Fraud in the Field: How to Spot It—And Mitigate It

When fraud hits construction businesses, it hits hard. According to the Association of Certified Financial Examiners (ACFE), the median cost of an episode of fraud in the construction industry is $245,000. And more than half of businesses who lose money to fraud recover nothing at all. 

Construction companies face many types of risk. They’re not immune from common financial schemes such as check tampering or financial statement fraud. Bid-rigging and other types of procurement fraud are another major industry problem. 

But with many employees, subcontractors, invoices, and expenses to manage, construction companies face unique risks from fraud in the field. No one can be everywhere at once, and it can be challenging to police everything that happens on site. That’s why it’s so important to understand your biggest threats—and address them before they hurt your business.  

1.    On-Site Corruption 
The incidence of corruption-based fraud in construction is well above norms in other industries, with 46.5% of construction fraud involving some form of bribery or conflict of interest. Gifts, kickbacks, and conflicts of interest can allow all kinds of bad practices to flourish.

How it happens: 

• Project managers may approve overpriced bids by subcontractors, or allow overcharging on time and materials contracts. A common scheme is “for a corrupt employee to work with an actual vendor’s rep to inflate prices and then split the difference,” says accounting firm Feeley & Driscoll.
• Change orders can enable fraud if a corrupt project manager or employee approves work under a change order that is actually covered by the original contract, or approves overcharging. 
• Corruption can lead to a blind eye being turned to the use of substandard materials or other failures of quality control. 

How to stop it: Look for instances where particular types of cost, such as materials, are making up an unusual proportion of site expenses. To mitigate the risk that long-term employees are getting too cozy with subcontractors, require competitive bids for materials and subcontracts over a specified amount, says fraud examiner Angela Morelock. 

Another safeguard is incorporating right-to-audit clauses in contracts. “These clauses aim to ensure compliance with contractual obligations and allow owners to specify how they expect contractors to use funds and maintain financial records, which the owner may audit at any time,” explains accountant Richard Pollack. 

2.    Theft and Unauthorized Borrowing
More than one in five episodes of construction fraud involve the theft of non-cash items, whether stolen by criminals, diverted by subcontractors, or pilfered by employees. Construction materials can be especially hard to track and easy to steal and sell. 

How it happens: 

• Subcontractors or employees order more tools or equipment than are needed, and then the excess is diverted and used elsewhere.  
• Tools, equipment, or materials are taken by employees for personal use—either temporarily or permanently.

What to do: Wherever possible, tools and materials should be secured on construction sites, and checked in and out by employees. Security measures such as lighting, cameras, perimeter fencing, and warning signs can help minimize thefts. Regular inventories and checks can help identify equipment, materials and tools that aren’t where they’re supposed to be. 

Insurance company Travelers says that “When an employer doesn’t clearly state opposition to theft and act to prevent it, they are subject to more theft.” Site meetings, clear policies, and handouts can help engage employees in the fight against fraud.  

3.    Expense Reimbursement Fraud
Expense reimbursement is a top-three fraud risk for the construction industry. 27.9% of construction industry frauds involve expense reimbursement—more than double the incidence of such schemes in general. 

How it happens: 

• If review of reimbursement claims is lax, employees can slip a few personal receipts in with legitimate expenses. 
• “Lost” receipts allow employees to disguise personal expenses as business expenses. A charge from a hardware store might seem legitimate, but without a receipt, how do you know whether the materials went into your site or an employee’s side job?  
• More elaborate schemes can involve altering receipts to show greater expenses than the employee actually incurred, or forging new receipts from scratch. 

How to stop it: No matter what system you use, it’s critical to have a clear, consistent expense management policy in place—and to query every expense that doesn’t comply with it. 

Although it takes time, a careful review of expense claims can stop fraudulent claims slipping through. Better tools can streamline the process, such as the great expense reporting software offered by Tallie. 

Finally, your expense management solution matters, and each has its pros and cons. Reimbursements are manual and time-consuming. Credit cards leave a paper trail, but are open to abuse and put the company’s credit at risk. 

At PEX, we’ve given a lot of thought to how expense management solutions can help prevent fraud. That’s one of the reasons we created the PEX Visa® Prepaid Card, a business prepaid card solution that offers multiple safeguards against fraud and waste, and also provides incredible flexibility in getting funds into employees’ and even subcontractors’ hands. The Card coupled with the PEX Admin desktop site allows employees to spend what they need to get the job done, while you maintain necessary control. The PEX Admin and Cardholder mobile apps provide up-to-the-second access to manage and oversee employee spending 24/7.

To learn more about how we help construction companies enable employees to spend in the field while maintaining control, download our PEX Fact Sheet.

The PEX Visa Prepaid Card is issued by The Bancorp Bank pursuant to a license from Visa U.S.A. Inc. and may be used everywhere Visa debit card are accepted. The Bancorp Bank; Member FDIC.