A contractor can commit fraud by falsely claiming to have completed a contract according to its specifications when it knows that it did not. A common example is a contractor that knowingly fails to lay the specified foundation for a road but bills for the work as if it were done correctly.
The repeated acceptance, without objection, of a contractor’s failure to meet specifications could indicate corruption of the inspection function.
To constitute fraud, the contractor must act knowingly and willfully with the intent to defraud the client. Knowledge is typically defined as:
- Actual knowledge of falsity
- Deliberate ignorance of truth or falsity (“willful blindness”)
- Reckless disregard of truth or falsity
Knowledge and intent can be proven directly, for example, by the admission of the subject, the testimony of a co-conspirator or other witness with direct personal knowledge, or by documentary evidence, such as an incriminating email.
Knowledge and intent also can be proven circumstantially, by, for example, showing that the subject knowingly altered or forged supporting documentation, lied to investigators, attempted to obstruct the investigation (e.g., by intimidating witnesses) or refused to produce pertinent records.
A pattern of prior similar “errors” or misrepresentations, beneficial to the subject, also can be used to show willfulness and rebut the typical defense of accident or mistake.
RED FLAGS OF FAILURE TO MEET CONTRACT SPECIFICATIONS
- Discrepancies between contract price, quantity and quality specifications and:
- Contractor’s payment requests and payment amounts
- Subcontractor and supplier’s invoices and supporting documents
- Test and inspection results
- Absent, inadequate or altered supporting documentation submitted by the contractor with its request for payment
- Apparently altered or fabricated test and inspection results
- Failed tests or inspections
- Increased or early product failures or repair costs vs. the norm
- Higher number of product returns, rejections or complaints vs. the norm
- Items unused in inventory for extended periods vs. the norm
- Indications from the contractor’s records that it did not incur costs necessary to comply with contract specifications, e.g., the contractor failed to purchase materials, lease equipment or hire labor to do the work for which it billed
- Contractor resists inspection of its books and records
- Reports or history of corrupt payments or gifts by the contractor to inspection personnel
CASE EXAMPLES OF FAILURE TO MEET CONTRACT SPECIFICATIONS
See actual case examples of failure to meet contract specifications from investigated cases.
BASIC STEPS TO DETECT AND PROVE FAILURE TO MEET CONTRACT SPECIFICATIONS
- Identify and interview all complainants to obtain further detail.
- Obtain the following documents and examine them for the red flags listed above:
- Request for bids or proposals, with specifications
- Bids and proposals, with tendered specifications
- Contracts or purchase orders, with specifications
- Change order requests, approvals and payment records
- Work completion reports
- Contractor’s payment requests and supporting documents
- Subcontractor’s and supplier’s invoices and supporting documents
- Test and inspection reports
- Do a due diligence background check on the contractor to see, among other things if it previously has been investigated or sanctioned for fraud or failure to meet contract specifications. Note whether the background information supports the contractor’s claims in its bid or proposal regarding its experience, finances or resources.
- Independently verify that the contractor met the contract specifications as claimed in its payment requests and supporting documentation; e.g.,
- Have independent consultants conduct unannounced tests and inspections on works and materials; compare to the results to the contract specifications, prior test or inspection results and the contractor’s claims;
- Contact suppliers and leasing companies to confirm that the items purchased or leased by the contractor met specifications; request pertinent documentation;
- Locate and interview:
- Former employees of the contractor and ask whether the company (1) failed to meet contract specifications, (2) whether it made corrupt payments to inspectors and (3) management’s knowledge of and involvement in the above. Request the pertinent records.
- Users and customers regarding observed defects in the works or materials and complaints to management regarding the above, etc.
- Site inspectors and testing lab personnel regarding (1) the quality of works and (2) the legitimacy and integrity of the submitted test and inspection reports. (Be alert for possible collusion between such parties.)
- Look for evidence of fraudulent knowledge and intent; e.g., apparently altered or fabricated supporting documents submitted with invoices, or incriminating memos or emails.
- Exercise contract audit rights to access the contractor’s books and records; note indications that the contractor failed to meet contract specifications, e.g., the contractor did not incur the necessary costs to complete the works as required. Also look for indications that the company provided inappropriate gifts, entertainment or payments to inspectors or testing lab personnel.
- Interview the responsible contractor personnel regarding the results of the investigation to obtain admissions or identify potential defenses; continue the investigation to confirm or rebut the claimed defenses.
The failure to meet contract specifications constitutes a fraudulent practice.