Defending Against Construction Fraud

BY ANDY KAY

"The typical organization loses 5% of its annual revenues to occupational fraud, according to the Association of Certified Fraud Examiners Report to the Nation on Occupational Fraud and Abuse."

construction safety signs

Construction fraud has issues ranging from physical asset theft to procurement fraud. Companies may be charged for heavy equipment that is not being used, or may be charged for better equipment than is being used on site. There are many different ways that fraud infiltrates the construction industry. A Kroll Global Fraud Report found that 75% of construction, engineering, and infrastructure companies have experienced fraud in the last year.

As fraud relates to construction, whether they are employees or bystanders, liability can change drastically depending on the degree of negligence on the part of the defendant.

 
 Billing fraud, bid / contract rigging, bribery, corruption, fictitious vendors, change order manipulation, theft or substitution of materials, false representation, money laundering, tax avoidance. 

Billing fraud, bid / contract rigging, bribery, corruption, fictitious vendors, change order manipulation, theft or substitution of materials, false representation, money laundering, tax avoidance. 

 

Many people in the construction industry will remember a big story from Sandusky, Ohio where a construction equipment and supply owner went to prison over equipment rental fraud. These sorts of things are not new, but are time consuming to go through nevertheless.

Fraud can easily devastate a company, regardless of how big it is. When dealing with this type of cases, we work with attorneys, large and small business owners alike to help them resolve the problem and get their business back on track. Not all kinds of frauds are equal, however, and each case is unique in its details. Some of the different types of fraud affecting the construction industry include:

·      Billing fraud: This takes place primarily on material, contracts, and time, on extra work orders, and on change orders. Unscrupulous contractors can work in concert with a company’s own employees to sign and approve extra work/services that the owners never receive or benefit from. Parties may receive kickbacks or favors from contractors, laws may be broken, and our job as the investigation company is to find where the problem starts.

 
 

Fraudulent injury/ workers compensation fraud: Many companies are self-insured or, for other reasons, do not have workers compensation insurance (depending on your state's laws). The construction company owners become personally liable for any claims of injury by employees…    

  •             claiming fraudulent injuries
  •             injuries taking place elsewhere
  •             staged accidents
  •             completely fake injuries

·      Purchase fraud: Purchase fraud is when employees purchase items that do not end up on your projects, or equipment being billed to a site are used elsewhere. I have seen entire homes built out of projects with the developer paying for everything. The development companies end up building an extra house they didn’t even know about for one of their own trusted employees. And yes, I have seen this happen…more than once…

·      Theft of time: Theft of time is when employees are reporting more time worked than they were actually present working.Basically, the construction company ends up paying the bill while at the same time losing the production they were supposed to get. Often times, one employee will clock in or out for others; and sometimes entire crews will leave jobs at noon on a Friday and go drinking with their immediate supervisor, leaving the construction company to foot the bill for the entire thing (yes, this actually happens and I have seen it myself!). 

·      Unemployment fraud: Unemployment fraud deals with past employees working under the table or under aliases while drawing off their workers’ unemployment fund. I have witnessed employees working on their own jobs that are competing against the companies that are paying for their unemployment. Incredible—and incredibly common.  

·      Substituting inferior material: This is when subcontractors provide or install materials/work below the specifications called out in the contract, creating future liability due to structure or system failure. This is a bigger issue than just fraud within a job, because it can affect public safety on a large scale depending on the job; and most jobs that this happens in (unfortunately) are the big projects.

The construction industry generates a lot of money, so the list of possible fraudulent activity is really as long as your imagination.

Why they call us:

When attorneys hire us in these situations, they know that we truly know every facet of this industry. We know how many hours a dozer can do a certain amount of work; we know what to expect from a framing crew, a roofing crew, a sheetrock crew, a paint crew, etc; we know what the safety regulations both federally and statewide require. We understand what general practices are included in a bid and how change orders should be addressed. We know how to find out if employees are working for you, or if they are getting their pockets lined by someone else. There is no private investigations company that knows this industry better than we do.

A note from Andy Kay

“Having grown up in the construction business, there is not any part of it I do not understand completely. I am currently the principle in both General Building and Grading and Paving construction companies, wherein we understand the materials and equipment like no other in the business. No matter what phase of construction and development the case involves, be it Residential, Commercial, Grading, Underground Utilities, Concrete, Framing, Roofing, Paving, or everything in between, we know how it should be done. As the foremost investigators in the field, we are experts on OSHA and MSHA rules as well as being fully committed to safe practices.
Our investigations department has multiple specialties in different fields of interest, as well. If your practice is in need of any such niche services, please don’t hesitate to contact us, and we look forward to being a valuable asset to your firm.”

 

Andy Kay

K&A Investigations