Cross-Charging and Mischarging

“Cross-charging” and “mischarging” are common types of procurement fraud that may serve as a basis for a False Claims Act qui tam lawsuit. Cross-charging occurs when a contractor performs work or incurs costs on one contract and then charges such work or costs to another contract.

The United States often awards contracts that can be characterized as “fixed-price” contracts, or, alternatively, “cost-plus” contracts. In a “fixed-price” contract, the contractor is paid a set price for the products or services it provides, regardless of what it costs the contractor to provide these products or services. By contrast, in a “cost-plus” contract, the contractor is reimbursed its costs for providing the products or services, and the contractor is also paid an additional percentage of its costs as “overhead” and “profit.”

Contractors that have both of these types of contracts, or that have a mixture of fixed-price commercial contracts and cost-plus Government contracts have a strong financial incentive to maximize profits by fraudulently removing their costs from the “fixed-price” contracts and, instead, allocating these costs to the “cost-plus” contracts. Frequently, contractors may also falsify time entries or other internal records in order to disguise the fact that they are cross-charging costs. Cross-charging also can involve the improper cost allocation of overhead or indirect costs. Contractors with both government and private commercial contracts may improperly allocate overhead costs among their contracts, so that the government ends up paying for more than its fair share of overhead costs.

Mischarging occurs when a contractor inflates its bills to the government by charging for labor, parts, or other costs that are greater than those the contractor actually incurred, or charging for things that are unallowable under the contract’s pricing specifications. For example, a contractor may inflate labor hours or product costs, fail to disclose or credit the government with subcontractor rebates, or charge the government separately for items or services that are supposed to be billed under a single all-inclusive contract line item number (“CLIN”).

VSG’s Qui Tam Attorneys Are Experienced in Handling Cross-Charging and Mischarging Cases

After a five-year courtroom battle against three high-powered corporate defense firms, VSG partner Janet Goldstein achieved an $82 million settlement in a qui tam whistleblower case charging a major Los Angeles defense contractor with improperly allocating commercial IT costs to government contracts. The United States awarded her whistleblower client 25% of its recovery.