construction fraud report

©2012

THE IMPORTANCE OF AUDITING IN AN ANTI-FRAUD WORLD CONSTRUCTION FRAUD: DETECTING, CONTROLLING, & AUDITING

Fraud is alive and well within the construction industry and permeates virtually all levels of

construction activity for both domestic and international projects. This session will provide an

understanding of fraud’s impact on the industry with a focus on the three primary elements of

construction costs where fraud occurs: labor, materials, and equipment.

LOUIS URSO, CFE, CIA

Principal

L.A. Urso Consulting

Lakewood Ranch, FL

Louis A. Urso has worked in the Construction Industry for more than 35 years in various key

management roles, including Project Controls, Construction Auditing, and International Project

Development. While with his former employer, Air Products and Chemicals, Inc., Mr. Urso

provided instruction and training in Project Controls, Construction Systems, and Construction

Audit techniques to engineering and financial professionals in the United States, China, Taiwan

Singapore, South Korea, Hong Kong, Indonesia, Malaysia, Thailand, Brazil, and the UK. He also

spent three years in Saudi Arabia and two years in Venezuela managing the project controls and

finance on several major heavy industrial projects.

Mr. Urso is currently an independent consultant providing clients who undertake major

construction projects with Controls Review and Analysis, Cost Recovery Auditing, Cost Systems

Development, Frauds Investigations, and Construction Audit and Fraud training seminars. He

has handled investigations regarding bidding irregularities, employee fraud, and contract fraud.

“Association of Certified Fraud Examiners,” “Certified Fraud Examiner,” “CFE,” “ACFE,” and the

ACFE Logo are trademarks owned by the Association of Certified Fraud Examiners, Inc. The contents of

this paper may not be transmitted, re-published, modified, reproduced, distributed, copied, or sold without

the prior consent of the author.

CONSTRUCTION FRAUD: DETECTING, CONTROLLING, & AUDITING

23rd

Annual ACFE Fraud Conference and Exhibition ©2012 1

NOTES Status of Fraud in the United States

Statistics on incidents of fraud consistently rank the

Construction Industry in the top tier of industries

experiencing fraudulent practices. The U.S. Census Bureau

has reported 2011 construction at $816 billion. Statistics

suggest that construction fraud might be as high as 10

percent of total construction activity.

Who Commits Fraud

Perpetrators of fraud do not fit the stereotype of deep dark

sinister individuals who consistently appear on police

wanted posters or crime alerts. Fraud is typically

committed by average individuals. They are generally

married, educated, long-term employees with no prior

arrests and attend church or synagogue. Fraud, at least

construction fraud, often is condoned by management

within contracting firms and their subcontractors. Fraud by

contractor management can manifest itself in the form of

various fraudulent billings, or manipulation of scheduled

values. Overzealous contractor personnel seeking to

maximize their employers profitability in an effort to gain

favoritism, or for personal gain, are very often perpetrators

of construction fraud.

Where fraud is detected, very often owner personnel are

involved in the fraud scheme. They might be involved in

bid rigging, change order manipulation, sole source

contract awards, or cover-ups of fraudulent billing. When

owner personnel are involved, it is almost always for

monetary personal gain in the form of kickbacks or gifts.

Organized Crime

No discussion on construction fraud would be complete

without mentioning Organized Crime and their activities

within the Construction Industry. Everyone has seen


23rd


NOTES depictions of Organized Crime on television and the

movies. While these venues are for entertainment purposes

and the stories presented are fictional, the real-world truth

is that their activities within the Industry are not fiction,

and have a major impact on construction costs and the

general integrity of the Industry. Typically, their activities

are focused within strong labor union areas of the Country.

The Northeast, in particular, parts of Pennsylvania, North

Jersey, New York, Long Island and Connecticut are very

heavily infiltrated by Organized Crime because of their

outright control of, or intimidating influence within, trade

unions. Their fraudulent practices include everything from

bid rigging to falsifying labor rates, billing for no show and

no work employees, and outright theft of material and

equipment.

