An entity’s vendor search may be impeded by haste, lack of time, laziness, or entrenched tradition. Regardless, the fraud examiner should inspect the procurement competition system and its internal controls for possible kickbacks and other cozy relationships.
Witness some recent procurement fraud cases:
Though inadequate competition for procuring vendor contracts is a good potential indicator of fraud, waste, or abuse, many fraud examiners fail to scrutinize the quality of the competition process. However, systematically gauging procurement competition should be a vital part of any fraud examination program.
If a contracting officer (CO) is regularly taking kickbacks from a contractor, the CO must first ensure his favored contractor wins the contract. Although many competitive controls have been built into most procurement regulations, unscrupulous COs know how to bend or tweak them all, which provides their contractors with an insurmountable competitive edge. But you may find clues that someone deliberately tried to steer the award by examining these competitive safeguards and their applications. Some COs steer awards for reasons other than kickbacks but skewed competition is often a great lead for detecting an improper relationship.
Obviously, firms actively seeking competition in their procurements get better prices, more options, increased negotiation leverage, and limited fraudulent relationships. Additionally, procurement fraud can adversely affect public and private company funding decisions, stock prices, and sales. Therefore, it’s easy to see how monitoring and enhancing vendor competition can affect your operations and bottom line. However, a glance at most priority lists shows “Enhance Competition” right next to “Clean the Garage.”
This article explores some of the reasons offered and techniques deployed for stifling or eschewing procurement competition. If you know these reasons you can better understand how to circumvent them before the fraud begins or how to uncover fraud if it has occurred.
In most cases, a paucity of qualified bids usually means competition was inadequately sought or deliberately stifled. However, a shortage of bids just might be how the ball bounced that time or because the project was highly specialized. Nonetheless, if getting only one or two bids is the entity’s typical yield, it’s not too productive, minimizes your options, and increases your chances for fraud.
If competition were decided without playing games, who knows how many times the Chicago Cubs (perennial baseball playoff losers) would have been champions? Some COs and program managers sincerely believe this axiom, which flies in the face of most procurement policies, particularly in the public sector. Also, because competition keeps prices low and promotes new ideas, why not compete openly and regularly as a matter of policy? If for no other reason, the favored contractor may sharpen his pencil and trim some fat off the price he expected you to swallow without blinking. Who’s going to give you the better deliverable – a firm that expects the job or a firm that needs the job? What price would a contractor quote if he knew there were 10 other bidders ... or no other bidders?
Without competition, the contractor has little incentive to control efficiencies, work harder, keep prices down, and assign or keep top staff assigned to the project.
There are few arguments against frequent fair and open competition but this doesn’t imply an entity should conduct monthly bidding competitions. Procurement rules should be based on dollar value and potential risk.
Training a new contractor is often time consuming and difficult. Because of this, some harried or lazy COs will try to steer the award back to the incumbent contractor. Training new contractors may be difficult, but if the new contractor’s price is saving the entity buckets of cash, it will be worth the time it takes to set up a new vendor file or teach someone about your invoicing protocols.
Social relationships and close friendships between contractors and COs sometimes develop over the course of a long-term contract. As the contract comes to a close, COs fondly recall all those goodie baskets, golf outings, lunches, and other little tokens of appreciation they may have received throughout the length of the contract. The CO mulls over the contractor’s satisfactory performance and the competition-killing rationalization begins. A healthy skepticism should always be at the forefront of your CO’s relationships with contractors.
In the worst cases, some COs seek to steer an award because they are receiving or will receive payment from an unscrupulous contractor or bidder. Catch these people as soon as you can and prosecute them most publicly. To further dissuade this practice, establish and publicize kickback prohibitions, set up hotlines so employees can report suspicious activities anonymously, and require COs to file annual conflict-of-interest certifications. Recommend installing an additional fraud hotline for reporting suspected procurement fraud.
