Fraudulent job postings on construction job sites are becoming a concerning problem

In the construction industry, fraud is an ongoing problem. It is a sad occurrence where chances and motivations often converge and create problems. In construction, fraud has already bankrupted many and is a rampaging force causing destruction.

Contractors bear the brunt of it. They face a higher occurrence of substantial financial losses compared to other businesses and industries. The only industry nearing construction is real estate. According to reports from numerous bodies, the construction sector reported a median loss of almost USD 205,000 which surpassed the losses of other industries by 110,000 dollars. However, real estate has a median loss of $440,000.

The median signifies the middle point between upper and lower values. However, the average expense of fraud revealed a sad picture. Companies on a global scale ensure a revenue loss annually of 5% thanks to fraud.

Moreover, numerous authorities in the United States uncovered that 21% of cases scrutinized about fraud showed losses exceeding 1 million dollars. Meaning the overall average loss each case had was of 1.8 million dollars.

Thankfully implementing programs for prevention and detection of fraud has a substantial impact. A clear example lies in the contrast in median losses companies face. Those who have hotlines face an average loss of $100,000. Those who didn’t have hotlines faced $200,000/

Construction companies should take proactive steps to tackle and confront fraud. The needed resources should be allocated for both prevention and detection of fraud. It has substantial financial consequences and internal control mechanisms, regular risk assessments, and a culture tackling fraud need to be established.

Almost anyone can commit fraud

Unfortunately, fraud knows no bounds. Anyone from lower and middle-tier employees to C-Suite executives and leaders can commit to it. Continuous monitoring is a necessity and sometimes it can be a problem too. 

Behavioral indicators of potential fraudsters are as under:

• Employees living beyond their typical means.

• Financial distress, issues, and strains.

• Unusual ties to customers, suppliers, or vendors.

• Bullying and Intimidation.

• Irritated behavior.

• Relationship problems/marital discord.

• A wheeler-dealer attitude.

Anyone from the most trusted employee to company management and owners can conduct fraud given the chance. The fraudsters often work in accounting (12%), Operations (15%), and sales (11%). Though less than a quarter of occupational fraud comes from owners and executives (23%), The losses at this level are as under:

• $337,000 per owner,

• $125,000 per manager,

• $50,000 per employee.

Moreover, six percent of the perps caught had previous convictions in fraud. Alarming isn’t it? Project Advisory professionals believe it is alarming.

Common Fraud Schemes found in the world of business and construction

More than half of construction-related fraud cases come from bribery, corruption, conflicts of interest, collusion, kickbacks, rigging bids, and other similar practices. The complex dynamics of contracts and the roles played by authorities and state officials raise the likelihood of corruption.

Quantum experts reveal that rigging bids consists of numerous tactics. Among them are:

• Suppressing bids.

• Complementary bidding.

• Rotation of bids.

• Offering assurances of subcontractors participating in exchange for coordination of bids.

Bidders are often forced to inflate their bids, adding unreasonable terms and forcing them to refrain from submission of bids via bids or threats. It creates the impression of a competent bidding process when it isn’t.

Billing fraud is of utmost concern

Billing fraud presents another monumental challenge. 24% of cases involved contractors or suppliers who exaggerated invoices or submitted falsified bills. The construction industry is of a complicated nature. Exercising vigilance is key when checking and validating invoices. It helps prevent the formation of fraudulent bills.

Payroll fraud is also rampant

Payroll fraud accounts for 24% of fraud cases in the construction industry. This involves employees receiving payment for work they did not do, for hours they did not work, or in both cases. Detecting it is not easy because it involves the following:

• Falsifying time records.

• Collaboration with colleagues in clocking in or out.

• Creating dubious or fictitious employee records.

• Manipulating pay rates.

Prevention and Detection of Fraud

Effective tactics for detecting and preventing fraud involve a wide range of methods and policies. According to quantum analysis experts, they range from segregating financial responsibilities to conducting stringent background checks.

The bolstering of defense mechanisms is done through the proper implementation of policies friendly toward whistleblowers. Financial and operational data should be scrutinized for any anomalies and irregularities. Internal controls should be made strong. Key revelations often come from numerous sources, including but not limited to:

• Anonymous Tips.

• External Audits.

• Internal Audits.

• Reviews from Management.

• Unplanned (and accidental) discoveries.

Straightforward measures like job rotation and surprise audits have had quite an impact on reducing median losses and the duration of fraudulent schemes. Yet their adoption is limited. Construction companies can prevent payroll fraud by implementing the following measures:

• Employee identity verification.

• Multi-layer approvals are needed for adjusting payrolls.

• Electronic timekeeping systems.

• Stringent monitoring of payroll records.

Over to You

Fostering a culture of vigilance requires continuous fraud prevention training which should be extended to everyone working in construction. This however is irrespective of their status of employment i.e. whether or not they’re subcontractors or temporary/permanent employees.

Management must communicate a resolute stance against fraud. They must ensure employees understand the concept completely and also understand the consequences, especially:

• Loss of profit.

• Negative publicity.

• Potential loss of job.

• A sharp drop in morale.

• A large drop in employee productivity.