Product Substitution and Contract Violations

Governments contract for a wide array of goods and services. Collectively, these contracts involve vast sums of money. In large contracts, delivering just a little less than what was contracted for can result in significantly greater profits for the contractor and the buyer getting significantly less than what was bargained for.

For example, if a contract to paint the interiors of a number of government office buildings requires the application of a primer and two coats of paint, actually applying only the primer and one coat of paint can save the contractor considerable labor and material costs. The same type of exposure exists in the thickness of roadbeds, the grade of cheese supplied for a school lunch program, or the capacity of air conditioners installed in a building. These types of fraud are often difficult to detect (as is the case in the number of coats of paint) or are hidden by repackaging.

At times, the real costs to the government don’t become apparent until after—sometimes years after—the work is completed or the product installed.

Some fraud of this type may not directly result in additional cost to the contracting government. Some federal awards require that certain products contain a specified percentage of materials fabricated in the United States. A contractor, looking to increase profits, may substitute lower-cost, foreign-made goods. The fact that the foreign-made goods may be of comparable quality does not change the fact that such a substitution violates the law.                            

Risks Risks Risks
General Guidance Complaints about quality.

A high rate of rejections, returns, or failures.

Lack of inspection/falsified reports.

A contractor that restricts or avoids inspection of goods upon delivery.

Mismarking or mislabeling of products and materials.

A contractor offers to select samples for testing programs.

A contractor refuses to provide supporting documentation regarding production or manufacturing.

Vendor fails to supply warranty information.

Vendor fails to apply manufacturers’ rebates/discounts towards final costs.

Photocopies of necessary certification, delivery, and production records exist where originals are expected.

Irregularities in signatures, dates, or quantities on delivery documents.

Certifications required in the contract are not signed.

Allegations of bribery of inspectors.

A supplier entertains or provides gratuities to procurement personnel.
Adequate project monitoring and oversight.

Agency verification of inspection reports.

Independent testing program.

Whistleblower mechanism.

National Association of State Comptrollers' Internal Control Questionnaires

Department of Defense's Fraud Red Flags and Indicators