Resolution Experts, PC

Overbilling and Defrauding the Construction Project Owner by Understating Contract Deductions

What many people do not realize is that overbilling and/or fraud frequently occurs where you are least likely to look. In our experience we have seen that fraud controls are often weak when it comes to contract deductions. People often say, "I got a contract price reduction, how great." Rarely do you hear, "I got a contract price reduction, was this reduction as large as it should have been?"

On large construction projects, contract price deductions for owner provided materials such as concrete or fuel, are often not sufficiently scrutinized and can account for significant overbilling or fraud. This article will discuss the circumstances under which these arrangements might occur on a construction project and some of the basic controls the owner should consider if it is providing materials to contractors in exchange for a reduction in the contract price.


1. Owners of large projects in remote locations often find that it is to their benefit to provide common materials like concrete. One of the largest frauds we ever uncovered involved under-deducting for the use of concrete from the owner's batch plant. This occurred on a project with numerous sub-projects including an airport, roads, mine shafts, and a crusher plant. Each sub-project was performed by a different contractor and each required concrete. The sub-projects were bid to different contractors, which were required to submit a fixed price for 100% of the sub-project's scope of work. Contractors were required to use concrete from the owner's batch plant and the owner deducted the cost of the concrete from the contractors' fixed price contracts. The cubic yards of concrete taken from the batch plant were counted and recorded on tickets prepared by the guard at the ingress/egress to the batch plant. Unfortunately, the tickets were not pre-numbered and the owner discovered that many tickets were lost and many were never prepared. Every missing ticket represented a truckload of concrete that was not counted and therefore not deducted from the contractor's fixed price contract. In effect the owner paid twice for concrete.

2. Many large owners, such as refineries and hospital chains, have discovered that their buying power exceeds the buying power of individual contractors. Therefore they will negotiate discount prices for certain materials, store them on site and then provide these materials to contractors working on their project. We encountered one situation where the material storage warehouse used by the utility was within a secured perimeter, but it unfortunately had a back door that lead directly into the parking lot used by the contractors. Because of this flaw in physical security, the owner lost a significant amount of specialty tools, drill bits, electric motors, safety gear, and other high priced items that coincidentally were easily re-sold on Internet sites like eBay.

Best Practices related to Common Materials:

A key step to mitigate the fraud risk when a construction project owner provides common materials to a contractor in exchange for a contract price deduction is to ensure that the contractor bid solicitation and final contract contain relevant control language. This language should establish the field reporting and benchmarking capabilities that will help the owner confirm the accuracy of the contract deductions. Following are some suggestions:

  • The bid solicitation should state clearly that the owner reserves the right to provide certain common materials to the contractor during the project and that the cost of these materials will be deducted from the contractor's fixed price at current market rates or some other specified unit price.
  • The unit price of the common material should be set in the contract. This can either be a fixed unit price, market price set at the time of usage, or some other price agreed to by the parties.
  • The deduction submittal form ("Deduction Submittal" form) to be used by the contractor to establish contract price deductions should be included in the contract as an exhibit.
  • The contractor should be required to prepare a field document each day ("Daily Usage Report") that records the actual usage of common material (e.g., cubic yards of concrete, feet of pipe, gallons of fuel).
  • The contractor's Daily Usage Report should be signed, on the day prepared, by a representative from the contractor and by an owner's representative.

As a part of bidding process, the owner should require contractors that may potentially use owner provided materials to include in their bid proposals:

  • The quantity of owner provided material expected to be used.
  • The unit price of the common material that is included in the bid.
  • The total cost of the common material that is included in the bid.

The owner should implement physical control over the disbursement of owner provided materials:

  • Establish physical boundaries around the facility producing and/or dispensing the common materials, with only one point of ingress and egress for material handling workers ("Drivers").
  • A camera should be placed at the ingress/egress point, which will download daily recordings into a secure server.
  • A guard should be stationed at the ingress/egress point.
  • The guard should confirm the amount of material being disbursed and:
  • Annotate a pre-numbered, two part, disbursement ticket with the Driver's identification, company name, quantity disbursed, time, and date.
  • Give a copy of the pre-numbered disbursement ticket to the Driver and keep a copy of the disbursement ticket at the guard post.
  • Log in the Driver's identification, company name, quantity disbursed, and disbursement ticket number.
  • At the end of each shift the disbursement tickets at the guard station should batched and delivered to a secure, owner controlled, location.

Finally, the owner must use the information acquired through implementation of the preceding procedures to confirm the accuracy the deductions submitted by the contractor during the course of the project. Some tests the owner should consider conducting include:

  • Put the contractor disbursement tickets received in numerical order by ticket number and search for missing tickets.
  • Compare the total quantity of material included in the Deduction Submittals with:
  • The contractor's Daily Usage Report
  • The tickets from the guard station
  • The contractor's bid quantity
  • An independent engineer's quantity estimate.
  • Check the ingress/egress camera video, count the trucks exiting, and then compare this count to the guard's log, or tickets prepared, during the same time period.
  • Compare the contractor's disbursement tickets to:
  • The contractor's Disbursement Submittal form
  • The disbursement log from the guard station
  • The owner's copy of the disbursement tickets
  • Compare the total amount of disbursements listed on the disbursement log, during a specific period of time (i.e., for a week or month), with the total amount of inventory disbursed from the facility (i.e., batch plant, fuel depot, or warehouse).

Resolution Experts PC, "ResX, PC", provides independent forensic accounting services for construction auditing and construction contract compliance. ResX is based in Michigan and serves clients throughout the United States. For more information and to learn about working with ResX, please visit our website:

The preceding narrative presents concepts that are dependent on facts and circumstances. These concepts can change depending on the specific facts and circumstances of an individual matter.

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