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Your Source for Reliable Corporate Investigative and Security Information

A P u b l i c a t i o n o f K e s s l e r I n t e r n a t i o n a l
Fraudbusters

Edition
Number 1 Vol ume 10
private organizations on a
rather regular basis.
Construction, while a
truly indispensable and
mostly honorable industry,
has a nasty reputation for
being rife with fraud. And
with good cause... the busi-
ness is simply littered with
unscrupulous contractors
looking to swindle innocent
businesses, nave organiza-
tions and even government
agencies. Scams range from
blatant, one-man "take the
money and run" plans to
complex financial deception
requiring the cooperation of
numerous crooked contrac-
tors and outside facilitators.
But why has construc-
tion fraud become so com-
mon, and quite often, so
ridiculously flagrant? The
answer is fairly simple...
because construction fraud is
easy. Easy to perpetrate,
easy to get away with, and
successful prosecution is
often extremely difficult.
Financial officers and public
officials sign off on expendi-
tures without even a cursory
glance as corrupt contractors
take advantage of their lack
of vigilance, corruption runs
rampant at job sites and local
hether it is a public
works project, a new high-
rise office building, a corpo-
rate headquarters, a stadium
or a sewer pipe, few things
are as costly -- and often con-
troversial -- as construction
projects. Major construction
almost always affects a con-
siderable amount of people
from company employees to
local community members,
and when it comes to public
construction, the taxpayers
are the ones footing the bill.
Construction projects usually
result in structures that are
necessary for a company or
community to function, and
often represent much more
than a building or public
service. These structures
represent the very face of
major corporations, the mod-
ern appeal of a small town or
the convenience of a boom-
ing urban environment.
Therefore, it's no sur-
prise that when major con-
struction frauds are revealed,
the outcry is usually enor-
mous. However, the unfor-
tunate reality is that most
construction frauds go com-
pletely unseen, and millions
of dollars are embezzled
from unwitting public and
offices, and purchasers pro-
cure bids from contractors
without taking the time to
research the market.
Furthermore, illicit activ-
ity in the construction busi-
ness is not exactly a modern
concept. Fraud, bribery, con
games and outright theft
have seemingly been an inex-
tinguishable part of the
industry for ages, so what
would make today's world
any different? Just as it has
always been, the allure of
easy money is often enough
to draw hardworking John
Q. Public to a life of crime.
Perhaps one of the prin-
cipal challenges in the fight
against construction fraud is
that virtually any type of
scam can be applied to the
business, giving dubious
contractors and pure con
artists an almost endless
array of opportunities to rip
off their victims. In addition,
due to the very nature of
large construction projects,
corruption can take place
during any phase of the job,
from pre-planning to final
inspections. The result is an
industry that presents so
many risks that some type of
fraud or dishonesty has
become practically unavoid-
able. Of course, certain vari-
eties of fraud are more com-
mon than others due to their
likelihood of success, low
odds of detection or, as is
sometimes the case, forced
necessity:
Fraudulent Disbursements
Generally found in large-
scale commercial or govern-
ment projects, this broad cat-
egory usually involves
crooked contractors in posi-
tions of financial authority.
Some classic methods of job-
site embezzlement include
shell companies, personal
purchases, ghost employees,
falsified wages, phony work-
ers compensation claims,
overstated and fictitious
expenses, fake invoices and
altered contracts. Quite
often, spurious expenditures
are approved with no regard
to the customer, as workers
purchase brand new tools,
computers, wireless phones,
and a litany of other wasteful
and unnecessary items that
shouldn't be billed to their
client. Some contractors
have even been known to
intentionally purchase exces-
sive amounts of expensive
Craft or Graft? The Insidious World of Construction Fraud
continues on page 2
materials, such as copper
wire, and sell off the unused
product to an outside buyer
for a large profit.