Minority Business Enterprises (MBEs)

Minority Business Enterprises, or MBEs, were established

in the late 60s and early 70s in an effort to allow greater

access to into business by firms owned and operated by

individuals classified as minorities. MBEs also include

Women Business Enterprises (WBEs). While being

beneficial in terms of providing greater access to the

general business community, fraudulent MBEs and WBEs

are very actively involved in the Construction Industry.

Unfortunately, many times minority enterprises are set up

as shell companies using the wife of a major contractor, or

a member of a minority community as its president, and

submitting inflated payment applications while providing

little or no services and kicking back to the real owners.


23rd


NOTES 2010 Fraud Statistics

As the above chart indicates, the greatest incident of

Occupational Fraud detection is through tips, followed by

internal controls, accident, internal audit, and external

audit. Within the Construction Industry, the most

prominent detectors of fraud are internal controls and

internal audit, followed by accidents. For the most part, tips

are not a strong detection tool in the Construction Industry.

From time to time, a contractor might provide a tip that bid

rigging occurred during the selection process in which they

were involved, although for the most part, those

accusations are found to be the result of personal issues

with the winning contractor, or an adverse relationship with

an owner employee. While these accusations are typically

unfounded, an investigation of the bidding process should

none the less be undertaken.

Bidding Fraud Schemes

There are many forms bidding fraud schemes, all of which

have the common thread of seeking to control the bidding

process and maximize the bid amount of the winning

bidder. These schemes include agreements to distribute

excess profits of the winning bidder among other bidding

contractors. There may also be agreements in place to

Detection of Occupational Frauds

0 10 20 30 40 50 60

EXTERNAL AUDIT

INTERNAL CONTROLS

INTERNAL AUDIT

BY ACCIDENT

TIPS

Ty

pe

of

De

tecti

on

% of Cases


23rd


NOTES award subcontracts or supply contracts to losing bidders, or

contractors who agreed not to bid.

Complementary Bidding

Complementary Bidding, also referred to as “cover,”

“courtesy,” or “symbolic” bidding, is the predominant

form of bid rigging. It occurs when a contractor or

group of contractors agree to submit a bid that is higher

than the contractor designated as the winner, or submits

a bid with terms and conditions known to be

unacceptable to the purchaser.

Bid Rotation

Bid Rotation is an extension of Complementary

Bidding and occurs when conspiring firms agree take

turns submitting the winning bid. Rotating bids to

contractors might be on the basis of distributing equal

monetary values of contract awards, or in the form of

volumes corresponding to the size of the contractor.

Bid Suppression

Bid Suppression occurs when a contractor or group of

contractors do not submit bids or withdraw a bid

already submitted, allowing the designated winner’s bid

to be accepted. Basically, Bid Suppression is the

practice of not submitting a bid for consideration.

Market Allocation

Market Allocation is the practice of contractors

allocating market share by geographic areas, or by

industry. For example, contractors might distribute

certain customers and agree to only submit bids for

specific customers (or submit a complementary bid).

Agreements may also be in place not to compete within

certain geographic regions by declining an invitation to

bid, or again, by submitting a complementary bid.


23rd


NOTES Symptoms of Bid Rigging

Bid rigging can be identified by understanding key

symptoms that exist during, or upon completion of the

bidding process.

The same contractor consistently winning contracts is a

clear signal that some form of bidding irregular might

exist. Typically, this can also be a sign of collusion

between a purchaser’s employee and the contractor.

A contractor or group of contractors submits unusually

higher bids than the successful contractor. This would

be especially evident where the high bids are in the

range of 10–15 percent greater than the winning

contractor.

Contractor submits a bid but withdraws it after

submission or at a time that coincides with the bid

opening process. This could be part of a bid suppression

scheme attempting to direct the award to another

contractor.

A contractor consistently participates in bidding

contracts but is repeatedly unsuccessful. This could be a

symptom of a complementary bidding scheme, bid

suppression, or customer/geographic allocation.

