APPENDIX Y.-EXCERPTS FROM THE DEFENSE DEPARTMENT INSPECTOR GENERAL REPORT, "INDICATORS OF FRAUD IN DEPARTMENT OF DEFENSE PROCUREMENT," REPRINTED IN FEDERAL CONTRACTS REPORT (VOL. 42), DATED SEPTEMBER 10, 1984 TEXT EXCERPTS FROM THE DEFENSE DEPARTMENT C. Fraud in the Development of Statements of work and detailing the are Bid specifications and statements of work (Vol. 42) 341 342 (Vol. 42) FEDERAL CONTRACTS REPORT 2. Falsified statements to justify sole negotiated procurement. source or 3. Justifications for sole source or procurement signed by officials without authority deliberate by-passing of required levels of review. 4. Placing any restrictions in the solicitation documents which would tend to restrict competition. 5. Providing any advance information to contractors E. Fraud in Solicitation Phase Fraud indicators include: 1. Restricting procurement to exclude or hamper any qualified contractor. 2. Limiting time for submission of bids SO only those with advance information have an adequate time to prepare bids or proposals. 3. Revealing any information about procurement to contractor which is not revealed to all (from either technical or contracting personnel). one invites bid 4. Conducting bidders conference in rigging or price fixing or permits communications between contractors (See Chapter IV). of 5. Failure to assure a sufficient number potential competitors are aware of the solicitation. (Use of obscure publications, publishing in holiday season, providing a vague or inadequate synopsis to Commerce Business Daily, etc.) 6. implied that if you use the referred business, you will be more likely to get the contract.) include 13. Failure to amend solicitation to necessary changes or clarifications. (Telling one contractor of changes that can be made after award.) 3. Change in a bid after othe: bidders prices are known. This is sometimes done by mistakes deliberately "planted in a bid. 4. Withdrawal of the low bidder who may become a subcontractor to the higher bidder who gets the contract. 8. Falsification information contractor Bid solicitation is vague as to the time, place, qualifications, financial capability, facilities, Ownership of or other requirements for submitting acceptable bids. equipment and supplies, qualifications of personnel and successful performance of previous jobs, etc. Little or no control over the number destination of bid packages sent to interested bidders. Fraud in the Evaluation of Bids and Proposals 8. Improper communication with contractors at or 9. Government personnel or their families acquiring 10. Government discussing possible Deliberately discarding or "losing the bid or nonresponsive bids from preferred 4. Seemingly unnecessary contacts with contractor personnel by persons other than the contracting officer during the solicitation, evaluation, and negotiation processes. 9-10-84 Published by THE BUREAU OF NATIONAL AFFAIRS, INC., Washington, DC. 20037 TEXT (Vol. 42) 121 343 5. Any unauthorized release of information to contractor or other person. a 6. Any exercise of favoriti toward a particular contractor during the evaluation process. 7. Using biased evaluation criteria or using biased individuals on the evaluation panel. 1. Award of a contract to a contractor the lowest responsible, responsive bidder. who is not 6. Advance information concerning who is going to win a major competition can give advantages to persons trading in the stock of both the winning and losing companies. 7. Awards made to contractors with an apparent history of poor performance. 8. Awards made to the lowest of a very few bidders 9. Awards made that include items other than those 10. Awards made without adequate documentation of all preaward and postaward actions including all understanding or oral agreements. I. Fraud in the Negotiation of a Contract of There are a number of abuses which can Occur in the negotiation of a contract. The first stems from the assumption many personnel that once it has been determined that negotiated procurement procedures can be used (called procurement with discussions in the new FAR), that procurement on a sole source basis has also been justified. Whether a contracting officer is making the decision on 3 small dollar contract or formal determination is being made by highe: authority. Competition required unless specific justifications exist and are documented. Fraud indicators include: 1. "Back-dated" or after-the-fact justifications may appear in the contract file or may be signed by persons without the authority to approve noncompetitive procurement. 2. Information given to one contractor which is not given to others which give it a competitive advantage. 3. Improper release of information (e.g., prices in proposals, technical proposals or characteristics of proposals, identity or rank of competing proposals, proprietary data or trade secrets, and Government price estimates) to unauthorized persons. D 4. Weakening the Government's negotiating position through disclosures to the contractor selected for award. Contractor misrepresentation as negotiations (See Chapter III). 5. 6. to costs during to obtain and Failure of Government personnel rely upon a Certificate of Current Cost or Pricing Data. September 1983, the Director of DCAA issued a aemorandum to DCAA auditors stating guidance in the area of 3. Failure to correct known system deficiencies. 4. Failure to update cost or pricing data knowledge that past activity showed that prices have decreased. 5. Specific knowledge, that 13 not disclosed, regarding significant cost issues that will reduce proposal costs. This may be reflected in revisions in the price of a major subcontract, settlement of union negotiations that result in lower increases on labor rates, etc. 344 (Vol. 42) FEDERAL CONTRACTS REPORT 8. Indications of falsification supporting data. alteration or of 9. Distortion of the overhead accounts or base 10. Failure to make complete known to responsible contractor personnel. disclosure of data 11. Protracted delay in release of data to the Government to preclude possible price reductions. 