Cross Charging is a common type of procurement fraud. It occurs when a contractor improperly shifts costs and expenses from one contract to another in order to illegally increase the contractor’s profits.
Assume, for example, that a contractor has two contracts in place with a government. One contract is a fixed price contract—one for which the contractor will receive an agreed upon amount upon completion of work. The other contract is a cost-plus contract—one for which the contractor is remunerated on the basis of his or her costs plus an agreed upon fee or profit percentage.
To boost profits, the fraudster charges costs relating to the fixed-price contract to the cost-plus contract. The contractor receives full payment on the fixed-price contract, which ostensibly included the cross-charged costs. The contractor is paid for these cross-charged costs again when they are included on the cost-plus contract.
Considering the size of certain government contracts, cross charging can prove quite lucrative to the fraudster.
Cross charging is similar to improper cost allocation, except that the latter involves charging the costs of a private sector contract to a public one rather than between two types of government contracts.
Without considerable oversight and an understanding of the costs likely to be incurred under a cost-plus contract, cross charging and improper cost allocation schemes may be difficult to identify and deter.
Frequent errors/corrections of errors on invoices and other documents.
Billing for time - One contract contains names of persons assigned to another contract.
Contractor costs on the fixed price contract are unusually low.
No requests for contract changes on a fixed price contract.
Costs on the cost plus contract are considerably higher than those expected or budgeted.
Cross charging schemes involve a certain manipulation of costs- taking costs from one contract and assigning them to another. This produces errors. Procedures should be in place to look for high rates of errors or corrections related to billings.
Aside from management personnel (included in overhead) and some supervisory personnel (whose time is potentially allocated to several projects), contract personnel do not generally work on several projects at once. Procedures should be in place to see whether contract personnel are billed to more than one contract for the same periods of time.
If there is more than contract being worked on by a contractor (one at a fixed price and the other on a cost plus basis) and the costs of the cost plus contract are high, while those on the fixed price contract are low, it may be an indicator of cross charging. Require that even fixed price contracts are accompanied by contractor statements.
Contract change requests are a common factor on fixed price contracts. A lack of them may indicate that the contract is unusually profitable because costs have been shifted to a cost plus contract.
When the costs of a cost plus contract are considerably higher than expectations, it may be because the contractor has shifted costs from a fixed price to cost plus contract. Evaluate the costs in light of budgeted costs and the costs experienced for similar types of projects.