Many times, losing contractors will subcontract to a

winning contractor. While not uncommon, an

investigation of the bidding process should be

undertaken to determine if any bidding irregularities are

associated with the contractor/subcontractor

relationship.

Change orders issued subsequent to contract award

might indicate collusion in a bid rigging scheme

involving both the contractor and an employee of the

purchaser directly involved in the bid solicitation

process.


23rd


NOTES Actual Case

While performing a contract procurement

audit at a major industrial plant, the auditor

noted issuance of a $150,000 change order

two weeks subsequent to contract award for

a major renovation contract. A review of the

bid package revealed an addendum was

issued to the bid documents and was

included in the final bid by all contractors

with the exception of the winning contractor.

The average additional cost of the

addendum bid by losing contractors was

$145,000. When comparing the addendum

to the $150,000 change order, they

appeared identical. A further review of other

contracts revealed the subject contractor

was consistently successful on numerous

other contracts. The major control

breakdown was the company entrusting the

bidding process to a single individual

without appropriate controls in place.

Socializing by personnel involved in the contract

bidding process with existing or potential contractors

might be suggestive of potential collusion in bid rigging

schemes, or telegraphing confidential bid data to aid the

associated contractor.

Controlling the Bidding Process

Strong controls are important at all levels of construction

activity but are essential during the bidding phase. Bidding

is a critical stage, and it sets the tone for the entire project.

A sound contractor qualification process is perhaps one

of the strongest controls leading into the bidding

process. At a minimum, the qualification process

should include a review of the contractors “certified”


23rd


NOTES financial statements, list of key officers, proposed site

personnel including résumés, a Dun and Bradstreet

check, list of project experience and a detailed

statement of their safety program. A detailed safety

program can be very telling about a contractor’s overall

management philosophy.

Adopting a team approach to the contractor

qualification and selection process, and the bid opening

and review stage will serve to mitigate any potential

improprieties associated with bid rigging or collusion.

Sealed bidding should always be used when soliciting

for major contracts. The bidding process must also

include a defined process for the receipt of bids,

including date stamping all bids received, maintaining a

log of receipt, locking all bids in a secure location,

strictly adhering to the bid cut-off date, and not

allowing any bids subsequent to cut-off.

Strong policies and procedures specifically addressing

how the bidding process is conducted are essential for

major contracting activity. Procedures should describe

the contractor qualification and review process,

contractor selection, bidding time table, bid receipt

validation, and the bid review and selection process.

Typical Construction Contracts

Lump-Sum Contracts

In Lump-Sum contracts, a contractor bids a fixed price

including all labor, material, and equipment. While

lump-sum contracts do not require a high level of

administrative oversight, many owners have the

erroneous opinion Lump-Sum contracts present little or

no risk of overcharges and fraudulent billings. Risk

issues associated with Lump-Sum contracts may

include initial contract documentation, material quality

and quantities, change orders, and labor allocation.


23rd


NOTES Unit Price Contracts

There are basically two types of Unit Price contracts.

The first relates to the procurement of material and

major equipment items where the vendor quotes a price

that includes labor, materials, and in some cases

shipping. The second type is for construction activity

where the contractor quotes a price based on

predetermined units.

Cost Reimbursable Contracts

Cost Reimbursable contracts present the highest level

of fraud risk and overcharge exposure as compared to

other types of contract models. Under a Cost

Reimbursable contract, a contractor is paid based on

actual costs incurred, plus a mark-up for overhead and

profit.

The keys to effective management and cost

containment for a Cost Reimbursable contract are the

initial payment requirements and audit clause

incorporated into the contract. A careful definition must

be established for what constitutes reimbursable and

non-reimbursable costs, the level of documentation

required, the owner’s right to audit and accessibility of

records.

Time & Material Contracts

Under a Time & Material contract, the risk of fraud and

overcharge exposure closely parallels the risks in a Cost

Reimbursable contract. Both types of contracts are

administered in essentially the same manner, although

with one major exception. Within a Cost Reimbursable

contract, labor is charged at actual costs plus overhead

and profit. Under a Time & Material contract, time is

billed at an agreed upon hourly rate including overhead

and profit. Material is normally billed at cost plus a


23rd


NOTES mark-up for overhead and profit. Equipment may also

be billed at a predetermined rate including operator

costs, fuel and overhead, and profit.

