Avoid "Courtesy Bids" - Government Considers Them to be Fraud Indicators

Although the number is down from a few years ago, the Government still performs audits of contractor compliance with TINA (Truth-in-Negotiations Act). These audits are also referred to as Defective Pricing audits. Under TINA, contractors have the affirmative duty to ensure that the cost or pricing data submitted to support a proposal to the Government is based on data that is current, complete, and accurate. Under current audit guidance, all instances of defective pricing are considered for possible fraud referral. That does not mean that all instances of defective pricing are ultimately reported as potential fraud - it means that the auditors will discuss among themselves and consult the DoD-IG's (Inspector General's) listing of fraud indicators to assess whether the submission defective cost or pricing data was laced with fraud.

The DoD-IG maintains a listing of Fraud Red Flags and Indicators on its website. DCAA auditors, as part of every audit they perform, are required to consult one or more of the indicator listings as pertinent to the particular audit they are performing. One of the fraud risk indicators for defective pricing is the contractor's use of vendor "courtesy bids".

In a published case study, DCAA reviewed the contractor's estimate for material pricing and found that the contractor's estimates for five of 40 parts selected for audit were based on courtesy bids. Vendors confirmed to the auditors that they issued courtesy bids when requested but they refused to do business with the contractor because of the complicated Government regulations that would have to be followed. The contractor used these courtesy bids to price the material, but later, purchased the parts from other vendors at lower prices.

Requests for competitive bids sent to vendors that a contractor knows will be either too high to be considered or does not meet contract specifications are not current, complete, and accurate cost or pricing data. The purpose of these bid solicitations is to create the appearance of competition and conceal secretly inflated prices included in the proposal.

Now here's the bottom line. According to the DoD-IG, such courtesy bids (also called complementary, or cover bids) are a form of bid rigging. Bid rigging occurs when competitors conspire to raise prices or keep prices artificially high when competitive bids are solicited prior to contract or subcontract award. Auditors will now be specifically looking for instances of courtesy bids. Contractors will do well to avoid even the appearance of incorporating them into cost or pricing data.