Spotting fraud is first and foremost a case of knowing where to look. Here are eight main types – some less obvious than others and harder to track.
Our recent global report into fraud in the construction industry – Time for a new direction: fighting fraud in Construction [ 1989 kb ] – followed research carried out in Australia, Canada, India, the US and the UK, and identifies the high-risk areas and challenges for construction companies dealing with fraud. Below we list the most common types of fraud.
1. Billing fraud
Purposely overstating the amount of labour, materials and other equipment required to complete a project.
2. Bid/contract rigging
When suppliers in the market collude to fix prices or direct customers to use certain contractors. This can include bribery or kickbacks (see point 3).
Often collusion by two parties entering into a secret agreement whereby a financial incentive is made for securing a particular outcome. Examples include the awarding of a public or private contract or purchasing property on ‘favourable’ terms.
4. Fictitious vendors
These are created by falsifying payment applications, covering up the purchase of personal items or diverting money to a phantom company. Activity is often controlled by an employee but can also be done by external entities through falsified company documentation or email addresses.
5. Change order manipulation
Diverting lump-sum cost to time and material cost by initially budgeting expenses as a lump sum then billing for time and materials related to change orders.
6. Theft or substitution of materials
Taking material from the work site for personal use or using lower-grade material than quoted, which might result in subsequent repairing or replacement.
7. False representation
This might involve using undocumented workers; falsifying minority content reports, test results or insurance certificates; non-compliance with environmental regulations; and misrepresentation of small business status.
8. Money laundering/tax avoidance
This is activity to legitimise money gained illegally. In real estate it could include making down payments on property and selling at a later date to give the money a legitimate origin. Tax avoidance can involve commonplace activity such as paying cash-in-hand for labour.
How to tackle construction fraud
To read our recommendations on how best to tackle fraud in construction, including a phased five-step programme to help protect your business against fraud risks, read our report: Time for a new direction: fighting fraud in Construction [ 1989 kb ].
Image: (CC) Ell Brown/Flickr