NOTE: Cost Reimbursable and Time & Material

contracts may also be structured to include a fee as

opposed to a profit mark-up. The fee may be structured

in several different manners: 1) Fixed fee determined at

the time of contract formation; 2) Contract pays a fee

based upon meeting or exceeding performance targets;

3) Fee is based on work performance (may be a

subjective determination); 4) Fee increases as contract

costs rise. This fee arrangement is seldom used because

there is no incentive for contractor to control costs.

Guaranteed Maximum Contracts

Under a Guaranteed Maximum contract (G-Max), the

contract cost is fixed at a “Guaranteed Maximum”

price. Typically, G-Max contracts are administered in

the same manner as a Time & Material contract with

one major exception; G-Max contracts include a cost

savings element in which both the contractor and owner

agree to share in any contract savings. Contract savings

percentage is determined at the beginning of the

contract. The contractor’s fee is also fixed and invoiced

based upon a percentage of completed work through the

billing period.

Use of G-Max contracts changes the atmosphere from

an adversarial relationship to one of a partnership

manifesting itself in a yield at the end of the project that

often exceeds the original objective. The whole issue of

cost is manageable when the savings are shared, rather

than negotiating from an adversarial position.


23rd


NOTES Lump-Sum Contract Risks

Prior to commencing any work, the purchaser must

have the assurance that each contractor has the

appropriate level of liability insurance and, where

applicable, automobile coverage. This should be

evidenced by a Certificate of Insurance from the

contractor’s carrier. Ideally, the certificate should be

part of the bid phase documentation process.

Evidence of any required bonding should also be

secured from the contractor’s bonding company.

Sales tax laws with regard to equipment and

improvements for construction activity vary from

state to state. The purchaser should gain assurance

that all appropriate sales tax credits have been

incorporated into the contractor’s bid and applied to

any additional material and equipment purchases.

Quantity and quality of materials in a Lump-Sum

contract is something the purchaser’s site

supervision should be monitoring. Further

assurances, however, can be gained by requiring

copies of material purchase orders from the

contractor, or, ideally, the purchaser can purchase

all materials for the contractor.

Quality of work is not just limited to aesthetics, but

also includes a welder performing welds on

stainless steel but not being certified for stainless; or

concrete that does not meet specified strength

requirements.

Regardless of how tightly written contract scope is,

there will always be contract revisions requiring

change orders. While change orders should always

be written on a lump-sum basis, the full scope of a

change may not always be known, and may be

written on a cost reimbursable, or time and material

basis. When changes are executed on a

reimbursable basis, the purchaser should validate


23rd


NOTES that workers charged to the change order are not

actually working on the Lump-Sum portion of the

contract. Controls should be in place to secure daily

time cards approved by the purchaser’s site

supervision, and periodic field checks performed for

the assurance that individuals charged to the change

order are physically involved in the work.

Unit Price Contract Risks

Unit Price contracts require a very strong field

supervisory presence to gain assurance that the

quantities invoiced are consistent with the quantities

installed. Contingent upon the type of contract (i.e.,

piling, piping, etc.), a log or some type of

documentation should be maintained by the

contractor for validation by field site supervision.

Measurement is of course the primary element in

billing Unit Price contracts. For example, a piling

contractor driving pilings based on meters must be

validated to ensure the billings are not measured in

yards. Another example might be a landscaping

contractor with a contract calling for ten trees per

acre over a fifty acre area, must be validated to

ensure the trees are not planted in a one and one

quarter acre area.

There is always a risk that unit pricing, or any

pricing, measurements are inflated. This is an

administrative issue where controls should be in

place to validate unit billings against those

stipulated in the contract.

