I once reviewed a U.S. federal contract file that showed the Department of Defense (DoD) had awarded a contract to a small business that I’ll call Company A. This was the first federal contract that Company A had ever received. In fact, the file included printed emails that indicated the government contracting officer had helped the company owner become a federal contractor and taught him how to submit its bid proposal.
But other witnesses told me that after the contract was awarded, Company A didn’t actually perform any of the work on the contract. Instead, the company subcontracted out 100 percent of the job to another company that wasn’t an approved government contractor.
While reviewing the file, I learned that prior to the contract’s award, the contracting officer’s supervisor requested that the Small Business Administration (SBA) issue a requiredCertificate of Competency (CoC) on Company A so that the DoD contracting office could justify awarding the contract to this new “small business.” The DoD subsequently awarded the contract to Company A; however, the contract file didn’t contain a copy of the CoC. I also noticed that the contract didn’t include the required limitations on the subcontracting clause. (See U.S. Code of Federal Regulations FAR 52.219-14.)
So, I visited the local SBA office and asked if it had issued a CoC on Company A for that contract. The SBA said they did issue the CoC, but the date of the CoC approval was several months after the DoD had awarded the contract. The DoD hadn’t told the SBA it had already awarded the contract before issuing the CoC.
Armed with this information, I went back to the DoD contracting office to interview the contracting officer’s supervisor:
Me: Let me make sure I get this straight. Before that contract could be awarded to Company A, a CoC was required to be issued on this small business set-aside, correct?
Supervisor: That’s correct.
Me: And when a small business set-aside contract is awarded, the company must complete a high percentage of the work?
Supervisor: That’s correct.
Me: How does the contractor know that they can’t just subcontract 100 percent or most of the work? Is it because you include the “Limitations on Subcontracting” federal acquisition regulation clause in the contract?
Supervisor: That’s correct.
Me: Is that clause required to be in the contract?
Supervisor: Yes, it is.
Me: And a CoC must be issued by the SBA before the contract can be awarded, correct?
Supervisor: That’s correct.
Me: Was it your job as a supervisor to review this contract before it was awarded?
Supervisor: Yes, I reviewed this contract before it was awarded.
Me: So, why was this contract awarded before the SBA issued a CoC?
Supervisor: Ah. Ah. I don’t know.
Me: Well, here, let me show you the dates on the documents. See how the CoC is dated several months after the contract had already been awarded?
Supervisor: I’ll be darned.
Me: And why did this contract not include the Limitations on Subcontracting clause?
Supervisor: Ah. Ah. I don’t know.
Me: Take a look at the contract yourself. I don’t see that required clause in there. Do you?
Supervisor: No, it’s not in there, but it should’ve been. But the contractors know the rules. They know what they can and can’t do.
Me: Wait a minute. Company A never had a federal contract before, and you’re telling me they knew all the rules?
Supervisor: Listen, the DoD requester was in a hurry to get this contract awarded fast and we strive to keep the requesters happy.
Me: So, you don’t follow the contract rules so you can make the requesters happy. Is that what you’re telling me?
Supervisor: We don’t do it like this all the time.
I later learned that the contracting officer had received orders from his high-ranking superior to intentionally not include the required subcontracting clause in the contract so Company A could subcontract the work to a favored company that didn’t want to be a government contractor. Company A wanted to reap and keep a profit of 10 percent of the contract price, so the contracting officer bumped the price to accommodate that. I also learned that the high-ranking superior was friends with the favored contractor.
The takeaway from this story is that contracting officials (and their superiors) can easily manipulate the contract award process in less traditional ways than are described in most contract fraud seminars. It takes time, but if you get really good at investigating contract fraud and corruption, you can uncover lots of wrongdoing. In this case, I also uncovered many other DoD contracts that were awarded to favor certain contractors.
In this article, I’ll cover the contract-award process and — much like the case above — when and how contract fraud schemes occur.
Contract-award processes can vary depending on the organization. A typical contract process might resemble the following:
A contract usually can be modified and/or terminated (in writing) if necessary and permissible as described in the contract.
Contract fraud schemes and related methods of collusion and corruption vary. They can occur during any and/or all of the below time frames:
Although there are many types of contract and procurement fraud schemes, below I outline bid-rigging and buyer schemes, and common forms of collusion in each.
Bid rotation: This takes place when two or more vendors discuss and agree with each other in advance on the dollar amounts they’ll offer on bids or proposals for the same contract(s). They then submit those agreed-upon bids or proposals.
By submitting previously agreed-upon bid prices, the vendors increase the likelihood that a particular participating vendor will be selected (usually because their price is the lowest). Typically, the conspiring bidders alternate or rotate being the low bidder. Alternating which vendor bids the lowest reduces the chance of detection over time. If the same vendor keeps getting awarded all the contracts, that might raise some red flags.
Those that regularly participate in this scheme (unless they get caught) also enjoy steady work. It’s not uncommon for the winning bidders to subcontract with or split awarded contracts with one or more of the other bid riggers (as in our opening case). Also, ensuring that the offered prices are similar means the buyer or contracting official is more likely to deem their prices to be “reasonable” because the buyer will often assume the vendors’ proposals were compiled independently of each other.
Complementary bidding: This is when a vendor convinces a second vendor to submit a “complementary bid” for a contract that the second bidder doesn’t actually want to be awarded. The second bid just gives a better appearance of adequate competition and usually price comparability. For example, if an item only costs $50, but Vendor A wants to greatly increase its profit, it might submit a bid price of $100 per item.
That bid price might seem way out of line. But if a second vendor submits a bid for $101 per item, then the price appears to be reasonable.
Fictitious vendors: During pre-award processes, scheming vendors will submit bids under the names of entities that don’t actually exist. Some do this for the same reasons described under complementary bidding.
