Every contractor would like to believe that his subcontractors are honest craftspeople who want to get the job done right.

But the fact is, 70% of construction companies experienced at least one fraud incident in 2016. (That was a drop of 5% from 2015… but there’s still a long way to go.)

As you start off the new year, why not make fraud prevention and detection one of your big business goals? Here are some facts to keep in mind.

Construction Fraud Facts

• Most incidents of fraud go undetected until there are money problems, or there’s a dispute toward the end of a construction project. Can you institute any fail-safes to try to catch fraudulent activities before that?
• In order to prove an act is fraudulent, you have to be able to prove intent. These are the elements that must exist for a successful cause:
• A false statement of fact (for instance, an application for payment that includes work not yet performed)
• The defendant’s knowledge that the statement was false
• The defendant’s intent to induce the plaintiff to act
• The plaintiff’s reliance on the statement
• The plaintiff’s damages from relying on the statement
• Billing for work not yet completed is often just the subcontractor jumping the gun a bit, trying to keep ahead of his own bills and meet payroll obligations. Keep your ears open for news of financial problems among your subcontractors, which could alert you to the potential for fraud.
• Sometimes there is an intent to cheat the contractor or property owner. How do you inspect work in progress and completed, to ensure that tasks have indeed been completed as they should have been?
• Subcontractor pay applications are often accompanied by waivers of lien from sub-subcontractors and suppliers, stating they’ve been paid up to date. But if a subcontractor is behind on payments, he might be tempted to forge signatures on such waivers. You can protect yourself from such forgery by requiring notarized original waivers, instead of allowing electronic submissions.

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