How Fraud Happens in Construction and Ways to Prevent It
How Fraud Happens in Construction and Ways to Prevent It

How Fraud Happens in Construction and Ways to Prevent It

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While fraud is inevitable in most types of businesses, it’s also pretty common in construction industries. We’re not saying that the construction industry is full of bad people, but rather, it’s one of the industries that come with few people who are determined to commit fraud. This is mainly because they are easily tempted by the large volume of transactions, significant numbers of subcontractors and suppliers, and possible employment levels that allow engaging in fraudulent activities.

That’s why managing construction properly is vital when you’re in the construction industry. There must be proper implementation of rules to the construction crew management and all involved in the project. Perhaps you want to know how fraud can happen in the construction industry.
In this article, we will let you know how and why construction fraud happens and ways to combat fraud towards having a quality assurance construction.

Understanding Fraud in Construction 

 

Construction fraud is defined as when there is an abuse of power by authority. It could happen in a contractor-subcontractor relationship and even owner-contractor. However, it’s usually committed by employees of any size or type of contracting firm. In most cases, fraud in construction goes undetected. However, it can only be detected when money is already involved or a dispute toward completing the project. 

Managing construction usually has numerous participants, and these participants have tons of moving and responsibilities. Unfortunately, financing in construction and payment systems for construction was not that implemented by some construction companies, especially those still implementing conventional construction systems. 

Because transparency and communication must have been a part of project management for construction at some point, not always exist. As a result, there are plenty of opportunities for an employee can commit fraud while the project is ongoing. 

And having said that, there is always a price for that, as fraud impacts the construction industry. Fraudulent practices in construction could affect the socioeconomic quality, economic growth, and reputation of the company. 

Different Construction Fraud 

 

It could be impossible to detect fraud or even develop effective means when you’re managing construction. So with that, the Pro Crew Schedule will let you understand the common types of fraud and be able to detect them before it’s too late. 

Here are the common types of construction fraud, so it would be easier for you to detect when it’s happening in your company. 

1. Falsifying Payment Invoices and Applications 

Falsification is the most common and easiest type of fraud in the construction industry. The wrongful doing of payment invoices and applications accounts for over half of the fraud in the industry. Furthermore, it could happen at any level of the payment chain. Here are the methods for manipulating and falsifying payment invoices. 

  • Payment Applications Falling Outside the Scope of Work 

Regardless of the project’s size, the top management parties will receive numerous payment applications and process them when it comes. However, this is where fraud happens. They can manipulate the payment applications and invoices and make up their price. They can even add work to their primary scope. 

  • Inflating of Material and Labor Costs

This happens anywhere on the payment chain. Those who are at the bottom of the payment chain can increase costs or the percentage of the completed work. Through this, they can boost their profit margin on the job. In addition, parties may try to exaggerate or hide whatever is being paid to their suppliers and never declare the difference once payment has been made. 

  • Improper Wage Categories and Rate 

There’s a big chance that a sub can charge the craftsman a rate for the work was done by an apprentice. They could also charge equipment rental fees higher than its price or even charge equipment that they own already. 

  • Billing for Work that is Unperformed 

This is common fraud in construction, especially when there is a poor construction daily log of employees. This fraud can be self-explanatory and easier to check, only if there is a proper construction daily report and log. 

Furthermore, there’s a big chance that subs and contractors can overstate the units of labor, production, or the equipment used on the project. 

How to Prevent Falsified Payments?

 

In managing construction, a clean and defined environment helps reduce misinterpretations when it comes to payment applications. The construction manager should always have a payment application checklist and request any invoices and receipts connected with materials or labor claimed. 

Also, scheduling the payment in advance and reconciling the request with job cost reports and work orders is one way to reduce fraudulent payments. Of course, you can always pair the payment app with the work order and prevent authorizing a payment just because the application has been received. 

2. Bid-Rigging or Collusion 

Bid-rigging happens during the bidding period. It involves collaboration among the potential contractors and subs. This is a type of construction fraud likely occurs when the soliciting contending bids are awarding contracts. When bidders arrange beforehand, or when the bidding is somehow stained, it undermines the entire process. 

