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Reporting on Federally-Funded Highway and Transit Projects
 

Reporting on Federally-Funded Highway and Transit Projects

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Seminar presentation by David Barnes at the 2006 national conference of Investigative Reporters and Editors.

Seminar presentation by David Barnes at the 2006 national conference of Investigative Reporters and Editors.

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    Reporting on Federally-Funded Highway and Transit Projects Reporting on Federally-Funded Highway and Transit Projects Document Transcript

    • Reporting on Federally-Funded Highway and Transit Projects Friday, June 16, 2006For additional information:David Barnes, Communications DirectorOffice of Inspector General, U.S. Department of Transportation202-366-6312David.barnes@oig.dot.govwww.oig.dot.govThis handout is designed to assist reporters covering highway, transit and airportconstruction projects involving the use of federal funds. NOTE: The descriptions provided in the handout are for information purposes only anddo not constitute legal definitions.About DOT-OIGThe U.S. Department of Transportation (DOT) sends about $40 billion each year to stateand 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 servicespurchased with federal transportation funds are delivered on-budget, on-time, and free ofwaste, fraud or abuse. DOT OIG provides oversight of federally-funded transportationprojects through: 1) joint investigations with other oversight agencies; 2) educating stateand local governments, industry, and the media, about how to detect fraud; and 3)auditing individual projects and federal oversight programs. For additional informationon DOT-OIG, visit our website at: www.oig.dot.gov. Oversight of Federal Transportation FundsIn many DOT programs, federal transportation funds are used, but the contracts areawarded and administered by state or local contracting agencies. In such circumstances,federal jurisdiction remains, but state/local contracting procedures apply. The states andlocal agencies agree to award and administer their contacts in accordance with DOTprocedures for this purpose. Most of the principles of Federal Acquisition Regulation (FAR) based procurement, e.g.,requirement for competition, sealed bid contracting, contract award, contractadministration and contract termination, are also present at the state/local level.Application of federal law to state/local programs: Federal funds = application of federalfalse claims (criminal & civil) and false statement laws. 18 USC § 666What is Fraud?Contractor complaints notwithstanding, fraud is not honest business mistakes, good faithbusiness errors and the like. All definitions of fraud have certain consistent themesinvolving dishonesty, deliberate misrepresentations and deceit. Most contract frauds arenot isolated instances, but are part of a larger, corporate-wide pattern of misconduct. All 1
    • involve seeking some unfair business advantage, and some involve the deliberatecorruption of government employees. Many frauds involve multiple, interlockingschemes 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 recipientCommon 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 theexistence of fraud. Common Contract Fraud SchemesAnti-Trust, Bid Rigging & Collusive BidsPrice-fixing, bid-rigging and customer-allocation conspiracies are most likely to occurwhere 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 federalanti-trust laws at: http://www.justice.gov/atr/public/div_stats/211491.htm 2
    • Product SubstitutionAttempts by contractors to deliver to the government goods or services which do notconform to contract requirements, without informing the government of the deficiency,while seeking reimbursement based upon the delivery of allegedly conforming goods andservices.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 MischargingInvolves attempts by contractors to bill costs that are not allowed or allocable to thecontract. They can involve material or labor costs, as well as overhead and general andadministrative 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 ClaimsIn 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: 3
    • • 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) ProgramThe Department of Transportation’s DBE regulation requires state and local agencies thatreceive financial assistance to: 1) establish goals for the participation of minority andwomen-owned small businesses; and 2) certify the eligibility of DBE firms to participatein DOT-assisted projects. Fraud occurs when companies either misrepresent their statusas DBEs or companies that have represented to state and local agencies that they wouldhave a certain percentage of DBE participation make misrepresentations concerning thelevel of DBE participationIndicators 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 ProcessSole Source AwardsThese 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 BidsIs the agency: 4
    • • 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 BidsIndicators 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 DebarmentPreventing contractors from obtaining government contracts is a powerful tool incombating fraud. In 2005, DOT strengthened its suspension and debarment order. DOTand its agencies must either initiate suspension or debarment proceedings or explicitlyjustify why such companies or individuals should continue to do business with the federalgovernment. http://www.dot.gov/affairs/dot16905.htm. 5