12. The employment of people known to have previously perpetuated fraud against the Government. These indicators should be applied as well by contracting officers and others involved in the procurement process. Particular note should be made in defective pricing cases that the "intent" of the contractor will be critical to a determination of whether criminal act occured. The deliberate concealment or misrepresentation of a single significant cost element could constitute a prosecutable crime. The establishment of intent should be the function of trained criminal investigators; auditors and contracting officials should make no assumptions that defective pricing results from unintentional conduct. C. Indicators of Collusive Bidding and Price Fixing The following list of indicators is intended to facilitate recognition of those situations which may involve collusive bidding or price fixing. In and of themselves these indicators will not prove that illegal anticompetitive activity is occuring. They are, however, sufficient to warrant referral to appropriate authorities for investigation. Use of indicators such as these to identify possible anticompetitive activity is important because schemes to restrict competition are by their very nature Secret and their exact nature visible. is not readily Practices or events that may evidence collusive bidding or price fixing are: A 1. Bidders who are qualified and capable of performing but who fail to bid, with no apparent reason. Situation where fewer competitors than normal submit bids typifies this situation. (This could indicate a deliberate scheme to withhold bids.) contractors 2. Certain bid always against each other or conversely certain contractors do not bid against one another. work 3. The successful bidder repeatedly subcontracts to companies that submitted higher bids or to companies that picked up bid packages and could have bid as prime contractors but did not. contractors appear to 4. Different groups of specialize in federal, state or local jobs exclusively. (This might indicate a market division by class of customer.) 5. There is an apparent pattern of low bids an 6. Failure of original bidders to rebid, or 7. A certain company appears to be bidding substantially higher on some bids than on other bids with no logical cost differences to account for the increase, i.e., a local company an is bidding higher prices for item to be delivered locally than for delivery to points farther away. 8. Bidders that ship their product a short distance bid more than those who must incur greater expense by shipping their product long distances. 9. Identical bid amounts on a contract line item by two or more contractors. Some instances of identical line item bids are explainable, as suppliers often quote the same prices to several bidders. But a large number of identical bids on any service-related item should be viewed critically. 10. Bidders frequently change prices at about the same time and to the same extent. 11. Joint venture bids where either contractor could have bid invididually as a prime. (Both had technical capability and production capacity.) 12. Any incidents suggesting direct collusion among competitors, such as the appearance of identical calculation or spelling errors in two or more competitive bids or the submission by one firm of bids for other firms. appear to 13. Competitors regularly socialize or or 14. Assertions by employees, former employees, competitors that an agreement to fix bids and prices or otherwise restrain trade exists. 15. Bid prices appear to drop whenever a new or infrequent bidder submits a bid. 16. Competitors exchange any form of price information among themselves. This may result trom the existence of an industry price list" or "price agreement" to which contractors refer in formulating their bids or it may take other subtler forms such as discussions of the "right price." 9-10-84 Published by THE BUREAU OF NATIONAL AFFAIRS, INC., Washington, DC 20037 TEXT (Vol. 42) 345 17. Any reference by bidders to "association price 18. A bidder's justification for a bid price or 19. Any statements by a representative of 3 20. Statements by a bidder that it is not their turn to receive a job or conversely that it is another bidders turn. D. Collusive Bidding and Price Fixing Examples The following sections describe common collusive bidding and price fixing schemes which DOD personnel may be able to recognize. These schemes relate to one another and overlap. Frequently an agreement by competitors to rig bids will involve more than one of these schemes. 1. Bid Suppression or Limiting In this type of scheme One or more competitors a 2. Complementary Bidding known as "Complementary bidding" (also "protective" or "shadow" bidding) occurs when competitors Subait token bids that are too high to be accepted (or if competitive in price, then on special terms that will not be acceptable). Such bids are not intended to secure the buyer's acceptance, but are merely designed to give the appearance of genuine bidding. 3. Bid Rotation on In "bid rotation," all vendors participating in the scheme submit bids, but by agreement take turns being the low bidder. In its most basic form bid rotation will consist of cyclical pattern a for submitting the low bid certain contracts. This rotation may not be as obvious as might be expected if it coupled with a scheme for awarding subcontracts to losing bidders, to take turns according to the of the contract, of the other market division schemes explained below. refrain 4. Marke from competing division schemes are agreements to 10 a designated portion of a market. Division of a market for this purpose may be accomplished based on the customer ос geographic area involved. The result of such a division is that competing firms will not bid or wi!! Submit only complementary bids when a solicitation for bids is made by a customer or in an area not assigned to them. Cost mischarging is one of the abuses which is common because of the fact that most large Covernment research and development and production contracts are cost type contracts. Because the Government reimburses all costs which are allowable, allocable and reasonable, the contractor may increase profit by mischarging. If labor costs are mischarged, they may be multiplied by 100%-300% 10 indirect cost allowances. Sometimes a contractor is doing similar work for different agencies on fixed priced and cost type contracts. Any work which can be billed to the cost type contracts will be advantageous to the contractor. Sometimes these costs are shifted into indirect cost pools. Frequently work that is being done by low level The issue as to whether a mischarge was a "mistake" or a Under cost type contracts, the Government reimburses the The DAR 15-205 (FAR 31.205) identifies costs which are |