Contract Management

Governments at all levels contract for any number of things: construction, supplies, professional services, outsourced governmental services…the list goes on and on. Due to the pervasiveness of contracts and contracting, the list of fraudulent contracting schemes also goes on and on. The size of governmental contracts and the difficulty in detecting fraud related to contract management make them attractive targets.

Bribery and corruption schemes are the most prevalent. These schemes are perpetrated when fraudsters use power or money to influence a transaction so that it benefits them at the expense of others.

Other schemes related to contract management involve unnecessary contract amendments, product substitution, and various types of inflated billing and performance misrepresentations.

Many of the same types of fraud, their related red flags and the best practices to combat them are similar to those involved in grants management.

Among the concerns of contract management are the prevention, detection and correction of fraudulent activities and their negative effects. Contract managers must be concerned when the red flags listed below are encountered.                          

Risks Risks Risks
Product Substitution

Altered inspection reports.

Poor cost documentation.

Counterfeit labeling.

Missing/altered serial numbers, model numbers or labels.

Significant number of field failures.

Altered/missing/late test reports.

Unexpected or premature part failures.

Restricted access to storage/production facilities.

Restricted/delayed access to records.

Latent defects.

High rejection rates.

Required certifications not signed.

Vendor, not buyer, selects samples for testing.

No warranties provided.

A common fraud scheme involves the delivery of goods of a lesser quality than was contracted for. To reduce the likelihood of this, goods should be inspected for conformity to specifications. In the case of certain types of goods, a chemical, metallurgical or similar type of test will need to be run on a sample to ensure that the product meets specifications.

Progress Payment Fraud

Altered inspection reports.

 

Physical progress inconsistent with billings.

Requests for payments inconsistent with prior cost datapdiv>

Restricted/delayed access to records.

Vendor/contractor resists inspection.

Required certifications not signed.

Contracts spanning months or years generally require that the buyer make payments during the project, before its completion. These progress payments usually match the percentage of the project that has, at the time of payment, been completed. Vendors and contractors have been known to accelerate the payments made to them by misrepresenting the extent of project completion. To ascertain the extent of completion, the purchaser should, as applicable, make inspection visits to the construction or have software projects completed in modules that can be individually tested. In construction, subcontractors produce lien waivers for payments they received and these should be available for review by the purchaser. All contracts should provide provisions allowing inspections, audits and proofs of completion. It is often of value to compare the progress of the current project against similar projects completed in the past. If it seems that billings exceed progress likely to have been made, it is a cause for further inquiries.

Systematic Mischarging

Labor mischarging- extension.

Material mischarging- extension.

Restricted/delayed access to records.

Generally, 3 times 5 equals 15, but sometimes it can be made to equal 16 or 17. Automated billing programs can be altered to make sure invoices are for amounts greater than agreed. The invoices, with refooting, look fine. The way to control this type of fraud is to check, at least on a sample basis, the calculations shown on invoices.
The vendor, contractor, or supplier is getting more than provided for in the contract.

Frequent change orders.

Unauthorized changes.

Rates or prices in excess of contract.

Rates or prices in excess of market norms.

Missing or altered inspection reports.

Undeservedly favorable evaluations of contractors.

Missing/altered serial numbers/model numbers/labels.

Requests for payments inconsistent with prior cost data.

Frequent invoice/voucher errors.

Poor cost documentation.

Claims for unallowable costs.

Little physical progress on contracts when significant costs have been billed.

Material mischarging—price.

Material mischarging—quantity.

Material mischarging—quality.

Labor mischarging—time.

Labor mischarging—rate.

Systemic mischarging—extension.

Double counting costs as both direct and indirect.

Professional fees for “services rendered” with few details.

Altered/missing/late test reports.

Unexpected/premature part failures.

Restricted access to storage/production facilities.

Restricted/delayed access to records.

Inadequate segregation of duties between contracting, purchasing, receiving, storing, etc.

Socialization between employee and contractor/vendor.

Vendor/contractor and employee address/phone match.

Multiple purchases just under bid limits.

Failure to take advantage of existing contracts/off-contract purchases.

A physical inspection should be made of all large or expensive goods that are provided to look for red flags.

All contracts should allow for audit of the provider and for unannounced audits should be conducted.

Vendor Has Committed Fraud in the Past or Performed Less Than Satisfactorily

Vendor is not authorized to do business in your jurisdiction, or is behind on taxes.

Check new vendors for Certificates of Good Standing or Status. These documnets are usually located at a state's secretary of state's office, or department/division of taxation, assessments, corporations.

Establish process to check all bidders/vendors/contractors for state/local debarment or exclusion from federal awards, suspended licenses, complaints from prior customers, etc.

Federal Excluded Parties List System (replaced by System for Award Management (SAM))

List of Individuals/Entities Excluded from Federal Health Care Programs

State of Maine Self Assessment - Procurement/Vendor Suspension-Debarment

Vendor is not Qualified to Perform Work or Provide Product or Service

Vendor suddenly bids on work far beyond previous scope or cost.

Perform background/reference/credit checks on vendors to determine financial capacity to perform work.

Perform oversight of prime/sub/vendor contract requirements to ensure agency gets what it pays for.

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