Defense Contractor Fraud

 

• Violations of Truth-in Negotiations Act (TINA): contractors must submit the costs of their contracts to the government, and unscrupulous contractors inflate the costs to steal from the government
• Cross Charging: This occurs when contractors misrepresent labor and material costs on different contracts
• Failure to comply with contract specifications: Producing shoddy or poorly made materials
• Improper cost allocation: The basic type of fraud; charging the government for activities that are not part of the production or research process
• Product substitution: Changing one product for another without the knowledge of government.

 

Violations of Truth-in Negotiations Act (TINA)

Unfortunately unscrupulous contractors artificially inflate their projections and estimates in order to defraud the government out of more money then they need to fund the project. If the government is unaware of this deception they cannot make an informed decision about the viability of the project and pay more than is necessary. This deception often comes during the bidding process where contractors inflate the real cost and keep the excess for themselves.

Cross Charging

This type of fraud deals with the way unscrupulous contractors bill the government for services, products, or labor. Government contracts generally fall into one of two categories: they are either cost-plus contracts, where the government pays for the costs plus a fixed amount over the cost; or fixed-price contracts that have a set amount for the entire cost of the operation including costs and profit.

Some contractors who have both types of contracts defraud fixed-price contracts by charging labor, parts, or services to cost-plus contracts when they are really part of fixed-price contracts. This in effect maximizes the profit margin on fixed-price contracts while sticking the government and taxpayers with an artificially inflated bill. Since defense contracts are regularly millions or even billions of dollars a criminal contractor can often steal millions of dollars from the government if not caught early.

Failure to Comply With Contract Specifications

The American defense industry should provide American servicemen and women the strongest and most reliable equipment available, which is why the Defense Department has such stringent requirements for the material these brave men and women count on every day. Unfortunately, many unscrupulous contractors believe that cutting corners on a few specifications can have no serious long-term effect except to increase their bank accounts. We will never know the exact number of soldiers, sailors, airmen, and Marines who have suffered because of faulty equipment.

Failing to meet specifications is not the only way contractors can defraud the taxpayers. Because military equipment must withstand the rigors of combat and constant use without regular maintenance it must pass many more quality control checks than anything in the civilian world. If a project begins to run over budget or behind schedule these tests may be sacrificed in order to preserve the production schedule.

Improper Cost Allocation

This type of fraud is very similar to cross-charging. When creating a product a contractor needs to provide accurate costs of the project in order to estimate total expenditures. Simple things such as material cost and direct labor expenditures are easy enough to track across a production schedule but if a corrupt contractor has both civilian and government contracts they can allocate indirect costs such as square footage and indirect labor from the civilian contract to the government contract and send the bill to the taxpayers.

By doing this the contractor takes their expenses from the civilian sector and adds them to the government contract. Without direct examination of the books many unscrupulous contractors can pad out simple contracts for millions upon millions of dollars.

Product substitution

The products our government demands for our servicemen and women must be made to certain specifications in order to insure uniform quality, strength, and reliability. Most contractors that produce highly technical items usually cannot provide the materials needed, so they must purchase the materials they need from subcontractors.

Unfortunately, some contractors choose to purchase sub-rate components from unauthorized subcontractors at reduced prices and pocket the difference. This defrauds the government out of funding that was to be spent to procure the proper equipment and endangers the brave men and women of the armed forces who must rely on inferior products to defend our country.