At most government contractors, the people who decide which contract number gets charged for a given expense are not executives. They are project managers, timekeeping administrators, and accounting staff working through spreadsheets and cost allocation systems, often under pressure to hit budget targets or keep commercial work profitable. The decisions they make, sometimes under explicit direction from above and sometimes as a matter of quiet institutional habit, can cross a legal line that carries significant consequences.
Cost mischarging, the practice of billing the government for costs that are unallowable, unrelated to the contract at hand, or simply not incurred, is one of the most consistently prosecuted categories of procurement fraud. It is also one of the most likely to go undetected without someone on the inside coming forward.
In April 2024, the Department of Justice announced that Consolidated Nuclear Security, LLC agreed to pay $18.4 million to resolve False Claims Act allegations that it submitted false claims to the Department of Energy based on hours recorded by technicians that were not actually worked under a cost-type contract. The scheme was not sophisticated. Employees recorded time on a government contract number. The time was not worked on the contract. The government paid for it anyway, until it didn’t.
The Rules Contractors Are Required to Follow
Cost-reimbursable government contracts operate differently from fixed-price work. Rather than paying a set amount for a deliverable, the government agrees to reimburse the contractor’s actual costs plus a negotiated fee. That arrangement requires a framework for determining which costs the government will and will not pay.
The Federal Acquisition Regulation, specifically FAR Part 31, draws that line. Allowable costs include direct labor on the contract, materials, and a proportionate share of legitimate overhead and indirect expenses. Unallowable costs include entertainment, lobbying, interest on debt, fines and penalties, and any expenses that are not reasonable or not genuinely connected to the contract being billed. When a contractor’s costs are audited by the Defense Contract Audit Agency, the question asked is whether the charges submitted are allowable, allocable to the contract, and supported by documentation.
When a contractor knowingly bills the government for costs that fail those tests, it is not a bookkeeping error. Each invoice that includes those costs is a false claim.
Where the Fraud Hides
Cost mischarging rarely looks like fraud from the outside. It tends to look like normal accounting, which is precisely why it persists. The most common forms include:
- Labor mischarging, where employees record hours against a government contract for work that was instead performed on a commercial project, an internal initiative, or not performed at all
- Cross-charging, where a contractor with both government and commercial work allocates shared expenses disproportionately to government contracts, effectively making taxpayers subsidize the contractor’s private business
- Indirect cost manipulation, where unallowable expenses are routed into overhead or general and administrative cost pools and then spread across government contracts as part of the contractor’s indirect rate, a method that can generate improper charges across an entire portfolio from a single manipulated pool
- Direct/indirect misclassification, where costs that should be shared across all a contractor’s work are instead charged directly to a specific government contract that carries a higher reimbursement rate
- Expressly unallowable costs billed knowingly, including executive compensation above federal caps and lobbying expenses, which carry separate penalties under the FAR on top of ordinary False Claims Act liability
Why DCAA Audits Miss What Insiders Know
The Defense Contract Audit Agency reviews incurred cost submissions, samples transactions, and examines contractor accounting systems. What auditors cannot easily detect are schemes designed to look compliant. Falsified time records, mislabeled cost categories, and cost pools structured to obscure how expenses are allocated can all pass a surface-level review.
The government’s most reliable path to these cases runs through people who were in the room. A program manager who knows that the company uses government contract numbers as a default charge code when commercial budgets run dry. A finance employee who watches certain expenses get reclassified before the incurred cost submission goes out. A contracts administrator who has been told to adjust cost pools in ways that shift more overhead onto government work. These people carry information that no audit is positioned to find.
What Coming Forward Means
The False Claims Act allows individuals with direct knowledge of fraud against the government to file a qui tam lawsuit on behalf of the United States and receive a portion of any recovery. The government can recover up to three times the amount it was improperly charged, and expressly unallowable costs can trigger additional per-claim penalties.
Federal law also prohibits retaliation against employees who report suspected fraud. That protection applies regardless of whether you file a formal qui tam lawsuit or cooperate with a government investigation.
Talk to a Whistleblower Attorney
If you work for a government contractor and have seen costs billed to government contracts that do not reflect the work performed, or expenses routed through accounting systems in ways that you recognize as improper, that knowledge has legal value. A whistleblower attorney at Keller Grover can help you evaluate what you know and determine whether you have a viable claim. Contact our legal team today.