What Happens When You Don't Adjust Rental Costs for Property Under Common Control?

A marine maintenance company (IMIA) and a rental company owned by the marine maintenance company's executives (MES), have agreed to pay the Government $2.8 million to settle claims they improperly billed the Navy for rental equipment.

According to the settlement agreement, IMIA billed the Government for equipment rented from MES. Since the two companies are related, FAR (Federal Acquisition Regulations) 31.205-36, Rental Costs, limits rental costs to the actual cost of ownership.

IMIA did not disclose its relationship with MES when it billed the Navy for rental costs from MES. The Government calculated that IMIA had overbilled the Navy by $1.4 million, the amount in excess of the actual cost of ownership. The Government contends that IMIA knowingly presented such claims for unallowable costs to the Navy in violation of the False Claims Act.

The settlement agreement calls for the two companies to pay $2.8 million to the Government of which $1.4 million will go back to the Navy as restitution.

There was no mention in the Justice Department press release as to how the alleged fraud was uncovered. We think it very likely that it was uncovered as a result of an audit by DCAA (Defense Contract Audit Agency) since DCAA participated in the investigation.

Rental costs are typically a high-risk category for a contract auditor. Any time there are significant rental costs in a proposal or incurred cost submission, the auditor will undoubtedly make inquiries as to whether payments were made to related parties.