Cost-Based Contract Risks

Labor and related charges for taxes, insurance, and

fringe benefits rank among the highest level of risk

in cost-based contracts. Initial labor rates will be

developed at contract initiation utilizing those


23rd


NOTES established by the contractor if non-union, or by

prevailing wage rates established under union

agreements. In either case, the risk exists that

employees may be fraudulently charged (ghost

employees), base labor charges may be inflated, or

costs in excess of tax bases, insurances, or fringe

benefits may be charged and profit and overhead

mark-ups may be inflated.

Other labor risk issues include charges for varying

classes of employee. Examples include journeymen

being charged as foreman or sub-foreman, or

apprentices charged as journeymen.

Salaries of some office support or contractor

management may also be included in a contract, but

special attention should be given to support costs to

make sure the charges are those authorized under

the contract, and any add-ons for bonuses or

additional overhead is not applied.

Overtime hours should also be carefully evaluated

and a clear statement included within the contract as

to when overtime and premium overtime shall be

paid. Unless specifically authorized by the

purchaser, the premium portion of overtime should

not be paid.

Contractor-Owned Equipment Rental

Construction equipment is a necessary part of any

construction contract. Excavation contractors need graders,

dozers, backhoes; a masonry contractor will need

scaffolding and hoists; an electrical contractor might need

power lifts or small cranes for lifting transformers into

place.

Regardless of the equipment needed, construction

equipment should be specifically detailed in the

contract listing each piece of equipment needed; the

equipment number; hourly, daily, weekly, and monthly


23rd


NOTES rental rate; the equipment’s fair market value; and its

age of equipment. While documenting by approved

timecards is essential to validate equipment utilization,

establishment of the equipment’s fair market value is

equally as important. This is essential because what the

purchaser should not do is pay more in equipment

rental costs than the equipment’s market value. By

paying costs in excess of value, an operating rental now

becomes a capital lease subject to depreciation.

Equipment rental rates, with regional adjustments and

fare market values for most major equipment, can be

found in the AED Green Book Equipment Rental

Guide. See “Useful Reference Material” at the end of

this paper for other helpful guidance.

Materials Usage

Material costs within Cost-Based Contracts present

substantial areas of risk for fraudulent activity. Examples of

items where the purchaser might have exposure include the

following:

Without a strong materials receiving and control

process, contractors can easily divert or retain material

for use on subsequent projects. It is also not uncommon

for a contractor doing an expansion, remodeling, or

renovation project to reuse removed materials and

invoice for them.

Contractors might also submit fraudulent invoices to

substantiate materials diverted or otherwise retained.

Cash and trade discounts can be substantial for major

projects. Conduct a careful review of all invoices to

make sure cash and trade discounts were taken and

credited to the purchaser.

Deposits are typically charged for cable reels and gas

cylinders. Deposits for cable reels can range up to

$1,000. Deposits should be carefully recorded in a

subsidiary journal and tracked for to ensure that the


23rd


NOTES purchaser receives full credit for all returns by the

contractor.

Bulk materials such as stone, sand, and fill are

estimated on a cubic yard basis, although typically

purchased by weight. Weight tickets from a certified

scale should always be required with review and

validation by site supervision.

QUESTION: When does one pound of dirt weigh more

than one pound?

Other material items that should be closely controlled and

monitored include:

Small tools

Consumable supplies

Both small tools and consumable supplies are typically

included as a mark-up added to the hourly labor rate. The

rate may vary, although is in the range of $.03 to $.05 per

hour. Alternatively these items may be included in the

contract as a separate line item charged as actually

incurred. Small tools include hand tools such as pliers,

screwdrivers, small drills and bits. Consumable supplies are

items such as oils, rags, weld rods and gas, sand paper, etc.

It is not altogether unusual on major projects to

purchase computers, copy machines, office furniture

and other equipment for utilization by the contractor

during construction. Often times this equipment is

ultimately intended for use within the facility being

constructed. Invoices for such purchases should be

retained separately along with maintaining an inventory

that should periodically be validated.

All materials purchased by a contractor are the property

of the purchaser. This includes surplus materials

remaining at the completion of the project and scrap

materials accumulated during construction. Some scrap


23rd


NOTES materials, such as copper, stainless steel, carbon steel,

aluminum, represent a substantial credit.