If you suspect someone is receiving kickbacks for steering or awarding contracts, you should employ basic fraud examiner techniques. In addition to interviewing staff, examining bid documents, and checking for lifestyle changes (such as a new car), you might want to conduct some forensic accounting. Forensic accounting in cases like this might require obtaining subpoenas or search warrants to properly examine bank records, phone records, and e-mails to prove procurement fraud and receipt of kickbacks. The suspect’s resume may provide evidence of a prior relationship with the suspected contractor that could bolster your case. Note: Be sure to request staff resumes from the human resources department because if you ask the suspects for their resumes, they’ll likely excise any leading information.
The subtle methods used to steer an award to a particular contractor are often undetected or may seem unimportant to the untrained reviewer. Fraud examiners should be aware of these red flags and develop tests to detect competition impediments.
Note that some COs may rank dead last on the procurement competition scale, but it’s not because they’re involved in an improper contracting relationship. Sometimes, the CO will be unaware or otherwise unconcerned about the lack of competition. Some COs ease all competitive restrictions for the sake of expediency, but it’s always harder and takes longer to do things right.
Most procurement packages list the required qualifications for all bidders. Common “must haves” include years in business, prior experience with projects of similar size and scope, and specific licenses. But in many cases, the incumbent contractor is the only entity able to fit this narrowly defined profile. Placing unnecessary, competition-stifling requirements is the most common technique to steer an award. Your entity should use common sense when reviewing these mandatory requirements. If the entity is seeking bids for its company’s e-commerce portal, why ask for 10 years of experience when portals didn’t even exist back then? When comparing security guard proposals, how much better is five years of experience compared to three? Does your entity’s office supply vendor really need 10 years of experience in the local area?
We’ll Evaluate on Three Things: A, A, and A
Ideally, the evaluative factors in any procurement should be distinct from one another. Consider the following two beauty contests:
Beauty Contest A – contestants will be graded on:
Beauty Contest B – contestants will be graded on:
In Contest A, the three criteria are clearly disparate and distinct from one another. However, the scores in Contest B are somewhat the same and you’ll essentially be judging the same thing three times.
Now consider the evaluative criteria from a recent federal procurement solicitation:
Proposals will be evaluated on:
Does this criteria look more like Beauty Contest A or Beauty Contest B? How much of an advantage would the incumbent contractor have in this federal procurement?
When designing the rules of its beauty contest, the entity should consider other factors such as quality of proposed project plan, proposed innovations, project phasing options, and other factors which may help it better discern the best candidate. It’s my experience that the most saintly COs with the most honorable intentions still have difficulty in creating distinct and disparate evaluative criteria. Therefore, if you find evidence of this, don’t start reaching for your gun.
Of all the competition-stifling techniques, few are more brazenly effective than soliciting only one source. While most procurement thresholds require the CO to solicit at least three sources to satisfy competition guidelines, some COs call only one firm, award the contract, and then list two other firms as “solicited” in the contract file. Deter and detect this fraudulent practice by calling the alleged non-bidders at random to confirm they were solicited. If the CO’s procurement file indicates one firm repeatedly lost or chose not to bid, contact that firm to discuss and confirm this. When speaking with these firms, explain you’re doing a quality control survey to confirm the procurement action, the date, and the manner in which they were solicited. If you find discrepancies, consider requesting copies of any solicitation documents they may have. Expand your random non-bidder search, focusing on procurement actions with repeated winners or losers. In the worst-case scenario, these firms who repeatedly lost to the repeated winner don’t exist or were never solicited for award.
Some procurement actions and projects are so specialized very few legitimate candidates for award exist. Space shuttle and Mount Rushmore jobs aside, these instances are and should be quite rare. Dealing with a sole source is a risky endeavor because the entity is at the mercy of the vendor’s schedule, resources, and most importantly, prices. More important to consider, what happens to the business if this vendor goes out of theirs? The entity should determine if there are indeed no other firms which could perform this task. If there are no other sources the entity should consider strategies to mitigate this risky reliance. If there are other sources, it should try to discover the reasons someone wanted to eschew the competition.
This is the easiest way to get a kicking-back contractor on board. Examine all sole sources and look for patterns. Try to discern who the biggest internal supporter and question that person skillfully. Seek to understand how cozy the relationship was between the winning contractor and internal staff.