Mediocre Materials & Labor
If you're paying for top-
quality concrete, you should
be getting nothing but top-
quality concrete. However,
some contractors will bill for
the good stuff and use cheap
or diluted materials instead,
thereby saving (and subse-
quently pocketing) a great
deal of cash. Of course, this
not only defrauds the cus-
tomer, but may put lives in
danger due to the use of sub-
standard materials. Even
worse, some contractors will
take it a step further by
knowingly engaging in shod-
dy, haphazard construction
and passing it off as com-
plete, or covering up poor
wiring and plumbing with
freshly-painted walls. All
across the country, inspectors
have been known to discover
dozens of building code vio-
lations when customers
thought their structures were
completely safe.
Bribery & Corruption
It's a problem for count-
less industries, but because
the jobs are so costly and are
often besieged with red tape,
the construction business is
renowned for being rife with
corruption. People with eco-
nomic or civic influence,
such as public officials, cor-
porate executives, labor
unions, mobsters and even
other contractors, are often
tangled up in construction
fraud through bribery, kick-
backs, gratuities, bid rigging
and extortion. Perhaps the
most common variety of cor-
ruption lies with those who
have the power to move the
project along, often in the
form of inspectors or union
leaders who can bring proj-
ects to a virtual standstill at a
moment's notice. Those who
have this sort of powerful
leverage are often bribed or
given kickbacks without
much deliberation. Some
even see it as a standard part
of the job, a toll paid to the
figurative gatekeeper. Of
course, shady dealings
between construction man-
agers and preferred subcon-
tractors are also quite com-
mon, and are even more apt
to go unnoticed, persisting
for years and damaging the
bottom line of one buyer
after another.
Tax Fraud
Nearly every sort of con-
struction scam involves tax
fraud in some way, a crime
that takes place primarily
due to the crimes that pre-
ceded it. For instance, if
bribery and corruption is
taking place, tax fraud is
inevitable since recipients
will certainly not be report-
ing illegal income (and can
thus be susceptible to tax
evasion charges) and those
handing out illicit payments
will seek to cover up their
under-the-table spending by
generating fraudlent expen-
ditures that can be reported
as business expenses. False
disbursements, overcharging
for materials, ghost employ-
ees... these are all bases for
tax fraud, and often the
process of concealing illegal
transactions directly leads to
other crimes, such as the fal-
sification of business records
or, when large sums are
involved, money laundering.
And while it's not likely that
crooked contractors are par-
ticularly concerned about
being prosecuted for tax eva-
sion, sometimes (as was the
case with famous mobster Al
Capone) it can be one of the
most effective means of put-
ting these criminals behind
bars.
Bid Rigging
This form of fraud takes
place before any contract is
signed, before an architect
draws up plans, before a sin-
gle bag of concrete is mixed.
In essence, the customer is
being ripped off in advance.
As bids for construction proj-
ects are being solicited, a
number of contractors con-
spire together to establish
excessive contract prices or
ensure that a particular ven-
dor will be chosen for the job.
The non-competitive envi-
ronment generated by the
group is crucial to their rack-
et, and legitimate competi-
tion is often forced out of the
picture by any means neces-
sary. And due to the fact that
there is usually no hard evi-
dence of collusion, bid rig-
ging is among the most diffi-
cult frauds to uncover and
prosecute.
(See the article Bid
Rigging: Fleecing the Public
from Day One on page 3 for
more information on this clan-
destine form of fraud.)
Certainly these four
examples do not come close
to a conclusive list, but they
provide a general overview
of the various types of fraud
and corruption in the con-
struction industry. Quite
simply, there are far too
many differing schemes and
plots to document here, and
most of them are specifically
tailored to a particular seg-
ment of the marketplace or a
certain geographical area.
So what does the future
hold for construction-related
racketeering? Construction
fraud has, for quite some
time, remained fairly stag-
nant in terms of innovation.
New cons do arise here and
there, particularly with the
emergence of technology in
the accounting process, but
by and large, the various
types of fraud occurring
today are not much different
from the scams of twenty
years ago.
Fortunately, while con-
struction fraud is still wide-
spread, public awareness is
growing at a significant rate.
