Contract Management

Ensure that all required forms are submitted prior to contract award and verify information provided.

Ensure contracts are awarded in accordance with applicable procurement processes, laws, regulations and sound business practices.

Sometimes an employee has a direct or indirect interest in a vendor. This may cause the employee, if he or she is in the position to do so, to favor the vendor or contractor in which he or she has an interest. Conflicts of interest can result in higher contract costs, significant contract changes, and purchases of goods or services not needed.

Any of these red flags can and frequently do point to false billing schemes. It is important that vendor management work with accounts payable to identify and follow up should any pattern of these Red Flags develop. Software exists that can be used to identify some these patterns, such as double billing. Other false billing fraud can be reduced by introducing policies that require expenditures be properly supported by documentation. Segregation of duties and appropriate review of documents by someone outside of vendor management, procurement and accounts payable also make the perpetration of these types of fraud more difficult.

Some contracts are based upon cost recovery or cost plus profit. A common fraud is to overstate the cost or use of materials. Since costs, prices and quantities are being manipulated (the vendor's records are not being used to produce the invoice), errors are more common than is normal. To cover the manipulation up, a vendor often does not provide appropriate documentation to support the billing and/or restricts access to records. When applicable, contracts should allow the buyer unrestricted audit rights. Also, material utilization rates should be checked against budgets/plans/expectations/industry norms. Prices should be verified against market prices. Goods received should be physically inspected to determine appropriate quality and quantity.

The actual amount of labor that will be required to complete a task is often difficult to predict. When the actuals equal the estimates, it may be a cause to investigate.

Some work needs to be done by licensed professionals. Administrative tasks should not be billed at the professional rate.

When auditing vendor time cards, alterations or execution by managment are both signs of potential trouble. Extend audit procedures to identify patterns of fraudlent activities.

Always require professional invoices to have sufficient detail. Review the detail for reasonableness. If suspicions arise, examine the time sheets or time cards.

Establish process to verify that all changes to vendor records (name, address change, bank account) are submitted by an authorized vendor signatory, and approved by an agency signatory.

Watch for red flags that point to collusion between the vendor and one of the buyer's employees. Both the vendor and the employee overseeing the letting or the administration of the contract should be scrutinized.

A ghost employee is the term applied to someone who gets paid, but doesn't exist. In the case of vendor management, a ghost employee is used to increase the cost in cost-plus type of contracts. A check is issued and cashed by another who pockets the money. This type of fraud exists in other contexts where an employee uses a ghost employee to steal from his employer. In the case of vendors, the fraud is perpetrated against the buyer and the vendor pockets the money.

Kickbacks involve an employee being compensated for in some way favoring a vendor. There are a number of behavioral indicators, like the red flags listed, that may point to an employee's receiving kickbacks.

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.

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.

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.

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

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.