FAR (Federal Acquisition Regulations) 31.201-5 is a succinct statement on how Government contractors need to account for income derived from their Government contracts. It reads: "The applicable portion of any income, rebate, allowance or other credit relating to any allowable cost and received by or accruing to the contractor shall be credited to the Government either as a cost reduction or by cash refund. We've discussed this provision before. See for example, this one from 2010 or a somewhat related one from 2015. Examples of credits that should be deducted from costs charged to the Government might include prompt payment or cash discounts, airline refunds, sales of scrap, and tax refunds (e.g. state income taxes that are allowable under Government contracts).
But what happens if a contractor does not give the Government back its allocable share of credits? Here's a recent case where a contractor did not pass along discounts. A whistleblower took notice and filed a False Claims Act lawsuit. The Government enjoined and a settlement was just reached where the contractor agreed to pay $940 thousand (of which the whistleblower received $160 thousand).
International SOS is a provider of overseas healthcare services for the Government. Among the services it provided was aeromedical evacuations which, since it did not have its own aircraft, subcontracted with other companies. For more than four years, up until 2017, International SOS billed TRICARE for the full cost of these aeromedical evacuations. Unknown to the Government however, International SOS negotiated discounts from its third-party air ambulance providers. It should have passed those discounts back to the Government but didn't. The company billed the full non-discounted cost to TRICARE.
We should also note here that failure to disclose the discounts could also result in defective pricing, i.e. violations of the Truth in Negotiations Act if the available discounts were not disclosed during contract negotiations.
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