High-profile corporate scan-
dals including Enron,
WorldCom and Tyco have
brought fiscal malfeasance to
national attention, and as a
result, many organizations
are beginning to institute
checks and balances that
were sorely missing. In
addition, the Internet has
made it much easier for
potential customers to
research the reputations of
contractors and to locate fair
market rates, giving buyers
an advantage and helping to
circumvent fraud before it
occurs.
But will this heightened
vigilance be enough? Will
construction fraud continue
to plague businesses and
public organizations alike?
Certainly no amount of pub-
licity or internal control is
going to make construction
scams disappear... in fact, it
will likely cause illicit con-
tractors to become even
more stealthy and clever.
But for the most part, the
populace is taking a step in
the right direction, and
hopefully this emerging era
of accountability will help
keep fraudsters at bay and
cash in the pockets of its
rightful owners.
K
Construction Fraud
continued from page 1
2
W
Bid Rigging: Fleecing the Public from Day One
hile tales of money skim-
ming and corrupt public offi-
cials are most likely to grab
headlines, it's important to
understand that construction
fraud isn't all due to blatant
job site overpayments and
easily-bribed government
inspectors. Sometimes, even
the most trusted construction
companies begin cheating
their customers long before
they are awarded the con-
tract through a process of
secret collusion and artificial
price inflation known as bid
rigging.
When large construction
projects are slated, the vast
majority of public, private
and governmental organiza-
tions seek out contractors by
asking them to submit bids.
The goal of this procurement
process is to encourage com-
petitive pricing among vari-
ous companies, ensuring that
the price paid for any goods
or services reflects fair mar-
ket value. This process also
provides all eligible vendors
with a fair opportunity to
compete for contracts and
reduces the likelihood of the
monopolization of a particu-
lar local industry. Bid rig-
ging occurs when companies
that would normally com-
pete for a contract instead
conspire together to submit
inflated bids or to gear selec-
tion toward a certain contrac-
tor, eliminating any sem-
blance of competition or
equality.
As in any other area of
commerce, lack of competi-
tion causes prices to rise and
quality service to dwindle.
In essence, consumers (tax-
payers in public projects) pay
more and get the same.
Naturally, any attempt to
artificially generate a non-
competitive environment is a
violation of federal antitrust
law. Under the Sherman Act
(15 U.S.C. 1), any violation
committed after Nov. 1, 1990
is considered a felony pun-
ishable by a fine of up to $10
million for a corporation,
and a fine of up to $350,000
or three years in prison (or
both) for individuals.
Unfortunately, despite
the prospect of hefty fines
and jail time, bid rigging
has become increasingly
common in recent years.
Businesses and other private
entities are widely affected,
but when public projects are
scammed, bid rigging
becomes big news. Schools,
hospitals, municipal depart-
ments and countless other
tax-funded organizations are
defrauded by conniving con-
tractors, and because evi-
dence is usually circumstan-
tial at best, the successful
detection of this illicit prac-
tice is especially rare.
The Faces of Bid Rigging
While schemes certainly
vary in method and scope,
bid rigging essentially boils
down to four basic types:
Bid Suppression
This is a fairly simple
method in which one desig-
nated company will invari-
ably win a contract, due to
the fact that competing com-
panies have either agreed to
withdraw their bids or not
submit bids at all. By doing
this, the remaining contrac-
tor can submit an inflated
bid, and the purchaser will
often be forced to award to
the contract to the lone bid-
der, not realizing that they
have been given an unfair
quote. The extra money will
then be disguised by the con-
tractor during the course of
the job, and sometimes the
wealth will be spread among
the group of conspirators.
Complementary Bidding
This form of bid rigging,
considered the most com-
mon of the four, serves to
create the illusion of compet-
itive bidding when in reality
it only obscures unfair prices
and the deception in
progress. Generally, com-
petitors will agree to submit
bids that are a bit too high or
contain unappealing terms,
thereby producing an easy
win for a pre-selected low-
bidding contractor. Of
course, due to this phony
(yet legitimate-looking) bid-
ding process, the low bid is
not low at all, and once again
the buyer is duped.
