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The engineer, in collusion with the contractor, cheated the government of a lot of money.

Is the above sentence grammatically correct. The reason to ask this question is that the phrase given here is cheated out of but here people have mixed opinions, so what's the correct form ?

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"Cheat of" does not sound entirely natural to me. The idiomatic expression is "cheat out of". "Cheat of" is certainly possible in some dialects, but I couldn't tell you which ones.

Otherwise, the sentence is fine but could be better written:

The engineer colluded with the contractor to cheat the government out of a lot of money.

Additionally, the phrase, "a lot of money" is fine in informal conversation, but probably would not be used in something like a newspaper. A journalist would either state the amount ("over a million dollars", etc.) or qualify by explaining why they don't know ("a substantial amount of money, but the police are still investigating the full extent of the fraud").

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