This document provides information for reporters covering federally-funded highway and transit projects, including an overview of the DOT Office of Inspector General (DOT-OIG) and its role in overseeing $40 billion provided annually for transportation projects. It also defines fraud and describes common fraud schemes, and lists indicators that can help detect fraud in the bidding, construction, and funding of transportation projects. Reporters are directed to DOT-OIG's website and past audits for additional details on oversight of federal transportation funds.

1. Reporting on Federally-Funded Highway and Transit Projects
Friday, June 16, 2006
For additional information:
David Barnes, Communications Director
Office of Inspector General, U.S. Department of Transportation
202-366-6312
David.barnes@oig.dot.gov
www.oig.dot.gov
This handout is designed to assist reporters covering highway, transit and airport
construction projects involving the use of federal funds.
NOTE: The descriptions provided in the handout are for information purposes only and
do not constitute legal definitions.
About DOT-OIG
The U.S. Department of Transportation (DOT) sends about $40 billion each year to state
and local governments for building, maintaining and expanding roads, highways, bridges,
and transit systems.
As the oversight arm of DOT, DOT OIG helps to ensure that the materials and services
purchased with federal transportation funds are delivered on-budget, on-time, and free of
waste, fraud or abuse. DOT OIG provides oversight of federally-funded transportation
projects through: 1) joint investigations with other oversight agencies; 2) educating state
and local governments, industry, and the media, about how to detect fraud; and 3)
auditing individual projects and federal oversight programs. For additional information
on DOT-OIG, visit our website at: www.oig.dot.gov.
Oversight of Federal Transportation Funds
In many DOT programs, federal transportation funds are used, but the contracts are
awarded and administered by state or local contracting agencies. In such circumstances,
federal jurisdiction remains, but state/local contracting procedures apply. The states and
local agencies agree to award and administer their contacts in accordance with DOT
procedures for this purpose.
Most of the principles of Federal Acquisition Regulation (FAR) based procurement, e.g.,
requirement for competition, sealed bid contracting, contract award, contract
administration and contract termination, are also present at the state/local level.
Application of federal law to state/local programs: Federal funds = application of federal
false claims (criminal & civil) and false statement laws. 18 USC § 666
What is Fraud?
Contractor complaints notwithstanding, fraud is not honest business mistakes, good faith
business errors and the like. All definitions of fraud have certain consistent themes
involving dishonesty, deliberate misrepresentations and deceit. Most contract frauds are
not isolated instances, but are part of a larger, corporate-wide pattern of misconduct. All
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2. involve seeking some unfair business advantage, and some involve the deliberate
corruption of government employees. Many frauds involve multiple, interlocking
schemes and all are designed to improperly obtain funds from the government.
Fraud has five elements:
1. False representation or concealment of a material fact;
2. Knowledge of a statement’s falsity (or gross negligence or reckless disregard);
3. Intent to deceive;
4. Reliance by the recipient;
5. Damage to the recipient
Common forms of highway and transit contract fraud include:
• Bid-rigging;
• Overcharging for materials;
• Providing materials of lesser quality than agreed to;
• overstating labor costs; and
• Fraud with respect to DBE program requirements.
It is important to remember that fraud indicators by themselves do not establish the
existence of fraud.
Common Contract Fraud Schemes
Anti-Trust, Bid Rigging & Collusive Bids
Price-fixing, bid-rigging and customer-allocation conspiracies are most likely to occur
where there are relatively few vendors.
Indicators include:
• Large price changes involving more than one seller of very similar products of
different brands, particularly if the price changes are of an equal amount and
occur at about the same time;
• Fewer competitors than normal submit bids on a project;
• Competitors submit identical bids;
• The same company repeatedly has been the low bidder on contracts for a certain
product or service or in a particular area;
• Bidders seem to win bids on a fixed rotation;
• There is an unusual and unexplainable large dollar difference between the
winning bid and all other bids;
• The same bidder bids substantially higher on some bids than on others, and there
is no logical cost reason to explain the difference.
The Justice Department has an informative brochure describing its enforcement of federal
anti-trust laws at: http://www.justice.gov/atr/public/div_stats/211491.htm
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3. Product Substitution
Attempts by contractors to deliver to the government goods or services which do not
conform to contract requirements, without informing the government of the deficiency,
while seeking reimbursement based upon the delivery of allegedly conforming goods and
services.
