It’s the height of the construction season in most parts of the country and your business probably wants to make the most of it. But rising costs, worker shortages, international tariffs, and other pressures may threaten the profitability of your enterprise. The last thing you need is fraud.

According to the Association of Certified Fraud Examiners’ Occupational Fraud 2024: A Report to the Nations, construction companies affected by fraud lose a median of $250,000 per scheme, compared with $145,000 per incident for businesses in all industries. Only the manufacturing, mining, and wholesale trade sectors experience higher financial losses.

Industry Prevalence

Some types of fraud are more prevalent in the construction industry, particularly corruption (52% of cases) and billing fraud (38%). Payroll scams are also common. Corruption schemes, such as bid-rigging, and billing fraud can lead to lawsuits and substantial legal fees. And paying under-the-table cash wages to avoid payroll taxes could result in criminal charges and significant IRS penalties. To prevent your managers and workers from acting illegally or unethically, tighten your internal controls.

Certain internal controls are essential for checking these threats. Every construction office should “segregate” duties, meaning multiple employees should handle financial and accounting tasks. The person who processes cash transactions shouldn’t also prepare your company’s bank deposits. If you don’t have enough accounting employees to segregate duties, consider outsourcing some or all accounting functions. Also, have monthly bank statements sent directly to you or a manager independent of your accounting department.

Other Measures

Forms of corruption, such as kickbacks, bribery, and bid-rigging, can be kept to a minimum with scrutiny. If your company is suddenly winning bids that you haven’t in the past and that seem like a stretch, verify that your bid processes have been followed. Sometimes employees disguise illegal activities as change orders, so be sure to review each one carefully.

You can reduce the risk of procurement or purchasing fraud by naming someone other than your purchasing agent (you or an estimator, for instance) to check vendor invoices, purchase orders, and other documents. Also, use prenumbered purchase orders and regularly inspect materials and supplies to help ensure they correspond to what was ordered.

To reduce the risk of payroll fraud in your company, ask a person who’s independent of your accounting department to verify the names and pay rates on your payroll. And if you don’t already, pay employees using direct deposit, checks, or cash. You may also want to make surprise jobsite visits to compare worker headcounts to time reports and wage payments.

Hands On

Even if you’re a very hands-on business owner, fraud perpetrated by workers, vendors, subcontractors, customers, and others can slip through unnoticed and hurt your bottom line. Contact us – we can assess your particular risks and help you strengthen internal controls.