Most contractors working in the construction industry are highly skilled and knowledgeable about operating a legitimate business. However, there are instances when contractors have the single intention of defrauding customers and clients out of vast sums of money without completing any work. Contractors who are not properly licensed and bonded put the construction industry at great risk, even for the companies that consistently perform the work they promise to residential or commercial customers. Recent increases in the number of contractor frauds have some concerned that the efforts of consumer and business watchdog agencies are insufficient in thwarting contractor scams.
A highly publicized case of contractor fraud highlights the influence nefarious actors in the industry have on legitimate businesses. The DC-based residential contractor was accused and ultimately found guilty of defrauding customers by misrepresenting his skill level and promising work that he had no intention of completing. Several homeowners were left with a construction nightmare, above and beyond the money spent on the fraudulent contractor. As a construction company operating legally and in customers’ best interests, it is important to recognize the warning signs fraudulent contractors give off.
Recognizing Common Fraud Types
First, the construction business gives way to many opportunities for fraud because of the numerous parties involved in each project completion. Even though it may seem like an impossible challenge to maintain a watchful eye on contractors, particularly on large projects, construction managers and business owners can start by recognizing the most common types of fraud in the business. These include:
- Theft of equipment, materials, and business or personal items
- Abuse of company equipment, most commonly in the form of personal use on company time
- False billing to outside vendors and suppliers for materials, labor, or personal items
- Bid-rigging and corruption such as bribery, kickbacks, or quid pro quo arrangements
Each of these common fraud types has the potential to increase the total operating cost of the business exponentially, even if they take place for a short period.
Establishing Internal Controls
In an effort to stop fraud among contractors before it starts, construction companies can and should establish internal controls that reduce their risk. These may include divvying up financial responsibilities among external and internal parties as it relates to paying vendors and suppliers, or subcontractors. Additionally, having a reliable system to track and compare bids and actual costs for projects and materials is necessary in keeping fraud at bay. Double- and triple-checking invoices, timesheets, and credit card statements internally help eliminate the potential for fraud from start to finish on each project.
Safeguard the Business
While understanding common fraud types and creating a system of internal controls benefit the construction business overall, it can be difficult to eliminate fraud among contractors completely. This is because most contractors have a work history of at least one year before they cross the line into fraud. They may have strong references, a reputable work history, or a trustworthy demeanor. Even when these seemingly positive traits exist, construction managers and business owners must be diligent about protecting the business. Always take the time to keep an eye on what’s happening on job sites and the relevant billing, and be quick to make adjustments when someone doesn’t seem to be working truthfully. Taking these small steps helps reduce the potential for a claim against the business from an unsatisfied customer, and safeguards the reputation of the construction industry across the board.
Eric Weisbrot is the Chief Marketing Officer of JW Surety Bonds. With years of experience in the surety industry under several different roles within the company, he is also a contributing author to the surety bond blog.