Booz Allen FCA Settlement: Gotta Keep 'em Separated

4 minute read | July.28.2023

The latest multi-million-dollar False Claims Act (“FCA”) settlement between the Department of Justice and Booz Allen Hamilton Holding Corporation serves as an important reminder that government contractors must guard against the appearance of commingling costs.

On July 21, 2023, Booz Allen paid $377.45 million to resolve allegations that it violated the FCA by improperly billing commercial and international costs to its government contracts. These claims arose from a qui tam whistleblower action filed by a former employee who alleged she unsuccessfully raised her concerns with company leadership before resigning. A related federal criminal investigation was closed in 2021 without charges, while a separate SEC investigation remains ongoing.

The FCA, 31 U.S.C. §§ 3729–3733, provides that any person who knowingly submits, or causes to submit, false claims to the government is civilly liable for three times the government’s damages, plus a penalty that is linked to inflation. According to the DOJ, under government contracting rules, there must be a nexus between the costs charged to a government contract and the objective of the contract. A contractor may charge to government contract costs directly related to that contract, as well as indirect costs that benefit multiple contracts, including the government contract. However, a contractor may not charge costs to a government contract that have no relationship to that contract.

The settlement sets forth DOJ’s allegations that for over ten years, Booze Allen engaged in five specific accounting practices that violate the FCA and related Cost Accounting Standards and Federal Acquisition Regulation provisions, including that it:

  • Charged indirect costs that supported its commercial and/or international businesses to its government contracts
  • Commingled costs supporting both (i) commercial and/or international contracts and (ii) government contracts
  • Sought inflated payments and reimbursements under government contracts, which costs and rates included indirect costs supporting its commercial and/or international businesses and failed to disclose current, accurate, and complete cost or pricing data related to such costs
  • Submitted inaccurate and/or misleading statements regarding the methods by which it accounted for, and the nature of, indirect costs supporting its commercial and/or international businesses
  • Shifted employees and work related to its commercial and/or international businesses between work centers, creating and maintaining indirect costs pools that resulted in misallocations of indirect costs to government contracts.

Booz Allen accepted no liability in the FCA settlement, reasoning its decision to settle was a business one.

Booz Allen is not the first company to be held accountable under the FCA for accounting control failures. Prior settlements included allegations of failing to maintain internal financial controls to prevent improper commingling of government and non-government funds and charging unallowable costs to the government via indirect cash pools.  But this latest settlement is one of the largest procurement fraud settlements ever.

It is a reminder for government contractors to examine their accounting controls and practices to ensure they (i) do not inadvertently lump together costs they incur in performing work on government contracts with those they incur working for corporate clients and/or foreign governments and (ii) submit only “allowable” costs to the government. It is also a reminder to take seriously the whistleblowers who sound the alarm.

As Booz Allen has acknowledged following the settlement, the accounting practices challenged in the FCA case are an “immensely complex matter.” And they can be. Government contracts fall into two broad categories: fixed-price contracts and cost-reimbursement contracts. But these can be further broken down to a myriad of variations, including time and materials, fixed-price (including with economic price adjustment, prospective price redetermination, or incentives), cost-reimbursement (including cost-sharing and cost plus), indefinite-delivery, and definite/indefinite-quantity contracts. Some call for firm prices, others provide for adjustable prices.  Some give contractors full responsibility for the performance costs and resulting profits or loss; in others, the negotiated profit is fixed. Due to these variations, some types of contracts are more susceptible to crossing the impermissible cost-commingling line than others.

But one thing is clear: all warrant a careful look, taking into account not just the contract particulars, but also the company’s operations and business model.