Bid Rotation
Rather than defrauding
buyers and divvying the
take, this method of bid rig-
ging allows for contractors to
take home the whole pie, as
long as it's their turn. When
new projects come along,
conspirators take turns as the
designated low bidder. This
results in a controlled distri-
bution of jobs and allows the
offenders to fix prices as they
see fit. Everyone is taken
care of proportionately, and
the volume of jobs typically
corresponds with the size of
the companies involved.
While this scheme often
appears legitimate and is dif-
ficult to spot at first, if con-
spirators fall into a pattern it
can be most visible method
of all.
Market Division
This scheme aims to
divide up certain markets or
geographical areas among
a group of conspirators, giv-
ing each crooked contractor
a virtual monopoly in one
particular segment of the
market. For example, collud-
ing companies may decide
that a certain contractor will
be the only one permitted to
submit bids in certain geo-
graphical areas or to certain
purchasers. In return, this
particular contractor will
refuse to bid or will place
unreasonably high bids on
other construction projects
that have been allocated to
fellow conspirators.
Any of these methods
can, and often do, result in
major financial scores for the
corrupt contractors involved
and excessive losses for the
victim purchaser. Even
worse, bid rigging is often
aided and abetted by public
officials who receive gifts
and kickbacks to look the
other way, or possibly, to
guarantee the selection of
vendors in accordance with
the colluding companies'
wishes. Taxpayer money is
funneled into a tainted sys-
tem and deposited directly
into the coffers of contrac-
tors, or in some scenarios,
those entrusted by the public
to lead the community with
integrity.
Turning the Tables
The unfortunate reality
of bid rigging schemes is that
they are extremely difficult
to discover. The crime is
designed to be as secret as
possible, and typically, only a
few choice individuals are
continues on page 7
3
O
The answer lies in an
independent inspector, usu-
ally referred to as an IPSIG
(Independent Private Sector
Inspector General), OPR
(Owner's Project Represen-
tative) or the more colloquial
term, "Clerk of the Works."
Bringing an independent
inspector on board can help
ensure a job site that is free of
fraud, corruption, waste and
negligence, potentially sav-
ing incredible amounts of
cash that might be otherwise
frittered away.
Of course, utilizing an
inpector is only effective
when three major factors are
considered. First, it is impor-
tant to locate an inspector
that is sufficiently qualified.
For instance, hiring an
inspector that is well-versed
in electrical systems but
knows nothing about plumb-
ing leaves a key aspect of the
project open to negligence.
Make sure that all major sys-
tems are part of an inspec-
tor's expertise. Secondly,
inspectors simply cannot be
stretched too thin. Even the
most qualified individual
may not be able to sufficient-
ly monitor numerous proj-
ects at once, so take care to
dole out a reasonable
amount of responsibility for
inspectors. And finally, a
good inspector must have
the credibility and assertive-
ness to command authority
when dealing with contrac-
tors. As it stands, most buy-
ers are essentially at the
mercy of contractors and
architects once a contract is
signed, so an intelligent, res-
n any given large con-
struction project, it is almost
inevitable that a few corners
will be cut, a few dollars will
be pocketed, and a few viola-
tions -- of various kinds --
will be ignored. Some say it's
virtually unavoidable to
experience some measure of
fraud, waste and negligence,
and will consider it the "cost
of doing business." What
creates havoc is when illicit
activities get out of hand and
losses amount to much more
than a stolen tool or substan-
dard asphalt. Many projects
are so saturated with fraud
that the purchaser may lose
hundreds of thousands, or
even millions of dollars.
How can this sort of
massive malfeasance be
avoided? Buyers (including
government entities) often
expect public inspectors,
who make periodic visits to
ensure zoning and building
code compliance, to be the
primary negligence watch-
dog and to help nip corrup-
tion in the bud. This is a
somewhat understandable
expectation, but leaving
everything up to public
inspectors can not only result
in oversights, but may lead
to bribes and kickbacks as
crooked contractors seek to
finish the job quickly and
without any snags. In addi-
tion, many buyers expect
project architects to take an
active role in assessing the
progression of construction,
but the jurisdiction of archi-
tects is actually quite limited
and they typically have no
real control over the many
varied elements of a project.
