Corrupt officials and contractors can manipulate contract amendments, also known as “change orders,” to facilitate corruption or fraud schemes. For example, a contractor, acting in collusion with project officials, can submit a very low bid to win a contract, knowing that promptly thereafter the officials will approve a change order to increase the price, allowing the contractor to recover its profit and fund bribes. Change orders often receive less scrutiny than the initial bidding and contract award process, making them a popular way to fraudulently access funds.
RED FLAGS of Change Order Abuse
- Poorly justified or documented change order requests and approvals
- A pattern of low bid contract awards followed by change orders that increase the price of the contract
- A pattern of sole source contract awards just below the competitive bidding threshold, followed by change orders that increases the price above the threshold
- One or a few contractors receive a disproportionately high number of change orders compared to other contractors or to prior similar contracts
- Known culture of corruption among project officials and inspectors
- Weak controls and lax procedures regarding the review and approval of change orders, e.g., the same official certifies the need for the change order and approves it.
CASE EXAMPLES of Change Order Abuse
A “representative” of a Project Implementation Unit paid an unannounced visit to a US company that was bidding for a $25 million agricultural testing laboratory, and told it that it would win the contract if it hired the rep as a “consultant” to help prepare its bid. The rep said his consulting fee would be 20% of the contract value, which he admitted he would share with project officials.
The US company was intrigued, but was troubled by the size of the bribe request; more specifically, it wondered how it could afford to pay a 20% commission and still be lowest qualified bidder. The rep replied that the project would issue change orders after the contract award to drop certain line items that called for expensive humidity and temperature control equipment, allowing the bidder to “low ball” this item in its bid, be the low bidder, and still have sufficient funds to pay the bribe. Additional change orders would be processed as necessary to cover the cost of bribes.
The company agreed, but was disappointed when it lost the contract after the representative negotiated a similar but more lucrative deal with another bidder. The US company was so upset at this betrayal that it reported the entire episode to the primary donor, which launched an investigation and eventually debarred the representative and the other bidder. The US company was given only a reprimand in exchange for its full cooperation.
BASIC STEPS to Detect and Prove Change Order Abuse
- Identify and interview all complainants and confidential sources to obtain further detail.
- Obtain the following documents and examine them for the red flags listed above:
- Requests for bids
- Bid evaluation reports
- Sole source award documentation
- Contracts
- 3. Change order requests, approvals, payments and related memorandaPrepare a spreadsheet that identifies:
- The number and monetary value of change orders awarded to each contractor
- Change orders that promptly followed contract awards
- The official(s) who requested and approved the change orders
- Examine the spreadsheet for the red flags listed above.
- Closely examine the reasonableness of low bid or sole source awards followed by change orders, particularly a pattern of such awards involving the same contractor.