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.                          

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Collusion With Employees or Other Vendors on Bids/Awards

Procurement files are missing standard forms and/or signatures.

Competitive process was not followed.

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.

Conflicts of Interest

Failure to file financial disclosure forms.

Employee declines promotions.

Vendor/contractor and employee address/phone match.

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.

False Billing

Frequent invoice/voucher errors.

Claims for unallowable costs.

Double counting costs as both direct and indirect.

Unauthorized changes.

Payments made that are unsupported by invoices.

Misdirection- goods or services to be delivered to the business or job site are delivered, instead, to an employee's home.

Double billing.

Improper indirect cost pool components.

Altered/missing documents.

Irregularities between styles/logos found on stationary/invoices/statements.

Documents presented as originals are actually photocopies.

Failure to claim discounts.

 

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.

False Pricing Data

Frequent invoice/voucher errors.

Poor cost documentation.

Material mischarging - price.

Material mischarging - quantity.

Material mischarging - quality.

Restricted/delayed access to records.

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.

False Time Records

Labor mischaring- time.

Labor mischaring- rate.

Professional fees with large sums charged for "services rendered" but with few details.

Restricted/delayed access to records.

If the actuals are equal to or very close to budget estimates.

Altered time cards.

Time cards filled out by management.

Inconsistencies between time cards and charges.

Job misclassification.

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.

Fraudster Tries to Reroute Payments From a Legitimate Vendor

Change in address, bank account info is not signed by an authorized agent of the vendor.

Documents submitted are not on official vendor stationery.

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.

General Contract/Vendor/Procurement/Bidding Fraud

No segregation between contracting, purchasing, receiving, storing, issuing, inspection, etc.

Continued acceptance of high priced goods or services.

Continued acceptance of substandard goods or services.

Numerous/costly change orders.

Contractor inability to perform.

Multiple purchases under bid limits.

Protests.

Failure to use existing contracts.

Off-contract purchases.

Emergency procurements.

Sole source procurements.

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.

General Guidance

Governments purchase vast amounts of goods and services under contracts of one type or another. Due to the vast sums involved and the difficulty in spotting and controlling it, fraud involving adherence to contracts are not unusual.

Ghost Employees

Restricted access to records.

Unexplained unfavorable labor variances.

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.

Kickback Schemes

Change in employee lifestyle.

Employee declines promotions.

Socialization between employee and contractor/vendor

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.

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.