Understanding the Need for
an Independent Inspector
The Kessler Report spoke with fraud specialist
Ronald Goldstock, former director of the New York
State Organized Crime Task Force, and now a profes-
sor of law and independent consultant. Our discussion
covered some of the problems inherent with fighting
construction fraud:
KR: What issues might be a catalyst for corruption
in, for example, inspectional services?
RG: Inspectors always have the ability to slow
down a project, costing builders a huge amount of
money. Discretion and cost is a recipe for bribery or
extortion. Depending on how archaic and convoluted
the relevant code is, inspectors will have even more
discretion and opportunities to cause delay.
Sometimes, building codes are so overprotective that,
for example, if a 2-inch nail might have worked, the
code might call for a three-inch nail. If the contractor
uses a 2-inch nail, which would have been perfectly
safe, it would not comply with the code and the inspec-
tor will have to tell the contractor to remove and
replace each and every nail. That can create huge
opportunities for bribery.
KR: What efforts have been made to crack down on
corruption, and have they been effective?
RG: It depends largely on whether the efforts are
aimed at the causes of corruption or at the symptoms.
If the latter, attempts at reform might be counterpro-
ductive. As in our previous example, increasing layers
of inspection and adding to the complexity of codes
might create even more opportunities for payoffs and
the use of expediters as the locus of illicit behavior.
Unfortunately, there has been the history of this type of
response in the industry -- a reaction to a scandal pro-
duces a non-thoughtful response which appears to sat-
isfy the electorate, but in fact creates more problems.
On the other hand, a thoughtful analysis of corruption
susceptibility and potential might lead to something
like the Independent Private Sector Inspector General
(IPSIG) program, which has had an enormous impact
on the issue -- as shown, for example, in the World
Trade Center cleanup.
KR: Are there any steps that can be taken on a wide-
spread level to fight against fraud and corruption?
RG: The mistake is to assume that all problems are
solvable the same way. There are so many factors to
continues on page 6
continues on page 6
4
N
Construction Contracts: What to Know Before You Sign
o matter if you are a gov-
ernment agency, a major cor-
poration or a small, local
business, planning and com-
mencing a construction proj-
ect can be an extremely try-
ing process, and for many
people, a very confusing
process as well. There are
numerous crucial considera-
tions... which contractors to
use, what the design will be,
how much money will be
appropriated. Of course, the
majority of buyers will focus
primarily on the third issue,
and that's why it is so impor-
tant to know what types of
construction contracts exist,
and how they can impact
your project plans and bot-
tom line.
While almost all con-
struction contracts are cus-
tomized for a specific project,
nearly every agreement is
essentially a modified ver-
sion of one of several basic
contract forms. These con-
tract types are often classi-
fied as follows:
Lump Sum, General
Contracting (GC)
This is typically thought
of as the traditional method
of contract structure, in
which a General Contractor
is employed after the design
process to perform construc-
tion duties. The GC is then
responsible for completing
the project for a lump sum, as
defined in the contract. The
owner will communicate
directly with both the GC
and the Architect, and while
there is no direct contractual
relationship between the GC
and Architect, these two enti-
ties typically work in concert
on each project to assure con-
formity in structural details.
The GC is also directly
responsible for the utiliza-
tion and management of
subcontractors. Subcontrac-
tors are typically transparent
to the owner, and any sub-
contractor issues are usually
resolved through the GC.
Contracts between subcon-
tractors and the GC are also
lump sum agreements. This
type of contract is meant to
increase efficiency and con-
trol costs among specialty
contractors, although the
juggling of numerous ven-
dors can place too great of a
burden on the GC if not
properly qualified.
Construction Management
with Guaranteed Maximum
Price (CM w/GMP)
In this type of contractu-
al agreement, the construc-
tion manager is responsible
for completing the project for
a total sum that is equal to or
less than a "Guaranteed
Maximum Price." Because of
this particular term, this type
of agreement is often said to
be "at risk." While the origi-
nally quoted contract total
may be adjusted during the
course of the project, CMs
must take care to adhere to
original contract numbers.