    • Speaking at OIG’s 2006 fraud prevention conference, Secretary Mineta affirmed hiscommittee to combating fraud through the use of suspension and debarment.http://www.dot.gov/affairs/minetasp042706.htmAdditional information about DOT’s suspension and debarment policy can be found at:www.dot.gov/ost/m60To find out if a company has been suspended or debarred from doing business with thefederal 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 containinginformation on state and local debarments. The Transportation Oversight ProvidersNetwork was developed by OIG as a tool for sharing and enhancing interagencycommunications aimed at strengthening oversight. www.topnet.gov. Detecting Problems on Transportation Construction ProjectsDOT 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 OIGauditors 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 CostOIG auditors use a project’s final environmental impact statement and record of decisionas starting points in tracking costs. Be aware that project costs may increase whenchanges 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. 6
    • • 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 tochanges in the project’s scope of differing site conditions. However, some change ordersare the result of design errors or omissions by engineersProject FundingProjects usually rely on a mix of funding. Understand the role of each financingorganization and what type of documents are available for review. State highway andtransportation departments are required to prepare ten-year master plans as well asstatewide improvement transportation plans that are updated every three years. Othervaluable 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 sourcesScheduleConstruction schedules can slip for any number of reasons, ranging from bad weather toObtain 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 ContractingState 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 localgovernments in new construction, reconstruction, and improvement of eligible highwaysand bridges, and components of the National Highway System.State transportation departments may have different contracting officials and departmentswith overlapping responsibilities. Contract administration is generally handled by acontract director, officer, and specialists who may or may not be engineers. They handlepre and post contract award matters, including processing and payment of claims tocontractors, 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; 7
    • - Project Engineer is responsible for specific projects and may supervise other Project Inspectors; - Project Inspector performs daily inspections of projects and reports. OIG AUDITSIn November 2005, OIG discussed needed improvements in oversight of federal highwayand transit reports in its annual report on the top management challenges facing theDepartment of Transportation. http://www.oig.dot.gov/item.jsp?id=1701OIG’s audits of highway and transit projects illustrate some of the problems that canoccur 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 AdministrationOn Nov. 14, 2005, OIG issued a report on FHWA’s efforts to identify and releaseFederal-aid funds kept idle on transportation projects year after year. We found $258million of unneeded funds in 14 states and estimated that states nationwide could releaseas much as $775 million in unneeded Federal-aid funds. In response to our audit, FHWAworked 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 transportationprojects. http://www.oig.dot.gov/item.jsp?id=1722OIG’s February 2005 report on FHWA’s need to capture aggregate cost and scheduledata to improve its oversight of federal-aid funds discussed project data shortfalls inFHWA’s Financial Management Information System that impact FHWA’s ability toperform 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 AidHighway Program” that concluded that the use of risk assessments by FHWA’s divisionoffices do not provide a systematic approach for assessing program risks throughout theagency. http://www.oig.dot.gov/item.jsp?id=1445. 8
    • Congressional TestimonyJuly 22, 2003: House Transportation and Infrastructure Committee hearing onControlling costs and improving the effectiveness of FHWA and FTA programs:http://www.oig.dot.gov/item.jsp?id=1132July 9, 2003: House Budget Committee hearing on opportunities to control costs andimprove the effectives of DOT programs:http://www.oig.dot.gov/item.jsp?id=1129http://www.oig.dot.gov/item.jsp?id=1123May 8, 2003: House Transportation-Treasury Appropriations Subcommittee hearingregarding management of cost-drivers on Federal-Aid highway projects:http://www.oig.dot.gov/item.jsp?id=1089 Information of Federal Acquisition RegulationsThe Federal Acquisition Jump station provides a central list of Internet sites andinformation concerning federal solicitations, acquisitions, procurement regulations, etc:(http://nais.nasa.gov/fedproc/home.htmlAcquisition Central, the website of Integrated Acquisition Management website containsmyriad information. http://www.arnet.gov/ U.S. DOT Contracting Reference ToolsInformation regarding laws, rules and regulations governing DOT acquisition is availableat 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.htmFHWA Office of Program Administration Contract Administration Group:http://www.fhwa.dot.gov/infrastructure/progadmin/contracts/hng22.htmFTA Guide for Procurement System Reviews:http://www.fta.dot.gov/library/admin/psrg/cover.html Other ResourcesThe American Association of State Highway and Transportation Officials:www.aashto.orgEngineering News Record: The “bible” of the construction industry. www.enr.comThe Government Accountability Office issued a report in January 2005 discussing theneed for FHWA to improve project oversight. The report (GAO-05-173) provides a goodoverview of the agency’s oversight of federally-funded projects. www.gao.gov. 9