March 18, 2025

Protecting Against Procurement Fraud

Procurement fraud is one of the most reported economic crimes, yet many businesses don’t realize they are at risk. Some assume fraud is only a concern for large corporations. Others believe internal controls are strong enough to prevent it from occurring. Procurement fraud can be hidden in everyday activities, from how contracts are awarded to the way invoices are processed. Without realizing it, companies may violate regulations and face legal, financial, and operational jeopardy. Understanding where fraud happens and how to prevent it is key to protecting financial resources and promoting fair competition. To help clients, prospects, and others, Wilson Lewis has provided a summary of the key details below.

What’s Procurement Fraud?

Procurement fraud occurs when individuals or businesses manipulate the bidding or contracting process for financial gain. Unlike common bidding errors, like miscalculating costs or forgetting required paperwork, procurement fraud is intentional and financially motivated. It often involves collusion, bribery, or deceptive practices that undermine fair competition.

According to the Risk and Insurance Management Society (RIMS), organizations lose between 4% and 8% of annual expenditures to procurement fraud. While government contracts often receive the most scrutiny, fraud is just as common in private-sector situations. 

Additionally, fraud can come from inside or outside an organization. Employees may collude with vendors to steer contracts toward the preferred bidder, while outside suppliers may manipulate pricing. The higher the fraud occurs, the greater the impact. When senior executives are involved, financial losses are often 10 times higher than when lower-level employees commit fraud.

Common Types of Procurement Fraud

Many organizations use Requests for Proposals (RFPs) and Invitations to Bid (ITBs) to promote fair competition. RFPs allow businesses to submit proposals based on specific project requirements, while ITBs focus primarily on cost, with the contract awarded to the lowest qualified bidder. These processes are designed to promote transparency and competition, but when manipulated, they can become tools for fraud instead of safeguards against it. 

Common types of procurement fraud include: 

• Bid Rigging — Competitors secretly coordinate bids to manipulate outcomes, eliminating fair competition. For example, a group of contractors may take turns submitting the lowest bid on projects, ensuring each company secures a contract at an inflated price.
• Contract Steering — A contract is deliberately structured to favor a specific vendor, reducing competition. A procurement officer might add highly specific technical requirements to an RFP that only one vendor can meet, which purposely shuts out competitors.
• Change Order Abuse — A vendor submits a very low initial bid to win a contract, only to inflate costs through change orders. For instance, a construction firm may submit a bid below market rates and add multiple change orders that dramatically increase the final cost.
• Conflicts of Interest — An employee influences contract awards in exchange for personal benefits or kickbacks. A purchasing manager, for example, may direct contracts to a vendor owned by a close friend in return for cash payments or gifts.
• Fake or Inflated Invoices — Fraudulent billing for work that was never performed or goods that were never delivered. A vendor might submit invoices for consulting services that do not exist, and funnel company funds to an inside employee who approves the payments.

High-Risk Areas

Procurement fraud can happen in any contract, but some situations make it easier to manipulate the process. Contracts that don’t go through a competitive bidding process tend to carry the highest risk.

Sole source contracts, where a vendor is awarded a contract without a competitive bidding process, can sometimes be necessary. Specialized goods and services may have only one viable supplier, and government agencies may use this method in highly specific situations. But without strict oversight, these contracts can inflate costs, reduce transparency, and create conflicts of interest. Fraudsters can exploit sole source contracts by manipulating justifications, inflating prices, or securing deals based on relationships rather than merit.

Emergency procurements have similar risks. When a government organization needs to fast-track purchases due to urgent situations, like a natural disaster or infrastructure failure, they often bypass standard procedures. While flexibility is important in a crisis, it also opens the door for fraud.

Strategies for Fraud Prevention 

The best way to protect against procurement fraud is through proactive monitoring, strong internal controls, and independent oversight. Key strategies include:

• Procurement Risk Assessments — Regularly review purchasing patterns and contract structures to detect vulnerabilities.
• Clear Bid Specifications — Ensure RFPs and ITBs include clear, well-defined, transparent evaluation criteria.
• Independent Oversight — Implement internal controls like a continuous monitoring system and conflict-of-interest checks.
• Detailed Documentation — Keep thorough records, especially for sole source and emergency procurements.
• Employee Training — Fraud prevention is a team effort. Educate staff on fraud risks and establish clear channels for whistleblowing.

Contact Us

Procurement fraud isn’t always obvious, and by the time it’s uncovered, the damage may already be done. Organizations that overlook fraud risks or lack strong oversight measures can face serious financial losses, contract disputes, and legal consequences. If you have questions about the information outlined above or need assistance with procurement fraud prevention, Wilson Lewis can help. For additional information call 770-476-1004 or click here to contact us. We look forward to speaking with you soon.