Extremely precise cost esti-
mates are required for this
type of construction manage-
ment, and CMs need to
exhibit superior knowledge
of every step of the construc-
tion process.
Furthermore, the CM is
directly responsible for each
subcontractor, much like a
general contractor, with the
distinction that the original
contract (which is often
signed before plans or speci-
fications are actually com-
pleted) is to be adhered to by
the CM and all entities under
its authority.
Agency Construction
Management (ACM)
Whereas the GC or CM
is often seen as a third-party
entity that is contracted to
complete a construction proj-
ect (with the authority to
manage subvendors), an
Agency Construction Man-
ager is seen as an extension
of the owner, and is utilized
to help the owner realize
profits that would otherwise
be earned by a contractor. In
addition to this financial fac-
tor, ACMs allow owners to
direct specialty contractors
without the hassle of dealing
with a third-party.
Essentially, the ACM
contracts with the owner to
provide management servic-
es in the capacity of a con-
sultant. The ACM will man-
age vendors much like a GC
or CM would, but without
any contractual ties between
them. As a result, subcon-
tractors (often referred to as
trade contractors in ACM
projects) report directly to
the owner.
Design-Build (DB)
With this type of agree-
ment, the owner contracts
directly with a design-build
firm, which handles not only
the task of designing the
project with an architect
(whether in-house or out-
side), but also handles the
entire construction process.
As such, the owner only
deals directly with one entity
that will manage all aspects
of the project from beginning
to end, seriously reducing
the administrative burden on
the owner.
For owners, the simplici-
ty of one single contract is
not the only advantage. This
type of contract essentially
pinpoints the responsibility
of every facet of the job on
one company. In addition,
the centralization of respon-
sibilities allows those respon-
sible for different aspects of
the project to work more
closely, and also allows for
minimal stalling during the
bidding, design and con-
struction processes.
Whether you are plan-
ning a massive public works
project or a simple building
renovation, knowing which
type of construction contract
is best for your organization
can mean the difference
between a successful project
and months of stress and
financial difficulties.
K
5
Publisher: Kessler International Editorial Director: Michael Kessler
Editor: Susan Peterson Copywriter: Nicholas Vrona
Contributions by: Ronald Goldstock
The Kessler Report (V10,N1) Copyright 2005 by Kessler International, 45 Rockefeller Plaza, Suite 2000, New
York, NY 10111-2000. The Kessler Report (V10,N1) is a trademark of Kessler International. No portion of this
newsletter may be reprinted without crediting The Kessler Report, a publication of Kessler International.
In addition to cost effective, thor-
ough investigative services, the
clients of Kessler International are
assured the highest levels of dis-
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details of our investigations.
GUARANTEE OF DISCRETION
olute inspector is crucial in
sustaining leverage over
your vendors.
Invariably, many buyers
are going to forego third-
party inspections for one rea-
son... to save money. Acom-
mon explanation for not call-
ing upon an inspector is that
funds would be put to better
use if allocated for building
maintenance, staffing or
other common expenses.
However, more and more
thrifty thinkers are finding
out that the benefits (both
financial and operational)
gained by hiring an inspector
would have far outweighed
the cost, particularly during
those first few weeks after
construction when complex
mechanical systems are
roused into operation for the
very first time. More often
than not, maintenance staffs
are under-trained and usual-
ly have little recourse when
problems arise. A qualified
inspector can help alleviate
those issues by working with
the project contractors and
the purchaser's staff to pre-
pare the inhabitants of the
new building for the future.
Clearly, an independent
inspector can be a tremen-
dous advantage to any con-
struction venture. By keep-
ing tabs on the progression of
the physical project itself,
ensuring compliance to num-
erous codes and standards,
looking out for signs of cor-
ruption and fraud, and help-
ing owners get acquainted
with their new structures, an
inspector can be an extreme-
ly effective deterrent to illicit
activity and a boon to over-
whelmed building staffs.
