Friday, July 23, 2010

The Importance of Accurate Timekeeping

We are going to take a break from our series on defective pricing but we will get back to that subject next week. There are a few other important points we need to cover. Today though, we want to use a recent press release from the Department of Justice to illustrate the importance of strong internal controls over timekeeping and labor charging practices. Unfortunately, the press release is bereft of details and our calls to DOJ's press line for more information have not yet been returned. Nevertheless, the information that has been published is certainly worth reporting.

On Tuesday of this week, a woman, working on a cost-reimbursable subcontract under a cost-reimbursable prime contract with the National Security Agency, pleaded guilty to making false statements arising from the number of hours she claimed she claimed she worked. She falsely claimed she worked 752 hours during a two-year period and as a result, was overpaid by $81,859 (that would work out to almost $109 per hour, an amount that seems rather high for delivering documents. Perhaps the $82 thousand included fringe benefits, overhead, and profit).

NSA contracted with The Titan Corporation to obtain document delivery services. Titan in turn contracted with Dragon Development Company to work on the services contract. Dragon was acquired by CACI International, Inc. In November 2007 and CACI assumed responsibility for the performance of the services contract.

The employee worked full time for Dragon and CACI, exclusively on the services contract. From approximately January 30, 2006 to December 28, 2007, Mitchell submitted timesheets to Dragon and CACI falsely claiming that she had worked 752 hours more than she had actually worked on the Services Contract. Mitchell represented in some of the timesheets that on 24 days she worked an average of eight hours, when in fact, she did not work at all on those days.

As Titan invoiced NSA for the hours that Mitchell falsely claimed to have worked on the services contract, NSA paid Dragon and CACI for those hours. The overpayment for Mitchell’s unworked hours was approximately $81,859.

We don't know how this fraud was uncovered. The fact that the subcontractor was not implicated in the matter suggests to us that the subcontractor uncovered the fraud and reported it to the Government (e.g. the Inspector General's office). But it could have been from a number of sources including a whistle-blower or a hotline tip.

Internal controls are important and internal controls over timekeeping are absolutely critical in order to ensure the propriety of labor costs charged to Government contracts. Companies with dispersed workforces are especially vulnerable to this kind of fraud. Companies place a good deal of trust in employees working at alternate worksites (including working at home). Companies with lax management control and oversight are equally at risk. Contractors should be assessing their risks and vulnerabilities in this area and decide whether the existing controls are satisfactory for protecting the company's interests as well as the Government's interests. Once those controls are in place, it is also necessary to test through internal reviews whether those controls are working as designed.

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