Where performance bonds are part of a construction

contract, the methodology under which the bonding

company is charging the premium should be

determined. Typically, under a cost-based contract,

which essentially reduces in value as completed, the

performance bond premium will also decrease because

risk to the insurance company becomes less as the

contract progresses.

Change Orders

Projects are never completed without change orders.

Change orders represent a very substantial risk to the

purchaser for inflated or fraudulent charges. Major projects

can have hundreds of changes and include items such as

design revisions, equipment changes, scope increases or

reductions, and base contract revisions.

One of the most common forms of change order fraud

is change orders for work already contained in the base

contract. This may be the result of collusion on the part

of a purchaser’s employee or poor contract

management. A contractor with nefarious intentions

will always be aware of the weakest link in the

purchaser’s personnel.

Change order pricing might also be improperly inflated

if the purchaser is not validating pricing. Pricing can be

confirmed by a formal estimating review process or

informally utilizing estimating guides. A useful

estimating guide for the non-engineer is the R. S.

Means “Estimating Guide.” This guide aids in walking

one through an estimate for a particular type of work,

and also contains very useful cost data, such as regional

labor rates, tax rates, workmen’s compensation rates,

productivity rates, and so on.


23rd


NOTES Fees and mark-up for change orders are usually stated

within the base contract. Change order fees, for

example, under a Cost Reimbursable or Guaranteed

Maximum Contract require special attention because

they may differ from the fee being charged under the

base contract. A contractor may also attempt to

intentionally inflate fees under a change order.

Purchasers might at times supply material otherwise

included in the contract. This could be a major piece of

equipment that the purchaser later determined they

could secure better pricing than originally estimated by

the contractor. In such a case, a deduction change order

must be prepared to reduce the contract.

Work orders can present a very substantial avenue for

fraud if not adequately controlled. Work Orders, also

referred to as Extra Work Authorizations, are written

for small miscellaneous work items that do not require

a formal change order. Typically, Work Orders are

written for amounts less than $8 million to $10 million.

Work Orders are then accumulated, and a single formal

change order is written for incorporation into the

contract. Over the term of a major project, Work Orders

can be substantial. Work orders should be carefully

monitored, estimated, and reviewed before they are

approved.

Backcharging is a process where costs incurred for

rework that is the fault of a contractor is charged to that

contractor. For example, a mechanical contractor

working to install piping damages drywall recently

installed by a carpentry contractor. The prime

contractor is responsible for executing an

“Authorization to Backcharge” and having the

offending contractor sign and agree to the charges.

Failure of a prime contractor to execute a valid

backcharge could be suggestive of collusion between


23rd


NOTES the prime contractor, or an employee, and the offending

contractor.

Other Controls

The single most important control point for the

mitigation of fraud and overcharges is the Construction

Contract. Sufficient detail must be included to clearly

define the project scope (i.e., what specific tasks will

the contractor perform), how the tasks will be

accomplished, and what material and equipment will be

needed.

Detailed billing and documentation requirements

should be included and list specific billing instructions

and documentation requirements. Examples may

include copies of purchase orders, detailed list of

equipment and rental rates, invoices supporting

materials purchases, time cards, certified payrolls, and

so on.

A strong audit clause that allows for full and complete

access to the contractors records, both at the project site

level and home office, should be included in the

contract. This includes, but should not be limited to,

access to payrolls, human resource records, tax records

and supporting documentation, overhead cost data,

insurance policies, expense reports, and so on.

Termination Clauses: As a contract progresses and it is

found the contractor is not executing in a manner

consistent with the project scope, or there is a suspected

element of fraudulent activity, the purchaser needs a

vehicle with which to terminate the contract. Two

specific clauses that should be included are Termination

for Cause and Termination for Convenience. Under

termination for cause, the purchaser must show cause as

to why the contract is being terminated. Without

sufficient cause, the issue could end up in the courts, or

at the very least in arbitration. Termination for


23rd


NOTES convenience is a much easier and cleaner way to

terminate a contract because a purchaser may terminate

a contract for any reason without giving cause.

