Types of cheating in federal government contracts

Have you noticed something suspicious in a Government of Canada (GC) contract? Cheating on a GC contract is serious but may be hard to spot. Those involved in cheating often try to conceal what they are doing. But you can help. Learn about common types of cheating that can amount to fraud or other offences.

Business schemes

These schemes are undertaken by a business or group of businesses so they can make extraordinary profits at the taxpayers’ expense.

Bid-rigging

Bid-rigging occurs when businesses secretly arrange amongst themselves who will win a particular contract, in advance of submitting a bid. They do this by agreeing on:

• how they will price their bids
• what type of contracts each business should win
• the order in which contracts will be “won”

When this occurs in GC contracts, it results in the GC paying higher prices and obtaining lower quality goods and services for Canadians. These increased costs are ultimately passed on to you as a taxpayer. Although these actions may seem innocent enough, bid-rigging is a crime that reduces or eliminates competition among suppliers, and harms the ability of new businesses to enter the market.

Examples of bid rigging

• Cover bidding
• Bid suppression
• Bid rotation
• Market division

Cover bidding

Businesses communicate and decide in advance which of them should be the designated winner of the contract. The other businesses involved in the scheme either submit bids higher than the designated winner, adjust their bids to make them unattractive, or include disqualifying elements (for example, intentionally including errors, unacceptable terms or not including all required information) to ensure they will not be successful in getting the contract.

Example of cover bidding

• Company A submits a bid for the manufacturing of widgets for $5 each
• Companies B, C and D, all submit bids for the manufacturing of widgets for an inflated price of $10 each to ensure that Company A is selected for the contract

Bid suppression

Businesses agree to either not bid or withdraw a bid so that the designated winner is most likely to obtain the contract. For example, if there are 3 businesses providing bids, 1 or more of the businesses will remove their bid or will not bid at all so that the designated winner is awarded the contract.

Example of bid suppression

• Companies A and B do not submit a bid for the manufacturing of widgets
• Company C submits a bid for the manufacturing of widgets for $10 each
• Company D removes its bid for the manufacturing of widgets
• The contract is given to Company C as it is the only company who submitted a bid for the manufacturing of widgets

Bid rotation

Businesses agree to take turns at being the designated winner and adjust their bids accordingly.

Example of bid rotation

Companies A, B, C and D work together to make sure that the first contract is given to Company A, the next one to Company B and so on, to make sure they each get a turn getting a contract.

Market division

Businesses agree to divide territory, customers or product markets among themselves instead of competing. The contracts are split up so that each business will get a "fair share" of the total contracts, without having to truly compete with the others.

Example of market division

Companies A, B, and C work together to assign certain areas of the city to each company to make sure that all contracts in the Northern zone are given to Company A, all contracts in the Southern zone are given to Company B, and all contracts in the Eastern zone are given to Company C.

Bid-rigging: Tools and resources from the Competition Bureau

Businesses teaming up to cheat

Businesses cause harm when they cheat and agree to act together instead of competing with each other. These schemes affect you as a taxpayer and as a consumer because they cause higher prices, decreased product choice and less innovation. They affect business owners too, as those who are operating honestly may have a more difficult time winning contracts. Groups of businesses that engage in this type of illegal activity are sometimes referred to as “cartels”.

Examples of how businesses team up to cheat

• Price fixing
• Allocate customers or markets
• Limited production or supply

Price fixing

Businesses agree to raise or fix prices they will charge the GC for their goods or services. Or, they set a minimum price below which they, collectively, will not sell.

Example of price fixing

Companies A, B, C and D usually sell their widgets between $5 and $8. They collectively decide to cheat to increase their profits and agree to all sell their widgets to the GC for $15. The GC has no choice but to pay $15 for the widgets.

Allocate customers or markets

Competing businesses assign certain markets among themselves, such as certain types of contracts, customers or geographic areas. They then agree not to compete in each other's assigned markets.

Example of allocating customers or markets

Companies A, B, and C work together to make sure that all highway contracts are given to Company A, all city road paving contracts are given to Company B, and all road maintenance and patching contracts are given to Company C.

Limited production or supply

Businesses work together to create a shortage of a certain product or service available on the market, to either increase prices or stop prices from falling.

Example of limited production or supply

Companies A and B manufacture widgets and sell them for $8 each. They both agree to stop producing widgets for the next 2 months to limit the amounts of widgets available for sale. The GC regularly purchases widgets. Companies A and B justify raising the prices of the widgets to $15 each due to the small supply of widgets available. The GC has no choice but to pay $15 for the widgets.

Investigating cartels: Conspiracies, agreements or arrangements between competitors.

Contract performance fraud

This type of cheating occurs after a GC contract has been awarded to a supplier. These frauds, orchestrated by suppliers, result in inflated costs, defective products, incomplete goods or services or an unfair advantage.

