typically to boost profits. This fraud is common in defense contracts due to their complexity and the large sums of money involved. Contractors might shift costs from a fixed-price contract, where they are paid a set amount regardless of actual costs, to a cost-plus contract, where they are reimbursed for all allowed expenses plus a profit margin. By doing so, contractors can artificially inflate their profits at the expense of the government and taxpayers.

Cross charges are a clear violation of the False Claims Act (FCA), which prohibits fraudulent claims for payment to the federal government. Contractors engaging in this practice deceive the government and undermine fair competition. For an industry insider, witnessing this systematic reallocation of line items is often the first indicator of a multi-million dollar qui tam case.

How Cross Charging Works

Cross charging typically occurs when a contractor has more than one contract with the government, often a combination of fixed-price and cost-plus contracts. In a fixed-price contract, the contractor agrees to complete a project for a predetermined amount, absorbing any cost overruns. Conversely, in a cost-plus contract, the contractor is reimbursed for all allowable costs plus an additional fee, making it easier to inflate expenses.

To boost profits, a contractor might shift costs from the fixed-price contract—where they would have to absorb extra costs—to the cost-plus contract, where they can be reimbursed. This manipulation is often subtle, making it difficult to detect. For example, a contractor might allocate hours worked by employees on a fixed-price contract to a cost-plus contract, or they might purchase materials for one contract but charge them to another. This practice not only inflates the cost of the cost-plus contract but also distorts the true costs of the fixed-price contract.

In addition to cross charges, related fraudulent practices include improper cost allocation and mischarging.

Improper cost allocation occurs when costs that should be assigned to one contract are intentionally assigned to another.
Mischarging involves charging the government for costs not allowed under the contract terms.

Both practices, like cross charging, are illegal and punishable under the FCA.

Real-World Examples of Defense Procurement Fraud

In the defense contracting sector, multi-million dollar settlements highlight how severely the Department of Justice punishes labor mischarging and procurement fraud under the False Claims Act:

Northrop Grumman (2010): Northrop Grumman Systems Corporation paid $12.5 million to settle a civil False Claims Act lawsuit alleging procurement fraud. The government asserted that the contractor failed to comply with strict testing protocols for commercial-grade electronic components used in military navigation systems. This case, originally brought by an internal quality assurance manager as a whistleblower, proved that failing to execute mandatory contract requirements constitutes a direct false claim.
The Boeing Company (2015): Boeing paid $18 million to resolve allegations that it submitted false claims for labor charges on maintenance contracts with the U.S. Air Force for the C-17 Globemaster aircraft. The whistleblower, a former Boeing employee, exposed that the company knowingly invoiced the government for hundreds of hours spent by mechanics on extended lunch breaks and personal rest periods instead of direct maintenance work.

Spotting Cross Charging Fraud

Detecting cross charges can be challenging due to the complexity of government contracts and the sophisticated methods used by contractors. However, there are red flags to watch for:

Unexplained Cost Increases: A sudden increase in the costs of a cost-plus contract may suggest expenses from another contract have been shifted.
Discrepancies in Timekeeping: If employees are consistently charging more hours to a cost-plus contract than a fixed-price contract without a corresponding increase in actual operational output, it could indicate cross charging.
Unusual Purchasing Patterns: Large purchases charged to a cost-plus contract that do not seem necessary could be a sign that these materials are being diverted to a separate project or a private commercial client.

Preventing Cross Charging Fraud

Preventing cross charging requires robust procedures, oversight, and vigilance:

Strict Accounting Controls: Contractors should maintain detailed and accurate records of all expenses and allocate costs appropriately. Regular audits should ensure compliance.
Increased Oversight: Government agencies should closely monitor contracts, especially those involving parallel fixed-price and cost-plus contracts.
Transparency: Contractors should operate transparently, with clear documentation of all costs and activities related to each contract. This helps identify any discrepancies that might indicate cross charges.

What Whistleblowers Can Do to Stop Cross Charging

Whistleblowers play a crucial role in exposing cross charging and other forms of defense contractor fraud. Under the False Claims Act, individuals who report fraud can file a qui tam lawsuit on behalf of the government. If successful, whistleblowers may receive a portion of the recovered funds as a financial reward for their efforts.

If you suspect cross charging or other fraudulent activities, consulting with a legal expert from The McCabe Law Firm can help you understand your options and protect your rights. Our firm provides immediate, strategic legal assistance to ensure that defense industry professionals can report systemic overbilling safely and confidentially. Whistleblowers are essential in holding contractors accountable and ensuring that taxpayer money is spent appropriately.

Conclusion

Cross charging is a harmful form of defense contractor fraud that not only wastes taxpayer money but also undermines military effectiveness. By understanding how cross charges work and taking proactive steps to prevent them, we can help ensure that government contracts are awarded fairly and that the military receives the resources it needs to operate safely.

Whistleblowers are essential in this effort, helping to expose fraud and bring those responsible to justice. If you have internal documentation, timecard trails, or ledger data showing that a defense contractor is shifting costs unlawfully, contact The McCabe Law Firm today for a completely confidential case review.