Procurement Fraud

Pre-award and post-award procurement fraud, from bid rigging and collusion to cost mischarging, and its prevention and detection.

5 minutes 5 Questions

Procurement fraud, in the context of the Certified Fraud Examiner (CFE) body of knowledge, refers to the manipulation of the purchasing process to obtain goods, services, or payments improperly. It is one of the most costly forms of occupational fraud because procurement involves large sums of mone…

Concepts covered
Procurement Process Elements and PhasesNeed Recognition SchemesPreventing Procurement FraudPost-Award Procurement Fraud SchemesBid Manipulation and Bid TailoringDetecting Procurement FraudCollusion Among Contractors and with Employees
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CFE - Procurement Fraud Example Questions

Test your knowledge of Procurement Fraud

Question 1

Which of the following BEST describes the central aim of a need recognition scheme in the pre-award phase of procurement?

Correct Answer: Persuading the buyer that it requires goods or services that are excessive or unnecessary

A need recognition scheme occurs when an employee of the procuring entity, often in collusion with a contractor, convinces the organization that it needs excessive or unnecessary goods or services, creating a purchase that benefits the favored vendor.
Drafting overly narrow specifications describes a bid tailoring or specifications scheme, a separate pre-award fraud. Altering bids after opening is bid manipulation during the solicitation phase. Arranging which competitor will win is bid rigging or collusion among contractors, such as bid rotation.
Key concept: distinguishing need recognition schemes from specifications, bid manipulation, and collusive bidding schemes in procurement fraud.

Question 2

In a cost mischarging scheme, a contractor commonly shifts labor costs incurred on its fixed-price contracts to its cost-reimbursable contracts with the same procuring entity.

Correct Answer: True

Cost mischarging occurs when a contractor charges the procuring entity for costs that are unallowable, unreasonable or that belong to another contract. A typical pattern is moving costs from fixed-price work, where overruns reduce the contractor's profit, to cost-reimbursable work, where the procuring entity reimburses those costs. Labor costs are especially easy to shift because employee time records can be altered.

Question 3

A contractor that wins an award with an unusually low bid and then receives a series of change orders raising the contract price may be exhibiting a red flag of change order abuse.

Correct Answer: True

Change order abuse often begins with a contractor submitting a low bid to win the award, sometimes with inside assurance that later modifications will be approved. The contractor then recovers or inflates its profit through change orders after the award. Examiners therefore treat a low winning bid followed by numerous price-increasing change orders as a detection red flag that calls for review of how those orders were justified and approved.

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