Being a credit manager in the construction industry involves many challenges. One involves looking for signs of fraud when negotiating construction contracts.
There are several scams out there designed to defraud construction companies out of money or materials. It is important to be proactive and watch out for these red flags.
Spoofing
Spoofing involves a caller falsifying their information on a caller ID to pretend to be someone else and place false orders. If you receive a call from a person or company you know, but do not recognize the person on the other end of the call, you should be suspicious.
Ask them to provide identifying information and more detail on what they are looking for. If you are still suspicious, tell them you will return their call. Contact the company directly and verify if the person who called you works for them and would have a reason to contact you.
Improper material substitution
Contractors sometimes supply materials that are different from the materials required to be used under the contract. This is called improper material substitution and is fraud. The material could be used, untested or improperly manufactured, usually to save the contractor money.
Thoroughly review documentation involving materials and look for inconsistencies between materials specified in the contract language and the materials that are used. Be wary of material substitutions done at the last minute.
Bid rigging
Bid rigging happens when contractors and subcontractors fix the bidding process to ensure one company wins. Bid rigging can take many forms.
Companies or competitors may agree not to enter a bid or withdraw a bid, making one company automatically win. Companies could also agree to submit extremely high bids to make one bid look better even though it is still inflated.
Sometimes bid rigging schemes get complex, involving payoffs for participating in the scam or a bid rotation system, where companies take turns being the inflated bidder.
Signs of bid rigging include an unusually small number of bidders, very high or low bids or suspicious relationships between bidders. Watching out for these signs can help you spot a bid rigging scheme as soon as possible.
Payroll fraud
Payroll fraud is a common form of fraud in the construction industry. Falsified time sheets, payroll logs or other financial records may seem like small losses, but they can quickly add up if not caught soon enough.
Always review payroll sheets and check for inaccuracies. Using payroll software that stores data and allows you to retrieve it quickly can help. Communicate with any employees who you believe may have put incorrect information in their time sheets.
Additional steps
Fraud can happen in any area of the construction industry. Being the victim of fraud can result in significant losses for your company. Consistently reviewing contracts between all third parties and your screening process for vendors are some steps you can take to avoid becoming a victim of fraud.
Additionally, stay current on the newest fraud schemes and keep communication lines open between everyone involved in a construction project. Fraudsters often take advantage of the structure of a construction project, which involves many different pieces and complex paperwork.
If you believe you are the victim of fraud in one of your construction contracts, there may be ways to undo the contract or recoup any losses you have incurred.