Indicators include:
• Delivery of look-alike goods made from non-specification materials;
• Delivery of materials that have not been tested in accordance with contract
requirements;
• Falsification of test results;
• Delivery of foreign-made product when domestic manufacture is required;
• Delivery of services at a lesser level than that called for under the contract (i.e.,
less work or lower level of skill/technical knowledge of workers);
• Efforts by the contractor to avoid independent testing of delivered goods;
• Use of reproduced copies, rather than original, when providing necessary
certifications;
• Contractors’ ordering, delivering, and billing documents that do not appear to
correlate with item delivered under the contract;
• Resubmission of previous rejected goods;
• Irregularities in signatures, dates, or quantities on delivery documents;
Cost Mischarging
Involves attempts by contractors to bill costs that are not allowed or allocable to the
contract. They can involve material or labor costs, as well as overhead and general and
administrative expenses.
Indicators include:
• Attempts by contractors to bill for costs which are specifically prohibited by the
contract, or by applicable law (entertainment, lobbying expenses, certain legal
fees).
• Attempts by contractors to bill labor or material costs from other contracts.
• Attempts by contractors to bill cost overruns, losses or disallowable costs.
• Supporting documentation for costs does not correlate with amounts billed to the
government.
• Contractor labor costs should be supported with at least two records; labor
distribution records, which are usually used to support bills to the government,
and source records, such as employee time cards. If the source records do not
support the labor distribution records, the contractor’s bills are inaccurate.
False Claims
In general, a false claim occurs when there is a request or demand for payment (a claim)
and the submitter knows that the claim is false, fictitious or fraudulent.
Indicators include:
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4. • Claims for goods or services not provided in quantities and/or quality required
under the contract;
• Claims supported with false documentation;
• Contract obtained through misrepresentation;
• Claims for expenses not incurred or not yet incurred.
Fraud in the Disadvantaged Business Enterprise (DBE) Program
The Department of Transportation’s DBE regulation requires state and local agencies that
receive financial assistance to: 1) establish goals for the participation of minority and
women-owned small businesses; and 2) certify the eligibility of DBE firms to participate
in DOT-assisted projects. Fraud occurs when companies either misrepresent their status
as DBEs or companies that have represented to state and local agencies that they would
have a certain percentage of DBE participation make misrepresentations concerning the
level of DBE participation
Indicators include:
• DBEs that are actually controlled by a non-DBE contractor.
• Listing a spouse, friend or relative as owner of the DBE company but having a
non-DBE company actually controlling it.
• Companies counting as DBE work that was actually not done by the
DBE contractor.
• Non DBE employees treated as employees of the DBE.
• Inflated payments to DBE that are then kicked back to non DBE or paid to
vendors.
• DBE’s subcontractors that do not serve any commercially useful function. For
example the DBE is listed as the providing materials or services but the DBE does
nothing more than sign off on the purchase of the materials or services from a
third party which provides them to the non-DBE contractor. In some cases these
goods and services are negotiated by, paid for, and accepted by the non DBE
contractor.
Information on the Department’s DBE program can be found at: http://osdbu.dot.gov/
Indicators of Fraud During the Bidding Process
Sole Source Awards
These are bids awarded without competition. Questions to ask include:
• Under what conditions can a contract be awarded without a bid?
• What sort of justification is needed to award a sole source contract?
• Which government official has approval authority?
• What is the total allowed value of sole source awards?
• Are agencies splitting awards into multiple contracts to avoid competing them?
Soliciting Bids
Is the agency:
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5. • Restricting procurement to exclude or hamper a qualified contractor or provide an
unfair advantage to favor a particular contractor?
• Limiting time for submission of offers so only those with advance information
have adequate time to prepare bids or proposals?
• Revealing information about procurement to one contractor which is not revealed
to all?
• Properly publicizing the bid to assure a sufficient number of potential competitors
are aware of the solicitation?
Awarding Bids
Indicators that fraud may be present include:
• Award of a contract to a contractor who is not the lowest responsible, responsive
bidder.
• Disqualification of a qualified bidder.
• Allowing a low bidder to withdraw without justification.
• Material changes in the contract shortly after award.
• Awards made to contractors with a history of poor performance.
• Awards made to the lowest of very few bidders without re-advertising
considerations or without adequate publicity.
• Awards made that include items other than those contained in bid specifications.
