Construction projects are minefields of potential financial risks for the unprepared contractor. Equipment theft, substandard materials, false pay applications, inefficient labor, bid rigging and bribery are just a few of the fraudulent activities that can take place on a construction project.
Who commits these crimes? Really, it could be anyone, regardless of gender, age, position of responsibility or tenure with the company. As long as there are situational pressures, opportunity and rationalization in the mind of the perpetrator, fraud will continue to plague contractors all across the country.
Can a company keep all fraud from being committed on its jobs? Probably not, but these are proactive steps that can be taken to minimize risk and improve the success of fraud detection measures.
Create a Code of Ethics. A written document that covers how the company will conduct its external business dealings and how the company expects its employees to conduct their business should be in place. All employees should be required, on an annual basis, to renew their pledge of compliance with the ethics statements and sign-off that they have not violated these expectations. Suppliers and subcontractors should also agree to abide by the code of ethics before conducting business.
Conduct Background Checks. Check past employment, criminal convictions, references, and education and certifications. Conduct drug screening often, since employees will steal from a business to support an addiction. Remember, however, to always get the written consent of candidates before doing research since many federal and state laws govern the gathering of such information. Consider a review/update when employees are promoted to positions of trust and responsibility.
Require Ethics Training. Fraud awareness and ethics training programs have been shown to be an effective way to reduce the average fraud loss by as much as half of what it is in organizations without the training.
Start a Whistleblower Hotline. Access to a 24/7 anonymous hotline allows employees to disclose a tip about a potential fraud without fear of confrontations. This is critical, as the majority of fraud schemes are discovered either by tips or by accident.
Conduct Internal Audits. These programs should include an assessment of labor costs, materials, equipment usage and job site security. They should reconcile material requisitions and deliveries with estimates and account for any significant differences. Special attention should be paid to change orders, which are common areas of fraudulent activity. Again, research suggests that organizations with an internal audit program have a shorter average duration to their fraud schemes and with smaller average losses than those without a program.
Conduct Surprise Payoffs. Surprise payoffs (audits) of a project are the least commonly used method of fraud deterrence. However, research by the Association of Certified Fraud Examiners suggests that fraud detection is quicker and smaller average losses are incurred when surprise audits are conducted.
Develop a Supplier/Subcontractor Screening Program. Such a program would at minimum answer these questions: How long has the company been in business? What is their track record? Who have they worked for in the past? What do customers have to say about them? Include a “Right to Audit” in construction contracts. This allows the company to inspect the books and records of subcontractors for a defined period after the job closes.
Protect the Material Staging Area. Routinely verify material quantities ordered and delivered to the project. Keep stored materials secure and limit access to trusted employees. Conduct regular inventory counts. Compare materials pricing by vendor across multiple projects or multiple vendors. There will be some deterrent effect once people are aware that you are watching.
Watch Out for Conflicts of Interest. Keep an eye out for any personal relationships that might exist between your organization and a supplier or subcontractor. For example, are there common family members in responsible positions in both organizations? While this alone is not necessarily a problem, it does suggest that the proposed relationship should be scrutinized a little more carefully.
Considering the potential for significant monetary losses, it behooves construction company owners to make the prevention of fraud a priority in their businesses. Though contractors never want to feel their employees are unscrupulous people, sometimes temptation or personal financial pressures can push even the hardest working, most trusted employee into perpetrating fraud. It takes knowledge, awareness and vigilance to cultivate and keep honest, ethical employees and business relationships.