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CONSTRUCTION FRAUDDETECTING
CONTROLLINGAUDITING
Louis A. Urso, CFE, CIAL. A. Urso Consulting8190 Natures WaySuite 12Lakewood Ranch, FL 34202
Construction Cost Recovery AuditingProject Controls Review & AnalysisProject Cost Systems DevelopmentSeminars – Construction Auditing
Phone: 941-306-5923Email: [email protected]
AGENDA
Status of Fraud in the U.S.Who Commits FraudBidding Fraud Schemes
SymptomsControls
Typical of Construction ContractsRisks and Potential Fraud/Overcharges
Change OrdersOther ControlsAudit
STATUS OF FRAUD IN U.S.
2011 – $816 Billion in U. S. construction activity
Private $529 – Public $287Current statistics suggest fraud accounts for 10% of construction costs
WHO COMMITS FRAUD
Contractor ManagementContractor Personnel/SubcontractorsOwner Personnel:
Site SupervisionProcurement/Contract Administration
KickbacksCash PaymentsGifts
Organized CrimeMinority Business Enterprises (MBE)
2010 FRAUD STATISTICS
Detection of Occupational Frauds
0 10 20 30 40 50 60
EXTERNAL AUDIT
INTERNAL CONTROLS
INTERNAL AUDIT
BY ACCIDENT
TIPS
Type
of
Det
ecti
on
% of Cases
BIDDING FRAUD SCHEMES
Complementary BiddingBid RotationBid SuppressionMarket Allocation
Bidding Risks
BID RIGGING SYMPTOMS
Same Contractor Consistent WinnerLosing Contractor(s) Submit Unusually Higher BidSuppliers WithdrawalContractor(s) Bid But Never WinLosing Contractor Subcontracts To Winning BidderChange Order(s) Issued Upon Commencement of ContractSocializing By Purchasing Personnel
CONTROLLING THE BIDDING PROCESS
Detailed Contractor QualificationTeam Approach to Qualifications Review/Bid OpeningSealed Bids
Date StampedLocked in Secure LocationAdhere to Bid Cut Off Date
Policies & Procedures
TYPICAL CONSTRUCTION CONTRACTS
Lump SumUnit Price
Purchase of Material Utilized on ProjectPerformance of Construction Contract
Cost ReimbursableTime & Material Cost-Based Contracts
Guaranteed Maximum
LUMP-SUM CONTRACT RISKS
Certificate of Insurance/BondsSales Tax on Tax Exempt ImprovementsSpecified Quantity/Quality Materials not UsedQuality of Work Installed does not Meet SpecificationsLump-Sum Charged to T&M
UNIT-PRICE CONTRACT RISKS
Quantities Billed Exceed Quantities PerformedMeasurement Methods do not Properly Reflect the Basis for UnitImproper Increases to Unit Prices on Billings
COST-BASED CONTRACT RISKS
Base Labor Rates/Prevailing WagesTaxes, Insurance, and Fringe BenefitsApprentice Billed as Journeyman
Excess Overhead Rates AppliedNon-Reimbursable Salaries/Bonuses & OverheadNon-Reimbursable Premium Overtime
COST-BASED CONTRACT RISKS, cont. . .
Contractor Owned Equipment RentalMaterials not Used or Diverted
Reuse of Materials
Fraudulent Vendor InvoicesCash or Trade Discounts/DepositsWeight Tickets & Quantities
COST-BASED CONTRACT RISKS, cont. . .
Small ToolsConsumable SuppliesOffice Equipment/Office Furniture/ComputersSurplus (scrap) MaterialsPerformance Bond Premiums
CHANGE ORDERSChange Orders for Work in Base ContractChange Order Price Proposals Improperly InflatedChange Order Fees/Mark-ups Incorrectly BilledOwner Provided Items not CreditedWork Order ChaosBackcharge Administration
OTHER CONTROLS
CONSTRUCTION CONTRACTClearly Defined Project Scope & SpecificationsBillings & Documentation RequirementsStrong Audit ClauseTermination for CauseTermination for Convenience
OTHER CONTROLS, cont. . .
Clear Delegations of AuthorityRelease of LiensSite SecurityFrequent Project Status ReportingDetailed Cost System
AUDIT
When to Conduct A Compliance AuditBeginning – During – End - - ANYTIMEAudit by Exception
Test Contractors Internal ControlsTest Your Own Internal ControlsTie Contractors WIP to Payment Applications
THANKYOU
QUESTIONS?
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“Certified Fraud Examiner,” “CFE,” “ACFE,” and
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