Billions of dollars in fast-track federal construction stimulus spending is expected to boost cases of fraud and ratchet up government scrutiny, say industry executives. The American Recovery and Reinvestment Act’s $787-billion spending total will likely lure many out-of-work firms into the federal contracting arena, boosting competition and fraud potential.
“There is a lot of public pressure to step up enforcement of taxpayer money,” said Mark A. Aiello, a partner with Foley Lardner LLP, Detroit, at the Construction Financial Management Association’s annual conference, held last month in Las Vegas.
Subcontractors and third-tier suppliers also are subject to federal sanctions for front-loaded progress payments, payroll padding, overstated profits, liability concealment, inappropriate markups and math errors, among other infractions, speakers told the more than 950 attendees. Fraud accounts for about 7% of the construction industry’s gross revenue, according to Russell F. Agosta, former managing partner at Grant Thornton LLP, Southfield, Mich.
With frozen credit conditions in the U.S. and a deepening recession generating longer project bid lists and more contractors shaving profit margins to win work, conditions are ripe for fraud, panelists told attendees. The government is incentivizing whistle-blowers with up to a 30% share of recovered damages. “Because of the economy and layoffs, we are seeing more of these,” Aiello said.
Debarment from government work is one possible outcome for construction firms found guilty. “Debarment can impact your nongovernmental business as well,” said John P. Horan, a partner with Foley Lardner, Orlando. “Companies who do federal work are prohibited from working with companies who have been debarred.”