Preventing Fraud in the Construction Business

Fraud is one of the biggest challenges construction business owners face — and one of the costliest. According to the 2014 Report to the Nations issued by the Association of Certified Fraud Examiners (ACFE), the average monetary loss from a typical fraud case in the construction industry is $245,000, about $90,000 more than the average loss across all industries.

This means that construction industry executives/owners like you shoulder a heavy burden when it comes to controlling and preventing fraud. To keep your business safe, you’ll need to keep a diligent eye on the areas where fraud is most likely to occur. Whether you’re new to fraud control or have some experience, these tips can help you better protect your company, from spotting fraudsters to creating internal controls to prevent it from happening.

The 3 Most Common Types of Construction Fraud

The first step in preventing construction fraud is understanding what you are up against. Below are the three most common types of fraud perpetrated against construction companies:

  • Billing Schemes – Schemes, such as payments to non-existent vendors, overpayments to vendors and purchasing personal items with company funds, make up 35 percent of fraudulent activity within the construction industry, according to the ACFE.
  • Theft – When construction equipment or materials go missing, there’s a good chance someone stole them. Don’t just be on the lookout for big ticket items. Because small items, such as tools, lumber, copper pipe and wiring, are hard to trace, they make perfect marks for thieves targeting construction sites.
  • Bid Rigging and Corruption – According to the ACFE study, almost 47% of construction fraud cases had an element of corruption, usually in the form of bribery, kickbacks or instances of quid pro quo.

How to Spot a Perpetrator

In addition to knowing the types of construction fraud, it’s important to be able to identify the people who are most likely to become perpetrators. That way, you can stop fraud before it happens. Unfortunately, your employees are the most likely perpetrators, so the vetting process is critical. (Learn how we can help you vet potential employees.) Some of the common characteristics of

  • No prior record – Most perpetrators have no prior fraud convictions. Of those ACFE studied, only 5% had a prior fraud-related offense.
  • Tried and true – Employees who have been with your company for more than one year are more likely to commit fraud than new hires.

This means that while background checks are still useful to weed out bad employees, but they aren’t a fool-proof defense against fraud. Some warning signs to look for include: employees living beyond their means or having an unusual, close relationship to vendors and/or customers. For more tips in spotting a perpetrator, check out the ACFE’s Profile of a Fraudster infographic.

Put Internal Controls in Place to Prevent Fraud

Internal controls can give business owners a sense of security, as they decrease opportunities for fraud. Some of these controls, like proper division of duties, can set a solid foundation for other implemented controls on site and in the office.

  • Check estimates for accuracy. Make sure labor rates, calculations and correspondence with drawings are correct.
  • Compare job-cost estimates with actual costs. Review any discrepancies.
  • Get quotes from 2 or more vendors for material estimates above a specified amount.
  • Make purchases with pre-numbered purchase orders. Match them with invoices and reports before making payments.
  • Use specific job numbers, phase codes and work order numbers in any on-site communications.
  • Always obtain signatures–either electronic or ink–before work begins.
  • Record maintenance expenses in the ledger and allocate equipment usage to contracts weekly.
  • Check billings for timeliness, accuracy and conformity with contract terms.
  • At least once per month, calculate under-billings and over-billings by reconciling the contract billings with general ledgers.
  • Prepare and review financial statements monthly and check them against supporting ledgers, bank statements and loan schedules.

Knowing how to keep your business safe is half the battle. Obtaining skilled tradesmen and construction workers is the other half. At CLC, we recruit workers through an extensive referral program. Let us worry about meeting your employment needs and leave getting the job done to you. For more information about how we can help you located pre-vetted, skilled craftsmen, please call 800-454-1896 or fill out our form.

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