Companion Guide to Video May 2016

www.fhwa.dot.gov/federal-aidessentials

Taxpayers expect transportation agencies to 

maintain high ethical practices throughout their 

organizations from design and construction to 

planning and operations. To meet these 

expectations and fulfill their duties, 

transportation agencies implement policies, 

procedures, and other controls to help 

eliminate waste, abuse, and fraud. 

The controls used to administer local or State 

funds can also apply to the administration of 

Federal-aid. For example, effective controls can 

ensure that employees and contractors avoid 

waste and abuse by using Federal funds only 

when they are needed and for authorized 

activities. Controls can also help prevent fraud 

that induces payment through 

misrepresentation of activities on Federal-aid 

projects. 

Let’s look at how agency personnel might apply 

the rule of SEVEN to strengthen existing 

controls, avoid waste and abuse, and detect 

fraud. 

The rule of SEVEN consists of: 

• Surprise inspections

• Examination of documents

• Verification of materials

• Evaluation of irregularities

• Notification of authorities

As we walk through each element, think about 

how it fits within your own organization’s 

current practices. 

Federal-aid Program Overview

Avoiding Waste and Abuse, and Detecting Fraud

Using internal controls to effectively manage Federal-aid programs 

and projects 
Federal-aid Essentials for Local Public Agencies

Are the inspections conducted at the same time 

each day, and do they focus on the same items? 

By adding a surprise inspection at different 

times and of different items to the routine, 

regular inspections, inspectors make it harder 

for employees and contractors to conceal 

substandard or out-of-specification materials 

and practices. 

Is your agency routinely examining all types of 

documents – both electronic and hard copy? 

For example, does it examine each bill of lading 

to match what was delivered to what was 

ordered? Does it perform and review tests to 

confirm acceptability of materials? Does it 

check certified payrolls to ensure accurate pay 

for work performed? 

While on the jobsite, what techniques does 

your agency use to verify materials for 

acceptability? While it might be standard 

practice to count quantities and verify strength 

or grading of rock, how are your inspectors 

alerted to unique, Federal-aid requirements, 

such as the “Buy America” requirement for 

steel or iron products, and “commercially useful 

function” requirement for Disadvantaged 

Business Enterprises? 

How do your inspectors evaluate defects or 

material irregularities? How do they determine 

when irregularities are within sampling error or 

when they suggest the likelihood of fraud? 

Lastly, what are your agency’s procedures for 

escalating concerns about fraud and notifying 

authorities? Are these procedures any different 

for Federal-aid projects? 

Let’s see how one agency used the rule of 

SEVEN to detect fraud on a Federal-aid project. 

In our example, a bridge project required a 

special reinforced concrete drainage assembly. 

When examining documents, the engineer 

noticed two red flags: The first was that the 

assemblies were cast before the plans were 
Federal-aid Essentials for Local Public Agencies

approved, and the second was that the 

Certification Notice for the assembly was not 

signed by a qualified individual. 

Following the review of the documents, the 

inspector performed a surprise inspection of 

the contractor by taking apart an assembly to 

see if the required special reinforcement was 

included. It was not. So new assemblies were 

ordered and tested, but they too were found to 

be deficient. 

Agency personnel then spoke directly with the 

contractor to further evaluate the irregularities. 

They were not satisfied with the explanations 

given by the contractor and notified the United 

States Department of Transportation (USDOT) 

Office of Inspector General of suspected fraud. 

Any suspicion of fraud on a Federal-aid project 

requires Federal review. It is not only a local 

issue. As a recipient of Federal-aid, your agency 

is obligated to notify immediately all 

authorities, including the State DOT, the Federal 

Highway Administration, and the U.S. DOT 

Office of Inspector General, if fraud is 

suspected. 

Your construction program manual provides 

inspection requirements that will help your 

agency detect and report fraud. To improve 

inspection practices on Federal-aid projects, 

become familiar with how inspectors use 

surprise inspections, learn the special 

requirements for Federal-aid projects, and 

educate yourself on the techniques for applying 

the rule of SEVEN.
Federal-aid Essentials for Local Public Agencies

The content of this 

document is not a 

substitute for 

information obtained 

from State departments 

of transportation, 

appropriate FHWA 

Division Offices, and 

applicable laws. 

Scenarios have been 

simplified for emphasis 

and do not necessarily 

reflect the actual range 

of requirements 

applicable to the 

scenario or this topic. 

This document was 

created under contract 

number DTFH63-11-F00066 by the Federal 

Highway Administration, 

U.S. Department of 

Transportation, and is 

offered to the public to 

heighten and focus 

awareness of Federal-aid 

requirements within the 

local public agencies 

community and 

reinforces the 

importance of these 

necessary policies, 

procedures, and 

practices.

This Companion 

Resource is the script 

content for the video 

production of the same 

name. 

Additional Resources

• Federal-aid The US DOT Office of Inspector General tip Hotline.

https://www.oig.dot.gov/Hotline

• Information on how to report fraud to the U.S. DOT OIG, including contact 

information 

http://www.fhwa.dot.gov/programadmin/contracts/fraud.cfm

• FHWA information and guidance on suspension and debarment actions

http://www.fhwa.dot.gov/construction/cqit/suspensi.cfm

• False statement notice requirement for all Federal-aid projects

https://www.law.cornell.edu/cfr/text/23/635.119

• System for Award Management (SAM) website containing the 

comprehensive list of debarred or suspended parties that are not eligible for 

new Federal contract awards.

https://www.sam.gov/index.html/#1