Fraud During The Post Award/Performance Phase
Indicators of fraud include:
• False test results on delivered products;
• False certifications that products meet contract specifications;
• Over billing;
• Inflating costs;
• Defective products;
• Product substitution;
• Change orders/supplemental agreements;
• False claims;
• Claims for contractor errors;
• Misrepresentations as to compliance with laws and regulations (Buy America,
labor laws, drug-free workplace, environmental requirements);
• Bribery;
• Conflicts of interest; and
• Gratuities.
Suspension and Debarment
Preventing contractors from obtaining government contracts is a powerful tool in
combating fraud. In 2005, DOT strengthened its suspension and debarment order. DOT
and its agencies must either initiate suspension or debarment proceedings or explicitly
justify why such companies or individuals should continue to do business with the federal
government. http://www.dot.gov/affairs/dot16905.htm.
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6. Speaking at OIG’s 2006 fraud prevention conference, Secretary Mineta affirmed his
committee to combating fraud through the use of suspension and debarment.
http://www.dot.gov/affairs/minetasp042706.htm
Additional information about DOT’s suspension and debarment policy can be found at:
www.dot.gov/ost/m60
To find out if a company has been suspended or debarred from doing business with the
federal government, check out the federal excluded parties list, http://www.epls.gov/.
DOT OIG is working with state and local officials to populate a website containing
information on state and local debarments. The Transportation Oversight Providers
Network was developed by OIG as a tool for sharing and enhancing interagency
communications aimed at strengthening oversight. www.topnet.gov.
Detecting Problems on Transportation Construction Projects
DOT OIG conducts audits of major highway and transit projects to determine if their cost,
budget and schedule are on track. This section is based on questions asked by DOT OIG
auditors when they evaluate highway or transit projects.
Questions to Ask When a Project is Announced
• Were there any independent cost estimates conducted for the project’s record of
decision or initial finance plan?
• How does the state plan to pay for the project?
• Does the finance plan include operating and maintenance costs in addition to
construction costs?
• Does the project perform internal and/or contract audits?
• Is there any independent oversight done by state or federal agencies?
• Does the project team have substantial experience in major projects?
• Does the project have a suspension and debarment policy?
• Is there a formal risk management plan addressing political; statutory;
environmental; and legal issues in addition to construction issues?
Tracking a Project’s Cost
OIG auditors use a project’s final environmental impact statement and record of decision
as starting points in tracking costs. Be aware that project costs may increase when
changes are made in the scope of the project.
Useful documents include:
• The project’s finance plan
• Any outside reviews of the initial and subsequent project cost estimates.
• Consultant agreements, construction contracts, equipment procurement and utility
agreements with estimated or awarded amounts and expenditures to date.
• All approved, pending and potential amendments and change orders/ claims,
associated with the above contracts.
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7. • A list of the right-of-way acquisitions showing both estimated and actual
acquisition costs.
Monitor change orders, which are initiated by the project or contractors in response to
changes in the project’s scope of differing site conditions. However, some change orders
are the result of design errors or omissions by engineers
Project Funding
Projects usually rely on a mix of funding. Understand the role of each financing
organization and what type of documents are available for review. State highway and
transportation departments are required to prepare ten-year master plans as well as
statewide improvement transportation plans that are updated every three years. Other
valuable documents include:
• Capital and Transportation Fund budgets
• State comptroller’s or other independent assessment of funding and bonding
capacity
• Bond prospectus or comparable documents that summarize the state and local
funding and related revenue sources
Schedule
Construction schedules can slip for any number of reasons, ranging from bad weather to
Obtain the following documents:
• Master schedule, including planned project milestones for each major
construction segment and project activity.
• Schedule of right-of-way acquisitions by construction segment.
• Schedule of advance utility relocation work by construction segment.
• Initial project schedule.
• Current project schedule.
FHWA Contracting
State and local governments perform the bulk of FHWA contracting. Under the Federal-
aid Highway Program (Title 23 U.S.C.), FHWA provides funding to assist state and local
governments in new construction, reconstruction, and improvement of eligible highways
and bridges, and components of the National Highway System.
State transportation departments may have different contracting officials and departments
with overlapping responsibilities. Contract administration is generally handled by a
contract director, officer, and specialists who may or may not be engineers. They handle
pre and post contract award matters, including processing and payment of claims to
contractors, until close of project.
