There are thousands of construction contractors who work in-line with state and municipal laws, starting with the appropriate licensing and bonding requirements to help safeguard customers from incomplete or poor work. However, these individuals are overshadowed by the bad actors who sidestep regulations or those who commit various types of fraud throughout a project. To ensure construction fraud cases do not impact your bottom line, it is essential to recognize the different types of fraud that can take place and the red flags that warn of potential danger ahead.
Fraud Types to Know
Because there are so many moving parts on any given construction job, ample opportunities exist for fraud to take place. The most common types of fraud include the following, in no particular order:
- Theft – anything from equipment and tools to building materials can go missing on the construction site, and it can be a challenge to monitor theft every minute a project is in progress.
- Abuse of equipment – similar to theft, equipment abuse can take place at any time during a project. Subcontractors may use equipment for their own personal gain, all while billing the job owner fraudulently.
- False billing – both large and small construction companies may take part in billing schemes, including overpayment for items or materials, payments to non-existent vendors or suppliers, or personal items that are coded as project-related expenses.
- Bid-rigging and corruption – some of the most glaring instances of fraud in construction take place with larger projects in the realm of bid-rigging and corruption. These issues may include bribery, kickbacks, or other arrangements that ultimately cost the project owner.
Recognizing Red Flags
Although it is not possible to thwart fraud on a construction project completely, there are strategies to reduce instances of fraud on every job. First, be sure to check that the contractor is adequately licensed in the state or municipality in which the work will be performed. This includes verifying the contractor has the appropriate surety bond in place, as well as any applicable insurance that works to protect you as the job owner. Additionally, never provide full payment, in cash, up-front, as this is often a sign of potential fraud down the road. A contractor who has the full payment before starting the work has no incentive to complete the job as agreed.
Finally, take steps to check contractor references and reviews before agreeing to hire the individual or the company to complete a project. Other satisfied customers are the leading indicator that the contractor is legitimate, but be sure to follow up by getting in touch with prior clients to verify the details. The Better Business Bureau and online review sites are also helpful in vetting construction contractors before entering into a new agreement for work.
Fraud in the construction business can run rampant when customers are not aware of the types of deceit that can take place, or the red flags that lead to financial losses on a project. Recognizing these issues in construction can go a long way in keeping fraud at bay.
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.