Worse, it could be illegal. And if these events keep happening, then it is common for schemes like bid-rigging to involve public authorities. To understand, here are four collusion plans that usually occur. 

  • Bid Suppression 

Bid suppression is when bidders are bribed, threatened, or even convinced not to go for the bidding. It could be through mutual agreements, money-making payouts, or even threat to violence or other action. 

  • Complementary Bidding 

Like bid suppression, complementary bidding is when competitors already know who will win the bid. Some bidders will submit immoderately high bids or unacceptable terms to improve the deceitful ‘bidding’ and have that genuine bidding going. 

  • Bid Rotation 

In bid rotation, each involved competitor will agree to take turns to be the winning or the lowest bid on a project. As a result, they will know the pricing of each other and assure the desired outcome. 

  • Promising in Exchange for Coordinating the Bids 

Another possible way of bidding that can be fraudulent is when a party convinces the other bidders to lose their bids or just withdraw purposely. This is in exchange for big subcontracts on the job. 

How to Prevent Bid-Rigging? 

 

When it comes to bidding, you must include non-collusion testimony as to the bid requirement for documentation. In addition, it must be standardized and clear to assist with the evaluation. You must also have the right to reject other bids if you think that the competition is unfair. 

Yes, this awareness might be ignored, but this will give you evidence when fraud is committed or discovered in the project. Furthermore, it could make the bidder think twice if they know they’re on a fraudulent scheme. That’s why bidding should always be a part of project management for construction to prevent these schemes from happening. 

3. Changing Lump-sum Costs to Material Costs and Time 

This happens when a project budget comes with an item like the equipment in a lump-sum computation. However, it shows that the equipment is also billed later by the contractor or sub on a material and time basis. 

Now, since this was already accounted for in the budget, it turns out it would be billed again later on, which results in double-dipping. 

How to Prevent Changing Lump-sum Cost?

 

One of the best ways to protect your construction business and the construction crew management from this type of fraud is to monitor the project closely. Before you send out the payments, ensure that you always compare the actual costs to the budget and have clear and online items. 

4. Equipment and Materials Fraud 

Material and equipment fraud is perhaps another common fraud in construction. This is done through removal, substitution, or simply exaggerating the materials used on the project. 

For example, it would be possible for contractors to promise to use high-quality and grade materials or equipment. It turns out they will substitute it with cheaper ones and not declare the difference. 

How to Prevent Equipment and Materials Fraud? 

 

Do you know what they say about sub-standard materials used in buildings? It’s about using low-quality materials for construction, even if a budget is intended for higher-quality ones. To prevent this, every time equipment or material is delivered to the site, and there must be transparency in receipts. It’s also a great idea that you get a confirmation of the brand. 

You have to verify and trust your subs; that way, you will know which and when the materials were delivered. You must also keep track of the equipment needed for the project, whether it’s leased, purchased, or owned. Keeping an accurate inventory will always help you keep track of all the expenses for the materials. 

5. Non-cash Misappropriation 

Stealing of non-cash assets of a construction company is also a fraudulent act. Some examples of non-cash assets are the equipment, supplies, scrap metal, and other materials used or unused in the project. 

Stealing happens when no one monitors the materials on the site or some involved parties join together in doing this fraudulent act. Take note that if materials aren’t complete, it could affect the construction timeline. 

How to Prevent Stealing of Non-cash Assets in a Construction Site?

 

With so many materials needed in a construction site, sometimes it gets hard to know if there is any lacking. However, inventory checking and monitoring the materials used and still unused could prevent stealing

There must be proper documentation of the in and out inventories every day. It’s also helpful if there are security cameras to check the site as well. 

Key Takeaway

 

Even though fraud is a serious issue in the construction industry, you can still develop project management for construction to prevent these unlawful practices. Having an excellent construction management software helps to detect these issues before it happens, so the project will not incur losses.

We are always happy to assist you with your construction business further.  Request a demo with our product expert to get familiar with our software. You will have a strong system of controls on your site and protect you and your construction company’s needs. We hope this blog has raised your awareness in preventing fraud in your construction business.

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