Project oversight is generally handled by the following officials:
- Chief Engineer is responsible for general management of daily operations and all
projects in state;
- District Engineer is responsible for daily operations and all projects in particular
state region/district and generally reports to Chief Engineer;
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8. - Project Engineer is responsible for specific projects and may supervise other
Project Inspectors;
- Project Inspector performs daily inspections of projects and reports.
OIG AUDITS
In November 2005, OIG discussed needed improvements in oversight of federal highway
and transit reports in its annual report on the top management challenges facing the
Department of Transportation. http://www.oig.dot.gov/item.jsp?id=1701
OIG’s audits of highway and transit projects illustrate some of the problems that can
occur during planning and construction, resulting in increased costs and schedule delays.
• The Sept. 29, 2004 audit of the Tren Urbano Rail Transit Project can be found at:
http://www.oig.dot.gov/item.jsp?id=1406
• The June 7, 2003 audit of the initial segment of the Seattle Central Link Light
Rail Project can be found at: http://www.oig.dot.gov/item.jsp?id=1117
• OIG’s November 2002 audit of the Springfield VA interchange.
http://www.oig.dot.gov/item.jsp?id=926.
• In April 2005, the Inspector General testified before the House Government
Reform Committee regarding the impact of water leaks on the Central Artery
Tunnel/Project. http://www.oig.dot.gov/item.jsp?id=1542.
Oversight Audits of the Federal Highway Administration
On Nov. 14, 2005, OIG issued a report on FHWA’s efforts to identify and release
Federal-aid funds kept idle on transportation projects year after year. We found $258
million of unneeded funds in 14 states and estimated that states nationwide could release
as much as $775 million in unneeded Federal-aid funds. In response to our audit, FHWA
worked aggressively with the states to review inactive obligations and as a result made of
$757 million of idle Federal-aid funds and available for use on active transportation
projects. http://www.oig.dot.gov/item.jsp?id=1722
OIG’s February 2005 report on FHWA’s need to capture aggregate cost and schedule
data to improve its oversight of federal-aid funds discussed project data shortfalls in
FHWA’s Financial Management Information System that impact FHWA’s ability to
perform adequate oversight of more than $30 billion in annual grant payments.
http://www.oig.dot.gov/item.jsp?id=1511.
In November 2004, OIG issued a report titled “Managing Risk in the Federal Aid
Highway Program” that concluded that the use of risk assessments by FHWA’s division
offices do not provide a systematic approach for assessing program risks throughout the
agency. http://www.oig.dot.gov/item.jsp?id=1445.
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9. Congressional Testimony
July 22, 2003: House Transportation and Infrastructure Committee hearing on
Controlling costs and improving the effectiveness of FHWA and FTA programs:
http://www.oig.dot.gov/item.jsp?id=1132
July 9, 2003: House Budget Committee hearing on opportunities to control costs and
improve the effectives of DOT programs:
http://www.oig.dot.gov/item.jsp?id=1129
http://www.oig.dot.gov/item.jsp?id=1123
May 8, 2003: House Transportation-Treasury Appropriations Subcommittee hearing
regarding management of cost-drivers on Federal-Aid highway projects:
http://www.oig.dot.gov/item.jsp?id=1089
Information of Federal Acquisition Regulations
The Federal Acquisition Jump station provides a central list of Internet sites and
information concerning federal solicitations, acquisitions, procurement regulations, etc:
(http://nais.nasa.gov/fedproc/home.html
Acquisition Central, the website of Integrated Acquisition Management website contains
myriad information. http://www.arnet.gov/
U.S. DOT Contracting Reference Tools
Information regarding laws, rules and regulations governing DOT acquisition is available
at DOT’s Acquisition Electronic Reference Library:
http://www.dot.gov/ost/m60/elecacq.htm.
FHWA Office of Acquisition Management: http://www.fhwa.dot.gov/aaa/hamhome.htm
FHWA Office of Program Administration Contract Administration Group:
http://www.fhwa.dot.gov/infrastructure/progadmin/contracts/
hng22.htm
FTA Guide for Procurement System Reviews:
http://www.fta.dot.gov/library/admin/psrg/cover.html
Other Resources
The American Association of State Highway and Transportation Officials:
www.aashto.org
Engineering News Record: The “bible” of the construction industry. www.enr.com
The Government Accountability Office issued a report in January 2005 discussing the
need for FHWA to improve project oversight. The report (GAO-05-173) provides a good
overview of the agency’s oversight of federally-funded projects. www.gao.gov.
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