Many times, the person requesting the contract action (the User) is the one involved in the improper relationship. In these cases, the CO may be unconcerned or oblivious to the User’s bias toward a particular contractor. A CO might believe his prime objective is to get the User exactly what they want as quickly as possible. In these cases, the CO may be a good source for information regarding a User’s bias toward a contractor.
Slight changes in project specifications, contractor requirements, evaluative criteria, and even due dates can translate into an insurmountable competitive advantage for a particular firm. Because of this, it’s a competitive death sentence if an incumbent or prospective contractor helps write or review an upcoming project’s requirements. It’s hard for a contractor not to slant things (subconsciously or deliberately) to its particular methodology or product, thereby creating a “can’t-lose” bid environment. Sometimes, for reasons ranging from well intentioned to downright scurrilous, an incumbent will be asked to review a future statement of work for accuracy or clarity. These unfair competitive advantages not only impede competition, they are also grounds for highly sustainable protests that if filed would likely result in costly schedule delays and re-procurements. Place strict controls when outside staff assists in preparing your solicitation documents or specifications. If outside staff is needed to do this, they must be excluded from bidding on this project or becoming a project team member. Furthermore, any people providing assistance in this regard should be required to sign confidentiality agreements to prevent them from providing others with inside information. These agreements should clearly list the repercussions (such as fines, prosecution) for violating their terms and conditions.
If this is a prohibited practice in your procurement arena, it’s grounds for a highly sustainable protest. If staff is delegating this all-important function, find out why. In the best-case scenario, outsiders are being asked to help because of expediency. In the worst-case scenario, the CO wants to ensure one particular firm wins the award because of a kickback promise.
Many times, a proposal due date gets extended at the last moment. While this often happens for innocuous and uncontrollable reasons (such as the CO went on disability), it could be an indication of award steering. Perhaps the incumbent or favored firm couldn’t or didn’t get their proposal in on time and the CO wants to make sure they get the award. Perhaps someone outbid the favored contractor and the CO needs to extend the deadline so the favored contractor knows what price they have to beat.
Whatever the reason, the contractor who worked all night on his proposal and cancelled other meetings to make the initial due date may not greet this extension with open arms. He went the extra mile to ensure his company beat its competitors to the finish line and now the finish line has been pushed back a little further. They may stop bidding on your entity’s jobs, denying it the benefit of competing prices and enhanced options. Word may spread in the contracting community that yours is a “closed shop” in which no new contractors, ideas, or prices are welcome.
In a perfect world, a well-run solicitation would yield several bids, each bid presenting a unique approach, and all within a few dollars of each other. However, in the world we live in, we might get only two bids – one for $100,000 and one for $1,000,000. Surely these two contractors based their bid on the same solicitation documents. The cause of these wide-ranging bids is typically due to your inability to precisely communicate your needs such as ill-defined quantities or an unclear depth of scope.
If you solicited for maid service for a two-bedroom apartment, here are some bids you might receive:
| BIDDER | BID | INCLUDES |
| Maid No. 1 | $50 per week | Vacuuming, laundry |
| Maid No. 2 | $100 per month | Vacuuming, laundry, windows, bathrooms |
| Maid No. 3 | $75 per month | Vacuuming, laundry, bathrooms |
| Maid No. 4 | $60 per month | Vacuuming, bathrooms |
It’s easy to see how a simple job with a poorly defined scope can leave you picking from apples and oranges. Imagine a job with more variables such as a closeout audit or a best practices study. To deter wide-ranging price bids, consider releasing the prior contract value or sharing the in-house estimate of cost or hours (if possible, some procurement rules prohibit this). Think of the key variables (such as total invoices to review) and try to define depth wherever possible (such as page length for a study).
If the scope is deliberately vague, it could mean someone wanted some wiggle room in the selection process. In the above scenario, a case could be made for each maid service offer, leaving the selection up to the bid panel’s whim when ideally it should be a cut-and-dry affair centered on the strength and clarity of the proposals. If the selection and evaluation process seems arbitrary to the contracting community, you may receive fewer bids in the future.
