In the construction business, fraud has taken center stage in recent years. According to a recent report published by the Association of Certified Fraud Examiners, financial loss from a typical construction fraud cases averages $245,000, far higher than other industries. Fraud in construction can cost far more, not only to the customer but the construction contractor managing the project. This is often due to faulty workmanship, job abandonment, and unnecessary billing for items or work not completed.
Construction contractors and business owners who operate appropriately and in-line with state and federal regulations make up the bulk of the market. However, the good actors in construction contracting can take steps to reduce fraud, improving the success of their business and the residential and commercial customers they serve. It starts with being licensed and bonded per the requirements of your state, followed by an awareness of how fraud takes place on the job. Here’s what to look for when it comes to construction fraud.
Understanding Common Fraud Types
Every construction contractor should take time to recognize the common fraud types in the business. Although not all-inclusive, construction fraud categories include:
- False Billing – Nearly 35% of fraudulent activity in construction companies large and small correlate to billing schemes. Payments to made-up vendors or suppliers, overpayment for items or materials, and the use of job-related funds for personal items all fall under fraudulent billing.
- Theft – Because of the location of many construction projects, theft runs rampant in the industry. Everything from lumber and concrete to piping, wires, and cables can be easily taken from a job site, and it is nearly impossible to track down after the fact.
- Abuse of Equipment – In some cases of construction fraud, equipment is misused both on and off the job.
- Bid-rigging and Corruption – Larger construction contractor projects are susceptible to bid-rigging and other types of corruption. These issues may include problems with bribery, kickbacks, and quid pro quo arrangements.
Once you are aware of the common types of fraud, preventing it and protecting your place in the construction contractor industry requires specific strategies.
Placing Internal Controls
First, establishing controls to reduce the potential for fraud among subcontractors, vendors, and suppliers within the business is critical to your success as a contractor. The most straightforward step to take in creating strong internal controls is a separation of responsibilities. For instance, having one person overseeing suppliers and another approving payments is a reliable internal control. Similarly, continuously comparing the estimates of projects with the actual costs helps uncover fraud if it is happening. Checking invoices for correct line-item expenses and charges, reconciling billing statements, and reviewing financial documents of the business on a regular basis all help prevent fraud from taking place.
Placing internal controls also comes down to recognizing warning signs of bad actors in the business, but this is easier said than done. This is because many construction fraudsters work sufficiently for one year or more before committing a fraudulent act, and they often have no prior criminal history or employment warning signs that would make one suspicious. The best thing to do is be diligent about keeping an eye on what’s happening on each and every job and every subcontractor, vendor, and supplier who comes in contact with a project.
Protecting Your Reputation
Construction fraud has a negative impact on the industry as a whole, as customers feel less confident that the work they need completed will get done without a hitch. As a construction contractor, you can focus on maintaining a strong reputation for your business to ensure fraud does not tarnish your name. Understanding your requirements for licensing, securing the right surety bond for your jobs, and completing due diligence on the work with whom you work closely all benefit your position in the industry.
Eric Weisbrot is the Chief Marketing Officer of JW Surety Bonds. With years of experience in the surety industry under several different roles within the company, he is also a contributing author to the surety bond blog.