Simple Measures to Prevent Construction Fraud

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By Elan Parra

Managing potential fraud is a fact of life in many industries, but it’s especially true in construction. While the good guys far outnumber the bad, if you own or manage a construction business, it’s likely that you will encounter fraud at some point eventually. When it happens, having a few simple measures in place can save your company from irreparable damage.


Despite its prevalence, fraud can be tricky to detect, especially for new businesses that may not have a lot of experience encountering the different types of fraud that can infiltrate a job site. But ignorance is no excuse when regulators come knocking and your company’s reputation is on the line. In many jurisdictions, the law even requires that general contractors have measures in place to ensure that subcontractors are not engaging in illegal activity. Construction companies are increasingly expected to monitor and investigate potential criminal activity. With that in mind, here are some easy to implement measures that can be employed by any company to stave off potential fraud.

First, make due diligence screening a requirement for any company you choose to do business with. Perform background checks on subcontractors and principals looking for tax liens, judgments, and other violations. Even simple Google searches can turn up potential red flags. Also, take time to learn their business structure. For instance, are there subsidiary companies that help shield principal identities? In other words, make sure you know who you’re really doing business with, including long-standing business partners who may also pose a risk.

Second, designate a chief compliance officer to manage your due diligence efforts and to conduct regular, ongoing reviews. Your compliance officer should report directly to the ownership or board of directors, which ensures accountability while also sending the message that you place great importance on compliance. A direct line to the top prevents facts from getting muddled before action may be taken to rectify an issue.

But it’s not enough to simply have a titleholder. Compliance officers should be empowered to analyze payroll, invoices, and contracts, and should have access to everyone on the job site. That means going into the field to speak with workers, keeping thorough records (preferably electronic) establishing rapport with subcontractors, and ensuring an anonymous method for anyone in the company to report suspected fraud, waste, or illegal activity.

It’s also worth consulting with experienced compliance professionals who can help establish compliance protocols, especially if you’re first setting out to implement them. Seasoned specialists can help you put the right system in place and eliminate much of the guess work.

Finally, make sure everyone in your organization clearly understands the consequences of engaging in or overlooking fraud, including debilitating fines, criminal prosecution, civil lawsuits, potential debarment, and most importantly, reputational harm to the company.

As a professional, you understand that nearly everything in the construction industry centers on risk. Simply put, detecting fraud is a variable that must be part of your risk calculus. Implementing these relatively simple steps upfront can help you protect your reputation and ultimately ensure the integrity of your bottom line over the long run.

Elan Parra is managing director of Lemire LLC, a New York City based compliance and risk management firm. 

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