Many firms develop contractor pools (such as task order agreements) to address recurring needs for a particular product or service such as office supplies or part-time help. These contractor pools contain a number of qualified contractors and – depending on the rules of the pool – when a procurement need emerges, one, some, or all of these contractors are given an opportunity to quote a price or submit an abbreviated proposal. A good pool will define pool utilization protocols upfront, clearly stating which pool firms will be solicited, how, and how often.
Contractor pools such as task-order agreements are recommended for streamlining operations but they must be closely monitored because of the diminished controls. Occasionally, these pools will be stocked with a favored contractor and an assortment of second-rate fish. A thorough procurement review will examine these pools to see if one contractor has received a disproportionate share of awards and/or fees. Undue concentration of award or fees to any one particular contractor may indicate someone is deliberately steering awards.
Examine a few task orders (start with the big-dollar awards), and see if the pool rules remained constant from award to award. Check to see if the awards are disproportionate to the fees. It may be that all of the pooled contractors won the same number of task orders, but one contractor got all the big ones. If you suspect chicanery, you may want to check with the accounts payable department to ensure actual payouts reconcile with the CO’s payment file. Some big task orders may be deliberately left off the CO’s payment file to throw off an inexperienced procurement examiner.
Giving potential bidders too little time to prepare a quality proposal is another subtle way to steer an award to a particular firm. Tipping off a favored contractor in advance of an announced requirement announcement affords them more time to prepare a competitive proposal or assemble a viable contract team. Ample time should exist between bid announcements, pre-bid meetings, and bid due dates to allow the contracting community to fulfill your needs.
Review procurement policies for any guidance on lead-time requirements. If none exist, consider developing and implementing them based on a risk-related scale.
The base of the selection power generally resides in the technical evaluation panel. Most panels have three to four members who will evaluate each proposal in four or five categories using a 1- to 10-point scoring system. These technical scores are then merged with their cost rankings to determine whose proposal is most advantageous. If a department head wanted to ensure his favorite contractor comes out ahead in the evaluation, this department head might chair the panel, pack it with subordinates, and covertly or overtly steer the group’s opinion. To further avoid any implication, the department head may simply appoint a subordinate to chair the panel and later provide less direct but equally effective steering pressures or inferences.
While department heads may be the most knowledgeable people about the subject matter in question, they are also the closest to the incumbent contractor and may have to work harder if a new contractor is selected. With all its decision-making power and potential for conflicted interests, the panel’s composition should be an integral part of any procurement review.
Examine the technical panel controls in your procurement policy, if any. At a minimum, each member should be requested to sign confidentiality agreements and statements of non-conflict of interest to dissuade or prevent any chicanery. Some procurement policies prohibit the hiring department heads or any of their subordinates to serve on the panel.
Because some procurement rules place no restrictions on panel membership, you may need to review the evaluation panel’s score sheets. Most numerical scores should be accompanied with supporting narrative. As a quick fairness check to see if each proposal seemed to have received the same scrutiny, look for evidence of rubber-stamping the winner’s proposal (such as “good proposal – 10”) and downgrading the others’ proposals (such as “good proposal – 7”).
A tremendous amount of ink has been spilled describing various methods to enhance procurement competition. If no one is steering the award, failure to adequately seek competition can range from poor outreach efforts to ineffective contractor databases.
Outreach efforts can be improved by posting advance notices on key procurements, conducting pre-bid conferences, having periodic vendor fairs, holding workshops for prospective vendors, and utilizing the Internet to broadcast needs.
Measure the effectiveness of contractor databases by examining solicitation-to-bid ratios. Many contractors overstate their range of services when registering with you, resulting in Joe’s Window Cleaning being needlessly solicited for your e-portal project. Keep the database vital by requiring contractors to periodically re-register.
Many fraud examiners are familiar with generally accepted accounting standards and frequently apply this knowledge while on the job. However, the enlightened fraud examiner becomes familiar with the procurement rules, seeks to discover who broke them, and then asks why.
If the fraud examiner finds competition was impeded or avoided, the next step is to determine if it was done so deliberately. (Be warned: The seasoned fraud examiner knows how difficult it can be to prove intent!) Deliberate stifling of competition could be an indicator of contractor kickbacks or other fraudulent practices.
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Written By:
Tom Caulfield, CFE, CIG, CIGI
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