Sometimes we come across stories of contractor fraud that make us realize why so many government auditors are so skeptical about government contractor costs, and why so many "gadfly" NFPs are so skeptical about the integrity of government contractors, and why so many politicians are so willing to assist in efforts to combat government contract fraud through passing legislation.

This is one of those times.

For Pete's sake.

How in the world does a contractor get into such a predicament? How in the world do so many employees fail to blow the whistle on such an egregious fraud? The amount of collusion here is truly staggering. How convenient that the fall guy is dead and can't tell his side of the story….

Care to learn more?

Today's story comes courtesy of the DOD Inspector General, who posted this press release from the U.S. Attorney of the Southern District of California. It concerns the travails of Vector Planning & Services, Inc. ("Vector"), who had reached a deal with the US Attorney in which it admitted to "criminally defrauding the Defense Department … resulting in losses … of over $3.6 million." Vector settled its issues for $6.5 million.

The details of the fraud are … staggering. Truly, words fail us. So we'll quote from the press release.

… Under a cost-reimbursement contract, a contractor is entitled to reimbursement for both its direct allowable costs … and a prorated portion of its indirect allowable costs … Because indirect costs must be pro-rated across multiple contracts, they cannot be precisely determined until the end of the fiscal year. Accordingly, under a cost-reimbursement contract, a contractor initially submits claims for indirect costs based on 'provisional' or estimated rates, and later submits its actual indirect costs to the government for review, reconciliation, and approval. This later submission, known as an 'Incurred Cost Submission' or 'Incurred Cost Proposal,' reflects what the contractor certifies were its actual allowable costs for the prior fiscal year.

In this case, Vector admits that after claiming and being paid for direct costs in connection with other, firm-fixed-price and time-and-materials contracts, Vector systematically reclassified these same costs in its accounting system to make it appear as if the costs were indirect costs that were incurred in connection with its cost-reimbursement contracts, thereby inflating its indirect cost rates. These inflated rates were then used by Vector to justify the rates claimed in its Incurred Cost Proposals submitted to the Navy. The effect of these fraudulent submissions was, in essence, to pay Vector twice for the same expenses, amounting to 'double dipping' or 'double billing' at government expense. Vector admits to submitting these false Incurred Cost Proposals for costs incurred in 2005 through 2009, with a total loss to the Defense Department of $3,672,756. As described in Vector's agreement, Vector made these false submissions in 2010, 2011, and 2012.

When faced with a Defense Department audit in late 2011, Vector falsified its electronic accounting entries, and prepared and backdated fake invoices in order to support those falsified accounting entries.

Not only did Vector reclassify direct costs to indirect costs in order to fraudulently increase actual indirect costs to better align with provisional indirect costs, company employees also decided it was a great idea to prepare fake invoices in order to support the validity of its reclassified costs.

Face palm.

We would like to go on record as saying--if in fact it needs to be stated--that we would never, ever, advise our clientele to emulate Vector. Indeed, we have discussed (in some detail) issues associated with adjusting provisional billing rates during contract performance. Any government contractor that contemplates such a weapons-grade stupid strategy to calculating indirect cost rates and/or supporting DCAA audits had better not call this consulting firm.

We couldn't take the gig anyway. We'd be too busy face-palming.