Stopping fraud in construction labour: What you should know

In light of International Fraud Awareness Week, Christine DiGangi, reporter and the social media editor for Credit.com, explains how construction companies can mitigate fraud to protect themselves, their clients and their businesses.

To manage a business is to maintain a consistent balance between the parameters of creativity and ethics, profit and procedure.

To maintain the illusion that everything will always run smoothly and strictly according to your business plan is to do yourself a major disservice: understand early on that rough terrain is typical to the landscape, and designing a working framework with this logic in mind is what will give you the flexibility to outperform competitors.

By familiarising yourself with risks and likely road bumps, you can minimise their impact and prevent any serious damage to your business. In the construction industry, fraud is one such risk.

International Fraud Awareness Week, which is currently running, directs our attention to the importance of mitigating serious incidences of fraud before they occur.

“It’s really going to happen at some point or another,” Elan D. Parra, managing director at Lemire, said. “You don’t want to assume that it’s happening on every job, but you have to just assume that it’s going to happen at some point.”

Fraud comes in many forms and can happen at many points in a job, including the bidding process, onsite and payment. Workers, contractors and the individuals that hired them can be both victims and perpetrators of fraud.

Because fraud is common, focusing on preventing it is a crucial part of operating a construction business. Here are some tips on how to protect yourself, your clients, and your business every step of the way.

Do your research

When you’re considering hiring an individual or a subcontractor, it’s important to take the time to research them. Tax liens and lawsuits against subcontractors can be found in public records (and can be red flags when it comes to labor fraud).

A simple internet search can help you get a sense of a company’s reputation.

It’s not a foolproof method — after all, there’s a first time for everything, so hiring someone with a “clean record” doesn’t mean there’s no risk of fraud. Still, it’s worth looking into, as a simple check can save a lot of time later on.

Set up an accountability system

A system of checks and balances throughout the business will make it less likely that fraud goes unnoticed.

Lorra Brown, the founder of LBE Consulting in Grand Prairie, uses time theft as an example of fraud that can be prevented: “On-site jobs with a buddy system can help account that theft of overtime. It can also help with employees wasting time.”

Basically, when no one is looking, fraud is more likely to happen. New software systems, and mobile time tracking apps, are also able to track employee’s actions more effectively.

That concept extends to protecting workers, too. Someone has to look out for them. It’s important for companies to invest in hiring a compliance manager, whether that’s someone on staff or an outside consultant, so someone is in charge of setting up systems to catch violations and fraud.

Compliance managers can take action by setting up an anonymous hotline for workers to report problems without fear of being negatively labeled by their peers, and going out into the field to interview workers to get a sense of what’s happening on the job site.

Keep good records

Whether it’s wage violations, materials theft or billing fraud, a paper trail (physical or digital) can help uncover it.

Max Robinson of Ace Work Gear has supplied construction companies with equipment for 15 years, and he said reviewing records is helpful in detecting and potentially stopping fraud: “Always keep a record of job cost estimates so you can compare them to actual costs and investigate any discrepancies,” he said.

The same goes for other expenses, whether it’s equipment use, maintenance expenses or general billings.

Checks and balances in the finance department go a long way in helping prevent fraud, too. Double-checking timesheets and invoices can help to reduce the likelihood of missing things, such as payroll or billing fraud, which is why it is a good idea to have multiple people reviewing all financial documents.

Having only one person working on the company books can present the opportunity for things like misusing a company credit card, embezzlement or using sensitive employee or company information to open fraudulent accounts. 

Why managing fraud is important

If you’re not prioritising compliance with labor regulations, you’re opening yourself up to the risk of prosecution or large fines, which can hurt not only your bottom line, but your reputation.

To proactively prevent fraud, and simply handle your day-to-day account reporting in a more accurate manner, strive to fine-tune the processes and controls behind your business model.

Stay attuned to the red flags of fraud, and follow important anti-fraud policies to safeguard yourself and your clients from serious financial risk.