Examples of contract performance fraud

• Overcharging through inflated invoices
• Supplying inferior products
• Abusing contract amendments
• Billing for fictitious goods or services
• Invoicing for work done on other projects
• Plotting with subcontractors to inflate billings
• Taking advantage of insider information (supplier)

Overcharging through inflated invoices

• The GC signs a contract to purchase 500 widgets from Company A at $5 each
• After shipping the 500 widgets, Company A tries to make a bigger profit and submits an invoice for 500 widgets at $7 each

Supplying inferior products

• The GC signs a contract with Company D for photocopier repairs
• Company D uses cheaper than agreed parts but bills the GC for more expensive parts
• Company D invoices the GC for 40 parts at $10 each when they actually only used 20 parts worth $5 each

Abusing contract amendments

• Companies A, B, C and D all bid on the same GC contract
• Company A purposely submits a much lower bid than market rates to obtain the contract
• The GC gives the contract to Company A
• Company A cheats and requests a contract amendment to obtain more money for the same work they agreed to do at a lower cost

Billing for fictitious goods or services

• The GC signs a contract with Company A for building maintenance services
• Company A invoices the GC for the replacement of 100 light bulbs when no light bulbs were replaced

Invoicing for work done on other projects

• The GC signs a contract with Company B for the design of a website
• Company B already has another contract with the GC for work on another website
• Company B uses some of the same content for both projects
• Company B cheats and invoices the GC twice for the same work

Plotting with subcontractors to inflate billings

• The GC signs a contract with Company D for the renovation of a building
• Company D hires different trades, such as plumbers and electricians to complete some of the renovation work
• Company D makes a deal with the plumbing company and asks them to artificially increase their billings in exchange for an amount of money from Company D
• Company D cheats and invoices the GC the higher prices for the plumbing parts and makes a big profit

Taking advantage of insider information (supplier)

• Company A, an engineering firm, is contracted by the GC to provide specifications for a large, upcoming contract for widgets
• The owner of Company A uses her insider knowledge on the widget specifications to provide consultation services to Company B and helps them prepare a bid for the widget contract in exchange for money
• The owner of Company A improperly used insider knowledge for financial gain, resulting in Company B obtaining an unfair advantage over other companies bidding on the widget contract

Schemes involving government employees

Schemes can also involve a GC employee. An employee may use their position in a dishonest manner to make or influence decisions in a way that benefits them personally.

Bribery of a government employee

Bribery occurs when money, an item of value, or a favour is offered or given in order to influence the judgment, decisions or actions of a public servant, procurement official or advisor to obtain favourable treatment.

Example of bribery: Kickback

Offering a bribe (also known as a kickback) to get a contract:

• A representative from Company A offers a GC employee free home renovations as a gift in order to get selected for a contract
• Companies A, B, C and D, all bid for the same contract
• As agreed, the GC employee gives the contract to Company A in return for receiving a gift

Conflict of interest involving a government employee

A conflict of interest occurs when a GC employee’s personal situation, related to family, financial or social factors, could compromise the employee’s judgment, decisions, or actions in the workplace or in relation to a contract. These situations have the potential to lead to special treatment, unfair advantages, corruption or fraud.

Rather than making decisions for the betterment of Canadians, a GC employee makes decisions in their own personal interest which can result in the GC receiving potentially inferior, or more costly goods or services which can damage the integrity of the public service and compromise fair competition. While both public servants and suppliers are required to tell the GC about potential conflicts of interest, some public servants or suppliers may choose not to disclose or may conceal their conflicts and, as a result, their actions, performance and decisions may be compromised.

Examples of conflict of interest

• Allowing an unqualified company to bid or become a supplier
• Awarding contracts improperly
• Paying too much for goods or services
• Buying too much of an item
• Accepting low-quality goods or services
• “Payrolling” a particular person under a contract
• Taking advantage of insider information (government employee)
• Accepting a gift after a contract is completed

Allowing an unqualified company to bid or become a supplier

• Nancy, a procurement officer for the GC, has a neighbourhood friend who has just started a brand new Company A
• Nancy feels she can personally vouch for her friend and bypasses the system to prequalify Company A to bid on contracts that are otherwise reserved for businesses who have proven experience in the field

Awarding contracts improperly

• Mary, a GC employee, is friends with the owner of Company D
• Mary needs to purchase $50,000 worth of widgets and wants to make sure Company D gets the order
• For contracts over $25,000, Mary must obtain bids from multiple companies
• Mary decides to split the contract in two smaller contracts of $24,999 each in order to select Company D without going through a bidding process

Paying too much for goods or services

• Abdul, a GC employee, needs to purchase 500,000 widgets as part of a major contract
• He owns shares in a small publicly traded company, Company C, which manufactures widgets
• Company C sells the widgets at $10 each
• Companies A, B and D offer the same widgets at $5 each
• Abdul influences the contract award process so Company C wins the contract

Buying too much of an item

• Helen, an office administrator, working for the GC needs to buy 30 widgets for the office
• Her son has just started a business, Company C, and is struggling financially
• Helen decides to help out her son and uses her acquisition card to purchase 100 widgets from Company C

Accepting low-quality goods or services

• John, the sales representative from Company D, has a neighbour who works for the GC
• Company D makes cheap widgets that break easily
• John invites his neighbour over for dinner, mentions that he is having a hard time meeting his sales quota for the month and asks his neighbour for help
• The GC employee agrees to purchase widgets from Company D, even though he knows the parts are of poor quality and will need to be replaced often

“Payrolling” a particular person under a contract

• A GC employee requires a consultant to complete an important project in a short time frame
• The GC employee’s childhood friend works as a consultant for Company B
• Company A currently has a contract with the GC for this type of work
• The GC employee uses her position of influence to ask Company A to subcontract the work to Company B for the services of the childhood friend

Taking advantage of insider information (government employee)

• Rashida, a GC employee, is aware of the upcoming award of a major contract to Company B
• The contract will be a significant source of revenue for Company B
• Rashida tells her spouse to buy Company B stocks before the contract is awarded to take advantage of the upswing in share price that will likely take place after the contract is awarded

Accepting a gift after a contract is completed

• A GC employee, Charles, frequently deals with Company C as it currently has a contract with the GC
• Since they have a great working relationship, Company C decides to give Charles an all-expense paid weekend getaway as a thank you gift
• The next time that Charles has to select a company for a contract, he feels obligated to give the contract to Company C

From: Public Services and Procurement Canada