Contracting fraud ain’t what it used to be.
Back in the 1980s, the problem was symbolized by grossly overpriced parts and supplies, most famously the Pentagon’s $435 hammer.
Today, the poster child for contracting fraud has become overpriced labor. Last week, the Justice Department announced that Boeing paid the government $18 million for allegedly submitting false claims for labor charges on aircraft maintenance contracts at its facility in Long Beach, California. Almost one year earlier, Boeing paid $23 million to settle similar allegations—billing for the time its mechanics were not actually working on the contracts—at its maintenance facility San Antonio, Texas.
Last month, defense contractor L-3 Communications agreed to pay $4.6 million to settle claims that it overcharged the government for the time its employees spent at Continental U.S. (CONUS) Replacement Centers preparing for overseas deployment. In February 2014, the company’s MPRI Inc. unit paid $3.2 million for allegedly billing the government for absentee employees on an Army support contract in Afghanistan. Several years earlier, L-3 paid $4 million to resolve allegations of overbilling the Army for labor hours in Iraq.
The list of major contractors accused of labor mischarging is getting longer. DRS Technologies paid $13.7 million to settle allegations that it charged the government for employees who lacked the required job qualifications. Computer Sciences Corporation paid $1.1 million to settle claims that it submitted false resumes to qualify its employees for higher paying positions on an Army information technology contract. Lockheed Martin reached a confidential settlement in a whistleblower lawsuit alleging that the company billed the government at least $6 million in fraudulent labor charges on military aircraft projects.
Timesheet fraud is the central issue in several lawsuits filed against KBR by whistleblowers who worked for the company in Iraq. They claim that KBR instructed employees to indicate 12 hours of work per day on their timesheets regardless of the actual number of hours they worked. One of the lawsuits was recently argued before the U.S. Supreme Court, which allowed the lawsuit to proceed but might have dealt it a fatal blow by ruling in KBR’s favor on a statute of limitations issue.
Last year, the Pentagon Inspector General found that Northrop Grumman and DynCorp may have submitted as much as $123 million in bogus labor charges. Northrop and its subcontractor, DynCorp, allegedly billed 16,270 hours over a five-year period for one employee who was classified under seven different job positions, even though the IG determined the employee was only qualified for one of those position and only 161 of his hours were properly billed. The IG also discovered a timesheet reporting 1,208 work hours over a 12-day period, or an average of 100 hours per day! Some of the charges questioned by the IG are also the subject of a civil fraud lawsuit pending against DynCorp.
A federal rule issued in December 2008 requires contractors to report “credible evidence” of fraud-related violations and “significant overpayments.” Since then, about 50 to 60 percent of reported incidents have involved mischarging violations, including labor mischarges.
The increasing incidence of labor mischarging correlates with the changing purchasing habits of the federal government, which now spends more on services than on goods or products. In fiscal year 2014, the government spent nearly $281 billion of the $445 billion in contracts awarded that year—roughly 63 percent—on services (including research and development). Those are just the contracts that are publicly disclosed: untold billions more are spent every year on contracts in classified programs.
Contractors are not solely to blame. The government also bears some responsibility for the flood of labor mischarging cases. It acquires some services through risky cost-reimbursable contracts, on which the government agrees to pay the contractor’s expenses, plus an additional amount to allow for a profit. This arrangement gives the contractor little incentive to maximize efficiency or control costs. The most infamous cost-reimbursable contract in recent years is the Army’s firm-fixed-price/cost-plus-award-fee Logistics Civil Augmentation Program (LOGCAP) III contract, on which KBR is accused of directing its employees in Iraq to falsely bill 12 hours every day.
The government is also to blame for not adequately overseeing contractors. In the Northrop/DynCorp overbilling investigation, the IG slammed government contracting officers for relying on Northrop to verify employee qualifications and for not adequately reviewing contractor invoices prior to payment.
Such is the unfortunate result of the growing contractor “shadow government” overwhelming the government’s oversight capabilities. Many contract workers never set foot in a government facility, performing their services in offsite locations throughout the world where the government is often unable to adequately monitor them. In unstable areas like Iraq and Afghanistan, contractor fraud, waste, and abuse is able to flourish outside the government’s so-called “oversight access bubbles.”
In classified intelligence and national security programs, excessive secrecy and other factors invite contracting corruption. Oversight and accountability are hampered by a lack of spending transparency and weak protections for government and contractor whistleblowers. Intelligence community workers fear retribution or loss of security clearance for reporting wrongdoing.
We’ll never know the true extent of contract labor mischarging in these top-secret programs, but occasional peeks behind the curtain indicate that it is a serious problem. In 2011, the Baltimore Sun highlighted several cases of National Security Agency (NSA) contractor timesheet fraud, including that of Northrop Grumman employee James Jackson and CACI International employee Donna Mitchell, both of whom were criminally punished for falsely inflating their timesheets by hundreds of hours.
In 2012, a Pentagon IG criminal investigation report noted that the NSA IG found “wide spread [sic] allegations of cost mischarging on cost reimbursable contracts,” including “contract employees claiming thousands of hours of labor, when the personnel alleged to be performing work were never present at the NSA facility.” The report summarized the cases of three unidentified contractor employees who were prosecuted for timesheet fraud in 2010 and 2011. According to the report, other contractor personnel were not prosecuted because they “did not meet the minimum loss to the US Government threshold” and their actions, “while still illegal, were not of a particularly egregious nature.”
In a 2013 semiannual report, the Inspector General of the Intelligence Community reported that his office closed 46 investigations into allegations of criminal and administrative violations. Half of these investigations confirmed allegations of contractor labor mischarging that cost taxpayers more than $1 million. One contractor employee billed over 200 hours during a five-month period for activities outside the scope of the contract, including writing a novel. The IG also found this employee’s experience did not meet the minimum requirements of the contract. In another case, two subcontractor employees were caught padding their timesheets by a combined total of 1,691 hours for non-work related activities, including—fittingly—running a “horse saddle padding” business.
Labor mischarging seems to be rampant in federal contracting. The deluge of instances could be evidence that the government is getting better at catching this type of fraud. But the more disturbing possibility is that we’re just seeing the proverbial tip of the iceberg. If the latter, the government needs to attack the problem on several fronts. It must use less risky contracting vehicles, beef up oversight, increase transparency, and strengthen whistleblower protections. When violations occur, the government must be willing to go after the companies—and the executives who run those companies—with criminal punishment and exclusions from contracting.
It’s time to put a stop to these outrages. Taxpayers can’t afford to have the 100-hour-a-day timesheet become the new symbol of federal contracting fraud.