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: lou.urso@consultant.com

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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