Malpractices in construction industry:

1. Corruption/Collusion:
Collusion between project managers and vendors/subcontractors
including kickback schemes, bid rigging at the subcontractor level,
conflicts of interest, bribery, etc.
2. Billing:
Substitution of materials while billing for higher quality, falsification of
pay applications and billing for uncompleted work, incorrect labor
rates, etc.
3. Expense reimbursement:
Falsifying invoices for expense reimbursements, inappropriate use of
company credit cards and gas cards.
4. Noncash misappropriation:
Stealing the noncash assets of a company assets such as job site
supplies, equipment, scrap metal and other materials, etc.
5. Check and payment tampering:
Office employees may have the opportunity to write checks to
fictitious vendors or collect checks from customers and hide the
activity through entries to the general ledger.Bribery/corruption
6. Often collusion by two parties entering into a secret agreement
whereby a financial incentive is made for securing a particular
outcome. Examples include the awarding of a public or private
contract or purchasing property on ‘favourable’ terms.
7. Fictitious vendors
8. These are created by falsifying payment applications, covering up
the purchase of personal items or diverting money to a phantom
company. Activity is often controlled by an employee but can also
be done by external entities through falsified company
documentation or email addresses.
9. Change order manipulation
10. Diverting lump-sum cost to time and material cost by initially
budgeting expenses as a lump sum then billing for time and
materials related to change orders.
11. Theft or substitution of materials
12. Taking material from the work site for personal use or using
lower-grade material than quoted, which might result in
subsequent repairing or replacement.
13. False representation
14. This might involve using undocumented workers; falsifying
minority content reports, test results or insurance certificates; non-
compliance with environmental regulations; and misrepresentation
of small business status.
15. Money laundering/tax avoidance
16. This is activity to legitimise money gained illegally. In real
estate it could include making down payments on property and
selling at a later date to give the money a legitimate origin. Tax
avoidance can involve commonplace activity such as paying cash-
in-hand for labour.
17. Charging for superior materials, but using sub-par materials
18. Padding timesheets
19. Skimping on safety, for employees and clients
20. Changing salary terms
21. Bribing inspectors and potential clients/representatives
22. Treating workers unfairly
23. Not following environmental regulations
24. False variation claims

Solution:
Establish strong internal controls and enforce them:

Ensuring that the in-office internal controls include reasonable and

thought out segregation of duties will greatly reduce the risk that an
individual will be able to falsify expense reimbursements, manipulate
checks/payments or misappropriate cash receipts.  Instituting
appropriate levels of approvals and oversight for bidding, selection of
subcontractors and vendors, change order approval, etc. can reduce
the risk of collusion between parties.  Appropriate controls over the
estimate and pay application process can prevent and detect issues
relating to fsalsification of completed work, inflating labor or material
costs, double dipping on billings, etc.  Controls can be implemented
throughout all areas of the business in order to protect it.

Conduct regular (and sometimes unannounced) job site visits –

Having unexpected visits to job sites can deter unwanted behavior
from field employees and can provide valuable information on how a
job is performing to compare to pay applications and estimates.

Perform appropriate due diligence – Setting up a strong

prequalification process for subcontractors and other vendors can
weed out undesirable companies.  In addition, due diligence
 performed at the appropriate level can help mitigate the risks that can
arise with change orders and selection of vendors/subcontractors.

Set up a System to Receive Anonymous Tips :

Majority of fraud is detected via tips that are provided by employees or

others that have knowledge of the fraud.  Setting up an easy medium for
individualstocommunicate these tips will allow for a higher likelihood of
uncovering ongoing fraud.

Although fraud is a real issue in the construction industry with significant

implications, businesses can take proactive steps to prevent fraud before
it happens and detect instances of fraud at an early stage in order to
manage losses.  TeamDKB has experience in such matters.  We would
be happy to discuss your business further, so we can help set up a
strong system of internal controls, to protect you and your unique
business needs.
Thank you