Post-Award Procurement Fraud Schemes

Why This Topic Matters
Procurement is one of the largest expenditure categories for governments and corporations, and the ACFE consistently identifies procurement fraud as one of the most costly categories of fraud against organizations. Most anti-fraud attention focuses on the front end of the procurement cycle (rigged specifications, bid rigging, leaking bid data), but a large share of actual losses occur after the contract is signed. Once a contract is awarded, oversight often relaxes, payments begin to flow, and the contractor controls the information about what was delivered and what it cost. That combination of reduced scrutiny and information asymmetry makes the post-award (contract performance and administration) phase a prime environment for fraud.

For the CFE Exam, post-award procurement fraud appears in the Financial Transactions and Fraud Schemes section under the broader topic of Contract and Procurement Fraud. Candidates are expected to recognize the specific schemes, distinguish them from pre-award schemes, identify red flags, understand which contract types are most vulnerable to which schemes, and know appropriate detection methods.

What Post-Award Procurement Fraud Is
The procurement process is commonly divided into stages: (1) the presolicitation phase (need recognition, development of specifications), (2) the solicitation phase (bid solicitation, bid submission), (3) the bid evaluation and award phase, and (4) the post-award and administration phase (contract performance, modifications, invoicing, payment, and closeout).

Post-award procurement fraud schemes, which the ACFE Fraud Examiners Manual also refers to as performance schemes, are frauds committed during that fourth phase. The contract has already been legitimately (or illegitimately) awarded; the fraud lies in how the contractor performs, bills, or modifies the contract. These schemes may be committed by the contractor alone, or by the contractor in collusion with an employee of the procuring entity (for example, a contracting officer, inspector, or project manager who approves substandard work or unjustified change orders in exchange for kickbacks).

The four principal post-award schemes tested on the CFE Exam are:
1. Nonconforming goods or services (product substitution)
2. Change order abuse
3. Cost mischarging (accounting, labor, and material mischarging)
4. Defective pricing

Understanding Contract Types First
Before studying the schemes, you must understand the two broad categories of contracts, because the exam frequently tests which scheme is most likely under which contract type.

Fixed-price contracts: The contractor agrees to deliver for a set price regardless of actual cost. The contractor bears the cost risk. Because every dollar saved is extra profit, the incentive is to cut corners on quality. Fixed-price contracts are therefore most vulnerable to product substitution / nonconforming goods and to change order abuse (as a way to raise the price after award). Defective pricing is also relevant where the fixed price was negotiated based on cost data.

Cost-reimbursable (cost-plus / cost-type) contracts: The buyer reimburses the contractor's allowable costs plus a fee. The buyer bears the cost risk. Because the contractor is paid based on reported costs, the incentive is to inflate or shift costs. Cost-type contracts are therefore most vulnerable to cost mischarging.

Time-and-materials and labor-hour contracts share cost-type vulnerabilities, particularly labor mischarging.

Scheme 1: Nonconforming Goods or Services (Product Substitution)
What it is: The contractor knowingly delivers goods or services that do not conform to contract specifications, while representing (typically through certifications, test reports, or invoices) that they do conform. This is also called product substitution, failure to meet contract specifications, or delivery of counterfeit or substandard parts.

How it works:
- Substituting cheaper, lower-grade, used, refurbished, foreign-sourced, or counterfeit materials for those specified.
- Delivering fewer units than invoiced or short-shipping while billing full quantities.
- Failing to perform required testing or inspections and falsifying test results or certificates of conformance.
- Using unqualified or uncertified labor while billing at certified rates.
- Skipping required procedures (for example, omitting a coating step or heat treatment) that are not visible on inspection.
- Bribing or colluding with the buyer's inspectors or quality assurance personnel to accept nonconforming items.