Remember, when com-
mencing a major construc-
tion project, your financial
stability is on the line. Don't
make the assumption that
the contractors you employ
are going to be forthright
and honest, and certainly
don't presume that every-
thing will work out exactly
as planned. There are
always going to be chal-
lenges. The good news is
that an inspector can help
prevent these problems and
solve them if they do arise,
saving time, money and
aggravation, and allowing
you to experience something
that is truly a rarity these
days... a project that is on
time, on budget and primed
for the future.
K
Construction fraud can affect anyone -- public cor-
porations, private businesses and even and even govern-
ment agencies -- and usually scams are only discovered
long after the project is finished. So what can you do to
prevent construction fraud in your organization? Avoid
becoming a victim by heeding these tips:
Hold a public hearing to get the community and
concerned entities involved in the construction process
from the beginning. The main objective of such a hear-
ing is to allow individuals and officials to publicly dis-
cuss elements of the costly project, which may help
ensure that the purchasing entity is proceeding with as
much information as possible, as well as creating public-
ity that may dissuade crooked contractors from taking
any chances.
Procure bids in the most visible manner possible,
and actively seek as many bids as possible. Limiting
your options to only a few select contractors can result in
collusion between contractors and bid rigging. By invit-
ing as much competition as possible, the potential for
bid rigging or other duplicitous activities is decreased
dramatically.
Conduct serious due diligence when considering
bids. Ask potential contractors for references, identifica-
tion and license information, verify licenses with author-
ities, obtain information regarding previous projects
completed by bidders, or contact an investigator to con-
duct a background inquiry. Even though the law often
requires that contracts be awarded the lowest bidder for
public jobs, evidence of irresponsibility, incompetence or
criminal behavior can disqualify potentially risky con-
tractors.
Create a flexible schedule for construction, but do
not allow unnecessary stalling. A great deal of bribery
and corruption occurs solely because jobs are rushed
due to deadline restraints, such as a school opening or
an outdoor public works project. When construction
hits a snag or lags behind, illegal payoffs are frequently
made to move the project forward, or contractors may
do substandard work to finish on time. Basically, if there
is ample time to finish the project, it is less likely that
bribes and slipshod construction will occur.
Strongly consider hiring a third-party construction
inspector to supervise your project from start to finish.
Public inspectors are often easily corrupted or may be
inclined (whether by pressure or not) to let things slide
to reduce further headaches and red tape. An independ-
ent inspector will take an objective approach to the pro-
Defending Your Walls
How to Help Prevent Construction Fraud
continues on page 7
Independent Inspectors
continued from page 4
6
consider... the geographical
area, the particular setting,
the rules and codes that are
in place, the inspection
process, the degree of priva-
tization, prevailing wage
laws, public versus private,
horizontal versus vertical...
each problem has to be
looked at separately, and
solutions that are specifically
directed toward those partic-
ular problems have to be
worked out. Of course,
one of the great advantages
in having a decentralized
system like in the United
States is that various possi-
bilities can be tried in differ-
ent places and those that
work can be copied.
Remember that if you set one
standard then you have no
innovation, and if there is a
flaw that can be exploited in
one place, then it can be
exploited everywhere.
K
continued from page 4
privy to any information. A
smaller amount of people in
the know means a smaller
chance of someone exposing
the operation. Dissidents are
quickly run out of the group
and may be kept quiet
through threats of violence.
However, like any other
crime, bid rigging can be dis-
covered if purchasing agents
and other key individuals
remain vigilant and know
what to look for. Some
potentially indicative signs
include:
One particular company
repeatedly wins contracts.
This points to a number of
bid rigging methods, and
becomes even more suspi-
cious when competitors con-
tinually submit bids that are
unreasonably high, late or
submitted in a way that dis-
qualifies the bid itself.
An exclusive, consistent
group of contractors bids on
projects, and winning bid-
ders appear to be on a rotat-
ing basis or following a par-
ticular pattern.
Bids submitted by con-
tractors are vastly higher
than estimates for compara-
ble jobs or previous bids on
similar jobs submitted by the
same vendor.
Bids submitted by a sin-
gle company for similar jobs
fluctuate in price by extreme-
ly large amounts with no
apparent reason for the dif-
ference in cost.
