Billing Unallowable Costs
Defense contractors that bill unallowable costs, such as excessive executive compensation, to indirect cost pools used to bill overhead costs to government projects are stealing tax dollars.
Federal regulations exist for many reasons, one of which is to ensure that American taxpayer dollars are spent wisely. For this reason, defense contractors and other contractors doing business with the government are required to abide by regulations that govern their accounting practices with respect to the costs they bill the government.
Overhead costs, also called indirect costs, are one example. A portion of a company's overhead, which includes such costs as office or plant space, and utilities, can be charged to the government as part of a contract as long as such allocations abide by federal rules.
But contractors sometimes violate these rules by billing unallowable costs as overhead, thus violating federal rules and overcharging the government under their contracts. In so doing, such contractors illegally profit at the expense of the American taxpayer.
To stop such abuses, whistleblowers with information of such illicit activities can file a False Claims Act lawsuit against the offending contractor. For helping to bring the wrongdoing to light, the whistleblower might receive a portion of the government's recovery, as well.
Examples of defense contractors that bill unallowable costs to indirect cost pools used to bill overhead costs to government projects include the following:
Jacobs Engineering pays $35 million to resolve claims that it improperly charged overhead costs to the government
Jacobs Engineering in 2000 agreed to pay $35 million to settle claims that it improperly charged overhead costs to the government. The claims stem from a False Claims Act case filed by a former employee. Jacobs was operating under "cost plus" contracts with the government, in which it was to allocate overhead, or non direct, costs pursuant to several regulations.
One of the regulations that Jacobs was required by law to follow provides that if a contractor sells property then leases it back, the most that it can charge the government for the overhead cost is what the company could have charged (mostly depreciation costs) had the contractor retained ownership.
Jacobs, the court found, did not abide by this regulation. Instead, Jacobs charged as overhead the amount of rent payable to the leasing company, which was much more than the amount of the building's depreciation. The California federal judge who heard the case ruled that Jacobs thus violated the law. Before the judge ruled on the amount of damages that the contractor owed the government, Jacobs settled the case for $35 million.
Sverdrup Technology, Inc., pays $2.5 million to settle allegations of mischarging NASA
Sverdrup Technology, Inc., a government contractor based in Tullahoma, Tennessee, in 2001 settled a False Claims Act lawsuit with the federal government for $2.5 million. The lawsuit stemmed from allegations that the company mischarged the National Aeronautics and Space Administration (NASA) for overhead costs related to two laboratories owned by the company. Sverdrup Technology is a wholly-owned subsidiary of Jacobs Engineering Group.
The allegations stem from a technical services contract between NASA and the company in the early to mid-1990s, in which the government charged that Sverdrup engaged in mischarging practices carried out by two laboratories it operated at the Stennis Space Center in Hancock, Mississippi. The case was filed in federal court in Mississippi.
The court found that in the case of one of the laboratories, the company violated the False Claims Act by mischarging overhead labor and materials costs as direct costs, allowing the company to increase its profits by concealing the extent of its true overhead expenses. The company subsequently settled the claims relating to this laboratory as well as the second laboratory, for which it faced trial for similar allegations.
The case was originally pursued by a chemist and former employee of the company at Stennis Space Center. The whistleblower was awarded $150,000 of the settlement for his role in the case.
Defense contractors are required to abide by accounting practices designed to ensure the government is not improperly billed for expenses not considered overhead costs.
Whistleblowers who bring False Claims Act cases can help prevent contractors from getting away with such fraud on the government. Individuals with knowledge of defense contractors that improperly misallocate costs to overhead in violation of federal law can help stop such fraud by filing False Claims Act cases. Whistleblowers who expose such wrongdoing help to maintain the integrity of the U.S. government's defense efforts and prevent companies from illegally profiting at the expense of taxpayers.