Red flags for detecting fictitious vendors and some bid riggers include:
Bid suppression: In these schemes, one or more vendors that usually submit bids for certain types of contracts, intentionally refrain from submitting bids so that another known vendor will most likely get awarded the contract(s).
Each complaint might only seem like a single red flag. But if you expand your investigative search based on the information provided, you might identify a pattern ... Take all complaints seriously.
Market division: Some contractors that sell the same types of products or goods, or provide the same types of services, will conspire to split specified markets among themselves by not competing against each other — even though they could. For example, one vendor might only sell to companies or individuals east of the Mississippi River and the other vendor will only sell to companies and individuals west of the Mississippi. They might artificially inflate their prices, and if asked to provide quotes in the other’s area, they’ll either refuse to provide the quotes or provide ridiculously high price quotes.
Price fixing: This occurs when vendors intentionally maintain, raise or fix the prices of their goods and services at artificially inflated prices.
A bid-rigging flag could be when vendors that have been awarded contracts split or subcontract the work with other vendors that also submitted bids for the same contracts. Be wary of vendors that have close business ties and relationships.
To prove most bid-rigging cases, you’ll usually need to review and analyze historic bids and proposals and the awarded contracts that followed. Review bid evaluations and ratings, and other contract file documents.
Splitting purchases: This scheme is when the buyer’s purchasing representative (often a contracting officer) intentionally splits what could be one order into two or more orders. A buyer might split an order to keep the total order’s cost under a certain threshold, which would’ve required more formal competition.
Look for patterns of abuse when the same buyers repeatedly place orders to the same vendors (perhaps at inflated prices) or make obvious attempts to favor certain vendors. There’s a strong possibility that the buyer who repeatedly splits orders is receiving or has received bribes, gratuities or something else of value from the vendor(s) to which they awarded the contracts/orders.
Release of bid information: A buyer could release bid information to a bidder before the bid closing time/date so the favored bidder can underbid others’ proposals.
Accepting late bid proposals: A buyer might accept bids later than authorized and still consider the late bids for the contract award. This red flag doesn’t prove a crime’s been committed. Obviously, it’s an indicator that perhaps the late bidder received inside information about the other bidders’ prices. If the late bidder won the award, then you’d certainly have another red flag.
Changing of bid prices and blank bids: Red flags would be use of correction fluid, inked cross-out marks and corrections, different color ink, or a mixture of handwritten and typed entries on a bid proposal. Cases also have shown that corrupt bidders sometimes send in bids without a cost listed in the bid price because they know the buyer (whom they paid off) will fill it in with the winning bid price.
Reposting the same need: A buyer could cancel a request for bid proposals after bidders provide their bids and then shortly after repost a second request for bids for the same need. This could be a red flag indicating the buyer shared bid proposal information with one or more other vendors.
Making unnecessary purchases: If a buyer or customer is receiving bribes or kickbacks, or is receiving gratuities, they might place orders for goods or supplies that aren’t necessary.
Excluding qualified bidders: Honest and good vendors sometimes have their bids kicked to the curb just because they didn’t follow instructions exactly. Detect favoritism by carefully examining and comparing all bids received and their evaluations and ratings. For example, a fair evaluation of bids shouldn’t allow exclusion of one vendor for a fault but consider another vendor who’s committed the same fault.
Intentionally vague, overly specific or overly broad specifications or contract requirements: Any of these might result in the selection of a favored contractor and/or the dismissal of other vendors’ bids. The way in which the requirements are written will cause qualified vendors to refrain from submitting bids.
Unjustified sole source: Customers or buyers might require parts or items from a certain brand name or manufacturer even though another brand or manufacturer’s part works just fine.
Change order and modification manipulation: A vendor might have inside information from the contracting officer that the company will modify the requirements after it awards a contract. In this case, the contracting officer might add additional products or services, extend the completion schedule or add other deviations to benefit the favored vendor. Because this information isn’t provided to others in advance, other vendors might not compete for the contract. And those that do, might bid higher because they don’t have access to all of the information.
Occasionally, vendors in the same industry that compete for similar contract awards will monitor contracts that are awarded to others and changes to other vendors’ contracts. Sometimes they make complaints to the awarding contracting office or other officials within that organization. In federal procurements they might file official protests with the U.S. Government Accountability Office (GAO).
Carefully review and consider those complaints because many of them have merit. Each complaint might only seem like a single red flag. But if you expand your investigative search based on the information provided, you might identify a pattern that even the original complainant wasn’t fully aware of. Take all complaints seriously.
The GAO’s website allows members of the general public to search recent bid protest decisions. However, central databases for all competitor complaints don’t exist. Consequently, each complaint or protest is typically evaluated on its own merit. But if you know of all or most complaints and evaluate them collectively, you could identify many more instances of corruption and wrongfully awarded contracts and other purchases.
Contract and procurement fraud, collusion and corruption are worldwide problems. Too often, organizations dismiss red flags because of their ignorance or misguided trust. But bad guys can’t undo the paper trail they’ve left behind. It will be your combined knowledge of contracting procedures and schemes, interviewing skills and persistence that will pay the highest dividends.
Charles E. Piper, CFE, is a private investigator and owner of Charles Piper’s Professional Services in Memphis, Tennessee. He previously served 30 years in law enforcement, including 20 years as a federal special agent with the Department of Defense. Piper was the recipient of the ACFE’s 2014 Hubbard Award. Contact him at pipercfe@cs.com.
Copyright 2018, from “Contract and Procurement Fraud Investigation Guidebook,” by Charles E. Piper, CFE. Reproduced by permission of Taylor and Francis Group, LLC, a division of Informa plc. Available at the ACFE Bookstore, Amazon and other booksellers. — ed.
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