Red flags:
- High rate of product failures, returns, warranty claims, or customer complaints.
- Test results or inspection reports that are missing, altered, incomplete, or suspiciously uniform.
- Certificates of conformance that cannot be traced to actual tests.
- Discrepancies between the description on packaging, invoices, and purchase orders.
- Contractor restricting or resisting access to its facilities, records, or subcontractors.
- Materials that appear visually different (markings, finish, weight) from samples or prior deliveries.
- Deliveries received outside normal hours or in unusual packaging.
- Inspector who always accepts a particular vendor's goods, or who insists on handling that vendor personally.
- Contractor unusually low bid on a fixed-price contract followed by delivery problems.

Detection: Independent laboratory testing of samples, surprise site inspections, review of the contractor's quality control records and purchase records to confirm the source and grade of materials actually bought, verification of certifications with the issuing entity, interviews with contractor employees, and reconciliation of quantities received to quantities billed.

Scheme 2: Change Order Abuse
What it is: A change order (or contract modification) is a legitimate mechanism to alter the scope, price, or schedule of a contract after award. Change order abuse occurs when a contractor, often with the cooperation of a corrupt procuring employee, uses change orders to increase the contract price or profit improperly.

How it works:
- Low-ball bidding / buy-in: The contractor submits an unrealistically low bid to win the award, intending to recover profit through numerous change orders after the contract is signed. The contractor may know in advance (through a corrupt insider or through flawed specifications) that changes will be needed.
- Submitting change orders for work that was already required under the original contract scope.
- Inflating the cost of legitimate change orders, since change orders are typically negotiated without competition.
- A corrupt employee approving unnecessary or excessive change orders in exchange for kickbacks.
- Using change orders to circumvent competitive bidding thresholds (expanding a small contract into a large one without rebidding).
- Shifting the contract away from its original purpose so that the final deliverable bears little resemblance to what was competed.

Red flags:
- Numerous, frequent, or large change orders on a single contract, especially shortly after award.
- Change orders approved by the same employee repeatedly, or approved without proper documentation or justification.
- Change orders that cumulatively increase the price significantly above competing bids.
- Pattern of a particular contractor winning with the lowest bid and then always exceeding budget.
- Vague or poorly defined original specifications that invite later changes.
- Change orders processed outside the normal approval chain or after the work was already done.

Detection: Compare the final contract value to the original award and to the next-lowest bid; review change order logs for frequency, timing, and approvers; verify that changed work was outside the original scope; obtain independent cost estimates for change order pricing; and analyze whether the same employee-contractor pair is repeatedly involved.

Scheme 3: Cost Mischarging
What it is: The contractor charges the buyer for costs that are not allowable, not allocable to the contract, or not reasonable, or that were never incurred. This scheme is most prevalent under cost-reimbursable contracts, because the buyer pays based on reported costs. The ACFE identifies three sub-types.

(a) Accounting mischarging
The contractor knowingly charges unallowable costs to the contract or conceals them by mislabeling them as allowable costs. Examples include charging entertainment, lobbying, advertising, personal expenses, or costs from other contracts and recording them as allowable overhead or direct costs. It also includes shifting costs from a fixed-price contract (where the contractor would absorb overruns) to a cost-type contract (where the buyer pays), or from a commercial contract to a government contract.

(b) Labor mischarging
Labor is usually the largest cost element and is the hardest to verify after the fact, making it the most common form of cost mischarging. Methods include:
- Employees charging time to the wrong contract (often at the direction of management) so that a contract experiencing overruns appears on budget.
- Charging labor hours never worked, or billing for fictitious employees.
- Billing for employees at higher labor categories or rates than their actual qualifications (for example, billing a junior technician as a senior engineer).
- Charging time for training, idle time, proposal preparation, or other indirect activities as direct labor on a contract.
- Falsifying or altering timecards after the fact.

(c) Material mischarging
The contractor charges the buyer for materials that were not used on the contract, that were of lower quality than billed, or that were purchased for other jobs. Methods include billing for materials diverted to other contracts or to the contractor's own use, inflating material quantities, billing for scrap or excess at full price, and charging materials from inventory at current rather than actual cost.