Estimates appear to fall
sharply when an unfamiliar
contractor bids on a project.
The presence of legitimate
competition compels the col-
laborators to temporarily
submit fair bids (at least until
the new contractor is invited
to join the scheme).
Successful bidders sub-
contract work to competitors
that submitted excessive,
unreasonable and otherwise
failed bids for the same job.
Bid paperwork submit-
ted by various vendors con-
tains similarities or even
identical items (calculations,
errors, fonts, etc.) This may
indicate that one entity has
submitted documents for
everyone in on the scheme.
A company claims to be
submitting a bid on behalf of
another contractor, whether
as a favor, a courtesy or any
other reason.
Evidence is found show-
ing that contractors have
previously discussed prices
with one another.
Public officials or other
key individuals become
excessively involved or vocal
concerning the selection of
certain vendors, or converse-
ly, become unusually discon-
nected from the entire pro-
curement process.
Looking for these signs
can certainly help reveal bid
rigging schemes as they play
out. However, prevention
may be the most sensible and
effective action, and by
thwarting bid rigging before
it starts, prices are more like-
ly to be competitive and fair.
Purchasers should keep in
mind that more competition
reduces the chance that bid
rigging will take place, and
therefore any prudent buyer
should actively solicit as
many qualified vendors as
possible. Doing this spoils
the carefully-controlled envi-
ronment formed by conspir-
ators, and a proactive
approach will help prevent
this form of theft that quietly
pilfers millions from unwit-
ting citizens every year.
K
7
KESSLERS CORNER
ject, will keep close tabs on
expenditures and build qual-
ity, and will help keep the
jobsite operating smoothly.
Remember that a few extra
dollars early on could pre-
vent major headaches and
very costly legal fees down
the road.
Insist on total accounta-
bility from contractors.
Every box of nails, every
spool of wire, every hour of
employee time should be
carefully recorded and duti-
fully organized. Keeping
accurate records can help
dissuade potential crooks
and help track down thieves
if fraud does take place.
Closely examine invoic-
es for services rendered,
change orders, and other
notable expenditures. While
it may not be reasonable (or
cost-effective) for a customer
to scrutinize every single
receipt, tracking large and
isolated charges can unveil
fraudulent spending that
you were probably expected
to overlook.
Most importantly, never
assume that you are in the
clear. Even the most power-
ful companies and govern-
ment agencies can be cheat-
ed by dishonest contractors,
and just because you can't
see fraud in action doesn't
mean it isn't there.
K
Defending Your Walls
continued from page 6
Bid Rigging
continued from page 3
Sometimes, you can look for all the signs, make all
the right preparations and document every transaction,
and construction fraud will still find a way to take a
chunk out of your budget. The harsh reality is that no
one is immune to fraud, and as a result, countless mil-
lions of dollars are swindled from innocent organizations
and public resources each year.
So what can you do when construction fraud has
taken you for a ride? What if you suspect fraud, but don't
have the means to prove it? The answer is simple. The
answer is Kessler International.
Since 1988, our firm has been tackling some of the
largest, most complex cases of construction fraud across
the nation and worldwide. Our forensic audits and con-
struction reviews have uncovered scores of large-scale
schemes from bid rigging to outright theft, affecting busi-
nesses and government organizations alike. It seems that
nobody is safe these days, but with Kessler International,
you don't have to remain a victim.
If youre feeling the effects of fraud, or if you believe
that something is amiss with your construction project,
contact us for a free consultation. We can deliver the
results you need to get justice and get back on your feet.
Sincerely,
Michael G. Kessler
President & CEO
KESSLER INTERNATIONAL
Corporate I nvesti gati ve Strategi es
INSIDE THE KESSLER REPORT:
Learn about the insidious world of construction fraud
Get valuable hints to help keep your organization fraud-free
Get expert insight into construction fraud vulnerability
See why an independent inspector is so important
Learn the basics of various construction contract types
Kesslers Corner: What to do if you suspect fraud
All this and more, only in The Kessler Report!
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