Forensic Accounting
Brand Protection
Computer Forensics
Corporate Investigation

Volume 10 - No. 1                    Download PDF

In this edition of
The Kessler Report:

Craft or Graft?  The Insidious World of Construction Fraud

Bid Rigging: Fleecing the Public from Day 1

Understanding the Need for an Independent Inspector

Q&A with Fraud Specialist Ronald Goldstock

Construction Contracts: What to Know Before You Sign

Defending Your Walls: How to Help Prevent Construction Fraud

Kessler's Corner:
What to do if You Suspect Fraud

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Bid Rigging:  Fleecing the Public from Day One

While tales of money skimming and corrupt public officials 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 contract 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 organizations seek out contractors by asking them to submit bids.  The goal of this procurement process is to encourage competitive pricing among various companies, ensuring that the price paid for any goods or services reflects fair market 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 particular local industry.  Bid rigging occurs when companies that would normally compete for a contract instead conspire together to submit inflated bids or to gear selection toward a certain contractor, eliminating any semblance of competition or equality.

As in any other area of commerce, lack of competition causes prices to rise and quality service to dwindle.  In essence, consumers (taxpayers 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 punishable 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 departments and countless other tax-funded organizations are defrauded by conniving contractors, and because evidence is usually circumstantial at best, the successful detection of this illicit practice 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 designated company will invariably win a contract, due to the fact that competing companies have either agreed to withdraw their bids or not submit bids at all.  By doing this, the remaining contractor can submit an inflated bid, and the purchaser will often be forced to award to the contract to the lone bidder, not realizing that they have been given an unfair quote.  The extra money will then be disguised by the contractor 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 common of the four, serves to create the illusion of competitive bidding when in reality it only obscures unfair prices and the deception in progress.  Generally, competitors 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) bidding 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 rigging 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 distribution 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 difficult to spot at first, if conspirators 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, giving each crooked contractor a virtual monopoly in one particular segment of the market.  For example, colluding companies may decide that a certain contractor will be the only one permitted to submit bids in certain geographical 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 system and deposited directly into the coffers of contractors, 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 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 discovered 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 suspicious when competitors continually submit bids that are unreasonably high, late or submitted in a way that disqualifies the bid itself. 

•  An exclusive, consistent group of contractors bids on projects, and winning bidders appear to be on a rotating basis or following a particular pattern.

•  Bids submitted by contractors are vastly higher than estimates for comparable jobs or previous bids on similar jobs submitted by the same vendor.

•  Bids submitted by a single company for similar jobs fluctuate in price by extremely large amounts with no apparent reason for the difference in cost.

•  Estimates appear to fall sharply when an unfamiliar contractor bids on a project.  The presence of legitimate competition compels the collaborators to temporarily submit fair bids (at least until the new contractor is invited to join the scheme).

•  Successful bidders subcontract work to competitors that submitted excessive, unreasonable and otherwise failed bids for the same job.

•  Bid paperwork submitted by various vendors contains 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 showing 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 conversely, become unusually disconnected from the entire  procurement 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 likely 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 environment formed by conspirators, and a proactive approach will help prevent this form of theft that quietly pilfers millions from unwitting citizens every year.

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