Wednesday, December 24, 2014

Another Case of Labor Mischarging

A couple of months ago, the Justice Department announced that a defense contractor had paid $13.7 million to settle a false claims allegations that it had billed the Government for a higher level of skill mix than had actually worked on the contract. In other words, the contractor billed the Government for an engineer but provided the services of a technician. You can read more about that case by clicking here. These kinds of cases are not that infrequent. In our posting that we just linked, we referred to two other recent similar cases. These kinds of cases are not difficult for an auditor to find either. Companies with T&M (Time and Material) contracts will be audited and a basic audit step is to verify the bonafides of the employees performing the work.

While the case just mentioned involves a Government contractor that is not particularly well known, such claims are not limited to just the small guy. Last week, the Justice Department announced that Lockheed Martin (the first or second largest DoD contractor depending upon how one measures) paid $27.5 million to settle the same kind of charges brought under the False Claims Act. Justice reported that the alleged mischarging occurred on two Army contracts where Lockheed provided rapid access to products and services in Iraq and Afghanistan. Lockheed violated the terms of the contracts by using under-qualified employees who were billed to the Government at the rates of more qualified employees.

The natural and probably consequences of these schemes is an increase in profits for the contractor at percentages above what was contemplated during negotiations and considered fair and reasonable.

Lockheed Martin stated that it had settled to avoid the distraction and risks of litigation. The company also reported that it had self-disclosed the issue when it came to their attention and that settlement was not an admission of liability. The self-disclosure rules for contractors is an interesting concept that we will take up at a later date.

You can read the Department of Justice's press release here.

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