What Is Procurement Fraud?

Procurement fraud refers to violations of the bidding process when private companies solicit contracts from public agencies. It includes overcharging for materials or labor, noncompetitive bidding processes, conflicts of interest, and supplying defective materials. This type of fraud prohibits public agencies from obtaining goods or services at the lowest possible cost.

Fraud might occur during the bid preparation process if costs are inflated or when a request for bids gives advantage to a certain firm. Public agencies typically place advertisements to solicit bids from competing companies. When planning or budgeting errors undermine competition, it might be considered procurement fraud. Fraud can also occur when a government employee gives confidential information to a particular supplier.

Procurement fraud can also occur during the selection process, typically when bribes or kickbacks are offered in exchange for awarding the contract to a certain company. Government employees commonly rank submitted bids to evaluate which firm can provide the service at the best price. The policy at some public agencies requires two or more people during the bid consideration process to ensure fairness.

Public employees might commit procurement fraud by deception. They might split goods or services into two separate contracts to avoid going through a formal approval process. Public bodies that oversee spending typically set a threshold for contract approval linked to a certain monetary amount. If an employee deliberately splits the order to avoid scrutiny, he or she might be accused of this type of fraud.

Suppliers might also cheat the public during the bidding process or after a contract is awarded. Bid rigging occurs when companies conspire to submit high bids that give one firm an advantage. A contractor that wins the bid might agree to send subcontracting work to a competitor who submits a high or unacceptable bid. These conspiracies give the appearance of competitive bidding when none exists.

Another form of procurement fraud happens when a contractor inflates costs of materials or falsifies documents submitted to support these costs. When a firm charges for work that wasn’t performed or materials not provided, it represents fraud. In some cases, a contractor might substitute defective or inferior products to increase profits. Some public agencies ask for documentation to confirm certain materials were used and their cost.

Controlling procurement fraud in an emergency situation is typically more difficult. If a natural disaster occurs, public agencies generally lack time to solicit competitive bids and follow the normal procedure when awarding contracts. In some cases, there may be a sole source of the services the agency needs in an emergency, which eliminates opportunities for competition.