Red flags of cost mischarging:
- Costs that appear to be transferred between contracts, especially near period-end or when one contract approaches its ceiling.
- Timecards completed in pencil, altered, or filled out by supervisors rather than employees; timecards with identical hours every day; time charged while the employee was on leave or traveling.
- Labor charged to a contract by employees whose skills or location do not match the work.
- Labor categories billed that do not match personnel qualifications.
- Material purchases not traceable to the contract or in quantities exceeding what the job required.
- Significant overruns on fixed-price work occurring while cost-type contracts at the same contractor show unusually high costs.
- Indirect cost pools that grow disproportionately or include unusual items.
- Contractor reluctance to provide detailed cost records or to allow audits.

Detection: Reconcile timecards to payroll records, badge or building access records, travel records, and project reports; interview employees about what they actually worked on; compare labor categories billed to personnel files; trace material invoices to receiving reports and to actual usage on the project; perform floor checks (unannounced verification of who is working where); and compare cost trends across the contractor's different contracts.

Scheme 4: Defective Pricing
What it is: Defective pricing occurs when a contractor submits cost or pricing data that is inaccurate, incomplete, or not current during contract negotiation in order to obtain a higher price than would otherwise be justified. In U.S. government contracting, the requirement to submit accurate, complete, and current cost or pricing data stems from the Truth in Negotiations Act (TINA), now often referred to as the Truthful Cost or Pricing Data statute. The misrepresentation is made at negotiation, but the inflated price is paid during performance, and the fraud is typically discovered in post-award audits, which is why it is grouped with post-award schemes.

How it works:
- Failing to disclose vendor quotes or discounts that are lower than those used in the proposal.
- Using outdated (higher) material prices or labor rates when more current, lower figures are available.
- Overstating the hours or quantities needed to perform.
- Withholding information about anticipated efficiencies, make-or-buy decisions, or planned use of lower-cost subcontractors.
- Submitting cost data from a different, more expensive project as if it were applicable.

Red flags:
- Actual costs during performance consistently and significantly lower than the proposal estimates.
- Contractor profits on negotiated contracts far above industry norms.
- Vendor quotes in the proposal that cannot be located or that differ from those in the contractor's purchasing files.
- Proposal data not updated between initial submission and final negotiation despite the passage of time.
- Contractor unable or unwilling to produce supporting documentation for proposed costs.

Detection: Post-award audits comparing the cost or pricing data submitted at negotiation to the contractor's internal records as of the date of agreement on price; comparison of estimated to actual costs; and review of the contractor's purchasing and estimating files for undisclosed quotes.

The Role of Collusion in Post-Award Schemes
Many post-award frauds require, or are greatly facilitated by, a corrupt employee of the buyer. An inspector who accepts nonconforming goods, a contracting officer who approves excessive change orders, or an auditor who overlooks mischarging may be receiving kickbacks, bribes, gifts, or promises of future employment. When investigating post-award fraud, examiners should look for the pairing of a contractor and a specific insider: the same employee always inspecting that vendor's deliveries, always approving its change orders, or showing unexplained lifestyle changes. The exam may frame a post-award scheme as a corruption question (bribery or kickbacks) rather than a procurement question, so be prepared to recognize both dimensions.

Prevention and Internal Controls
- Clear, measurable specifications and acceptance criteria written into the contract.
- Independent inspection and testing, with rotation of inspectors.
- Right-to-audit clauses and retention of the contractor's cost records.
- Multi-level, documented approval of change orders, with cumulative thresholds triggering re-competition or higher-level review.
- Reconciliation of invoices to receiving documents and to the contract schedule of values.
- Comparison of estimated to actual costs and post-award pricing audits for negotiated contracts.
- Conflict of interest disclosures and gift policies for procurement, inspection, and project management staff.
- Hotlines accessible to contractor employees, who are often the first to know about mischarging or substitution.

Exam Tips: Answering Questions on Post-Award Procurement Fraud Schemes

Tip 1: First identify the phase. Many questions describe a scenario and ask which scheme it illustrates. Ask yourself: has the contract already been awarded? If the fraud involves rigged specifications, split purchases, sole-source justifications, or leaked bid information, it is a pre-award scheme. If it involves what was delivered, how it was billed, or how the contract was modified, it is post-award. Eliminating wrong-phase answers quickly narrows your choices.