Delegations of Authority are typically a standard policy

within most organizations. A well-defined signing

authority should also be in place for project activity,

specifically stating who can requisition material, sign

purchase orders, execute contracts, approve change

orders and work orders, approve utilization of budget

contingencies, and sign off on expense reports and petty

cash payments.

Release of lien is an essential part of project close out

activity. Without a properly executed release, the

purchaser may be held responsible for any unpaid

subcontractor costs incurred by the prime contractor.

Throughout the term of the project, it is advisable to

monitor subcontract payments for the assurance all

obligations are being satisfied.

Avoiding theft and diversion of materials or equipment

can be mitigated by establishing a strong site security

program. This may include fencing, controlled site

access, private security guards, “lunch box

inspections,” and tight materials control.

Frequent project status reporting will avoid surprises at

the end of a project and aid in forestalling unauthorized

utilization of contingency funds and avoid actual costs

outpacing committed costs. Status reporting should also

include a project forecast update for comparison to

commitments and actual costs.

A detailed cost reporting system can be a very valuable

tool in fraud prevention by allowing for cost monitoring

at any level of detail defined by the purchaser. A good

cost system should have the capability to monitor the

project budget, commitments to budget, project

forecast, and actual costs. Applications can also be


23rd


NOTES developed for procurement and material receiving,

manpower loading, scheduling, and treasury functions.

Auditing

AUDIT & AUDIT OFTEN. A well-defined audit plan

is a major deterrent against fraudulent billings and

overcharges. A plan should be developed that addresses

all segments of project activity where a risk of fraud or

overcharge exists. For major projects, a well-defined

plan should first review specific segments of a contract

rather than attempting a comprehensive review. Audit

programs should be developed detailing each specific

item to be reviewed and the steps necessary to achieve

the desired results. When auditing construction activity,

the technique to be used is auditing by exception. We

are not performing an audit in a manner consistent with

a financial audit that serves to validate data rather than

auditing for fraud and overcharges.

Testing a contractor’s internal controls is something

that should be performed during or immediately

subsequent to the bidding process. However, because

an audit function is typically not involved in the

bidding process, an initial review of the contractor’s

internal controls prior to commencing an audit will

serve to identify weaknesses where specific audit

attention is necessary.

As important as testing a contractor’s internal controls,

the contracting organization must have a well-defined

controls process in place. This should include policies

and procedures related to construction activity, standard

boilerplate contract formats that can easily be modified

to fit most projects, and a strong team with decision-

making power to monitor construction activity.

Tying out a contractor’s payment applications to their

WIP account will provide an indication of any

substantial overcharges that might have occurred.


23rd


NOTES Variances can be an indicator of fraudulent activity in

the form of kickbacks.

USEFUL REFERENCE MATERIAL

Rental Rates and Specifications

National Averaged Rental Rates for Construction

Equipment

Associated Equipment Distributors

www.equipmentwatch.com

Construction Equipment Ownership and Operating

Expense Schedule

U.S. Army Corps of Engineers

www.usace.army.mil

(Click on library/publications/engineering pamphlets/er-

1110-1-8 vol. 1-12 region I-XII)

Building Construction Cost Data

R.S. Means Company, Inc.

www.rsmeans.com

Excluded from Receiving Federal Contracts

Excluded Parties List System

www.epls.gov

Handbook of Construction Law & Claims

Irv Richter

www.amazon.com

Managing Construction Contracts: Operational Controls

for Commercial Risks

Robert D. Gilbreath

www.amazon.com

http://www.usace.army.mil/

http://www.rsmeans.com/

http://www.epls.gov/

http://www.amazon.com/

http://www.amazon.com/


23rd


NOTES American Institute of Architects

Forms and other useful publications

www.aia.org

Auditnet

Audit Programs for Construction and other Industries

www.auditnet.org

http://www.aia.org/

construction fraud report

Documents