Six ways to detect construction fraud

Fraud is alive and well within the construction industry and permeates virtually all levels of construction activity for both domestic and international projects.

The Association of Certified Fraud Examiners didn’t mince words when this was published in 2012. That’s not what you call good news if you’re a construction company owner or the person financially at risk on a construction project. In the past four years, nothing has changed.

Construction fraud is the illusion of easy money.

A contractor, subcontractor, or vendor might get away with it once, perhaps a few times. Maybe more. However, each instance of fraud and theft (which is what it is) leaves a paper trail that eventually points back at the source: the perpetrator. When the hammer falls it destroys lives, professional reputations, and companies.

How does someone defend against a process that, as the ACFE says, “permeates all levels of construction activities.” Diligence, done with due care. It’s not easy. There are myriad ways in which money can be siphoned off a construction project, and it’s virtually always in the paperwork, or lack thereof.

What are some principal things to look for, as a contractor or project owner? There’s a basic rule to follow: if there’s any smell at all, assume it stinks.

1. Change order fraud.  Change orders can come in a flurry, and sometimes the number is designed to cause those monitoring the process to throw up their hands and green-light everything rather than delay a project.    

Change orders are a construction fraud Achilles heel.   Ensure change orders are within the original scope of work and complete documentation exists to justify change orders that raise project costs; are change orders within the architectural and engineering design requirements? Have clear guidelines – and stick to them - written into the contract about change orders and their usage.

2. Verify materials used on the project meet the specifications of the plans.  A fairly common practice is for a subcontractor to substitute lesser quality materials and pocket the price difference between it and the materials called for in the construction specifications.

3. False payment orders: this isn’t complicated in practice: false payment vouchers or orders are submitted for work not performed or are inflated above the cost of the actual work. This is particularly problematic in projects with multiple subcontractors.

4. Bills falsified for work not done are an issue in that it’s difficult for the accounts payable person to know if work was actually performed. Really, how does someone sitting in an office poring over a multitude of bills, change orders, etc., know if a particular element of work was actually carried out? It’s not easy. It puts a premium on documented justification and a comparison with actual project specifications.    

Here’s the value: if contractors and subcontractors see that specific attention is being paid to even small project items there’s less likelihood they’ll cheat on them or the bigger things.

5. You should get what you pay for. If you’re buying tools and equipment for the job, are those tools being diverted into the toolboxes of people working on the job? Is equipment being used on the project, then disappearing into a black hole, otherwise known as a worker’s or subcontractor’s inventory? Make lists. Take inventory.

6. Compare budgets to costs by line-item. Again, this is in some ways a running audit of the project, it can catch problems before they become back-breakers, and again communicates that everything is being scrutinized, thus potentially deterring large-scale fraud and theft.

The ACFE is an excellent resource for anti-fraud information. There are a great many tools to eliminate the odor of construction fraud. But only if they’re used.

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Tagged ACFE, Construction, Featured, Fraud, Industry