Tip 2: Memorize the four post-award schemes and their sub-types. Nonconforming goods/product substitution; change order abuse; cost mischarging (accounting, labor, material); defective pricing. If a question asks which is NOT a post-award (performance) scheme and lists bid splitting, bid rotation, or bid tailoring, that is the answer.

Tip 3: Match the scheme to the contract type. This is a favorite exam distinction. Fixed-price contracts invite product substitution (contractor keeps the savings) and change order abuse (contractor raises the price after award). Cost-reimbursable contracts invite cost mischarging (contractor is paid based on reported costs). If a scenario mentions a contractor shifting costs from a fixed-price job to a cost-plus job, the answer is accounting mischarging.

Tip 4: Know the signature red flags. High failure or warranty rates and missing or altered test certificates point to nonconforming goods. A very low winning bid followed by many change orders points to change order abuse (low-balling). Altered timecards, identical daily hours, or hours charged while on leave point to labor mischarging. Actual costs consistently far below proposal estimates point to defective pricing.

Tip 5: Recognize the key vocabulary. The exam may use synonyms: product substitution = nonconforming goods or services = counterfeit parts = failure to meet specifications. Low-balling = buy-in. Cost or pricing data that is not accurate, complete, and current = defective pricing (associated with TINA). Floor check = unannounced verification of labor charging.

Tip 6: Labor mischarging is the most common form of cost mischarging. If asked which cost element is most susceptible to mischarging, or which is most difficult to verify after the fact, the answer is labor.

Tip 7: Defective pricing is about the data at negotiation. Do not confuse defective pricing with cost mischarging. Defective pricing involves misrepresenting cost or pricing data used to set the price; cost mischarging involves misreporting costs actually incurred during performance. Both can occur on the same contract, but they are tested as distinct schemes.

Tip 8: Expect corruption crossover. If a scenario involves an inspector or contracting officer receiving payments to accept substandard goods or approve change orders, the question may be asking about bribery or kickbacks (a corruption scheme) rather than naming the procurement scheme. Read the question stem carefully to see whether it asks what the contractor did or what the employee did.

Tip 9: For detection questions, choose the most direct verification. For product substitution, independent testing of samples beats reviewing the contractor's own certificates. For labor mischarging, reconciling timecards to independent records (badge data, payroll, travel) and conducting floor checks beats simply reviewing invoices. For change order abuse, comparing final cost to original award and to competing bids is the classic analytical test.

Tip 10: Watch for absolute language and best-answer traps. The CFE Exam often offers several partially correct choices. Pick the one that most specifically describes the scenario. A question describing a contractor billing a junior technician at a senior engineer rate is best answered as labor mischarging, not the more general cost mischarging, if both appear as options.

Worked Example
Question: A construction company wins a fixed-price municipal contract with a bid 30 percent below the next-lowest bidder. Within six months, it has submitted fourteen change orders, all approved by the same city project manager, raising the contract value above every competing bid. Which scheme is most likely indicated?
Approach: The contract is already awarded (post-award). The contract is fixed-price, so cost mischarging is unlikely. The pattern of an abnormally low bid followed by numerous change orders approved by one individual is the textbook description of change order abuse through low-balling, with the single approver suggesting possible collusion. Answer: change order abuse.

Summary
Post-award procurement fraud schemes exploit the period after contract award when oversight weakens and the contractor controls the information. The four core schemes are nonconforming goods or services (product substitution), change order abuse, cost mischarging (accounting, labor, and material), and defective pricing. Fixed-price contracts are most exposed to substitution and change order abuse; cost-type contracts are most exposed to mischarging. For the CFE Exam, focus on identifying the phase, matching the scheme to the contract type, recognizing signature red flags, distinguishing defective pricing from cost mischarging, and selecting the most direct detection method. Master those distinctions and post-award procurement questions become among the most predictable on the exam.