The Fraud Scenarios in Change Orders

Let us discuss a few scenarios to gain a deeper understanding of the issue at hand, which can help us design proper governance and processes. However, despite the implementation of sound governance and processes in some clients systems, they are unable to fully adhere to them due to various reasons. For instance, a contractor may delay the work or refuse to comply with specifications deliberately, possibly to avoid financial losses. In such instances, the client is left with little choices but to accept essential works (not critical) required to start the facility operation. Example, an important road with failed CBR asphalt test. However, the amount that can be deducted from the contract is often insufficient to cover the cost of remedying the work, which leaves the client in a precarious situation and might force them to go to court in some cases.

However, the overall control gap is not having proper budget estimation. A lack of clear budget definitions in large portfolios can also create opportunities for fraud using change orders. When budget definitions are not clearly established for each portfolio, it can be difficult to determine what costs are associated with individual projects. Additionally, when there is shared infrastructure and facilities among portfolios, there may be overlapping costs that are not clearly defined.

For example, a contractor may intentionally submit a low bid for a project within a large portfolio with shared facilities and infrastructure, knowing that they can use change orders to increase the cost of the project later on. This can result in additional costs being unfairly allocated to other projects within the portfolio. In addition, a lack of clear budget definitions and shared facilities and infrastructure can create opportunities for collusion between contractors and clients. A client may deliberately create a budget that is not clearly defined or allocate shared infrastructure and facilities costs in a way that benefits a particular contractor. This can allow the contractor to use change orders to inflate the price of the project, knowing that they have the support of the client.

Having said the above, let’s move to discuss the potential fraud scenarios using change order as cover might be as followings:

• Collusion between someone in the client side and the contractor: The client and the contractor collude to manipulate the bidding process, with the contractor submitting a low bid for the initial project knowing that they can use change orders to increase the scope and price later on. Ex. here, the contractor price for unit rate for this particular item, will be priced high and the other items priced low to win the LS contract. So the margin in this item is so high.
• Intentionally submitting an incomplete or ambiguous bid: The contractor may intentionally submit an incomplete or ambiguous bid, leaving out important details or subcontractors. This allows them to use change orders to add these details or subcontractors later, increasing the overall cost of the project. Ex, accepting a bid in the first stage of evaluation of the tender, even with missing such important details. Then during second stage and negotiation, this work excluded or priced as Provisional Sums.
• Using provisional sums in a contract: Provisional sums can be exploited for fraudulent purposes when contractors deliberately underestimate actual costs and allocate a lower amount for provisional sums to win the contract, then inflate costs with change orders. They may also hide costs or conceal other fraudulent activities like kickbacks.
• Omitting important information from the scope of work: The client may omit important information from the scope of work, intentionally or unintentionally, which allows the contractor to manipulate the process to their advantage.
• Non-clear procurement strategies: When the procurement process is not clearly defined, it can create opportunities for fraud, such as deliberately benefiting a particular contractor who then inflates prices with change orders.
• Shared facilities and infrastructure: When multiple projects share facilities and infrastructure, it can be difficult to allocate costs fairly, leading to contractors submitting low bids and then increasing costs through change orders, unfairly allocating costs to other projects.
• Inflating costs: Contractors may intentionally inflate costs associated with change orders by charging higher rates or claiming materials cost more than they do, often without seeking competitive bids.
• Concealing or misrepresenting the true cost of change orders: Contractors may hide costs within other line items or bill for unnecessary or fictitious items, leading to clients overpaying.
• Inflating the scope of work: Contractors may claim additional work is required when it is not, or create change orders for work already included in the original scope to generate more revenue.
• Failing to properly document change orders: Lack of proper documentation can lead to fraudulent claims or forged signatures to inflate project costs.
• Kickbacks: Contractors may offer bribes to individuals involved in procurement or supervision to secure contracts or inflate change order costs.
• Inaccurate estimates: Contractors may intentionally provide inaccurate estimates for change orders to win a contract, resulting in clients overpaying.

The above, by the way, are only some scenarios from many it might occur. Some of the above might shock you. However, the real life is more shocking when we all know that the budget overrun is a pandemic and cost the economy more than what we can measure in case it effect people lives which does in many cases.