Fraud: A haunting reminder for construction credit managers

For credit managers working in construction, being proactive when it comes to fraud can be hard. With so many different schemes orchestrated to swindle your company out of materials or money, it can be a real nightmare for credit managers to know what to look out for, especially as fraudsters adapt.

Why it matters: Fraud can attack every facet of the construction industry. Whether it’s a spoofed phone call or a strange material substitution, it can put your company at risk for lost income or materials. On average, the construction industry incurs a median loss of $203,000 per fraudulent incident, placing construction fourth among other industries in terms of losses to fraud.

To mitigate the risk of fraud, Alex Koltsov, principal in risk advisory services at Grant Thornton, LLP (Charlotte, NC), recommends credit managers review their vendor screening process and check over all contracts between third parties.

“If you’re overseeing a project, do a ‘kick the tires’ approach to see across that supply chain what’s really being done,” Koltsov said during a Construction Credit Thought Leaders Forum. “And see if there’s potentially a weak link in there that could have that house of cards effect where somebody’s doing something really wrong and then everybody else in their environment all of a sudden gets implicated in that.”

The construction industry’s fragmented workforce, contract structures and complicated documentation system create ample room for fraud, according to Koltsov. The best way to protect against fraudsters? Learn how to identify them early on.

“Learning the red flags is critical and is something we talk about frequently, not only with the sales team, but the order writers on the front line,” said Lisa Moran, district credit manager, Crescent Electric Supply Company (Hazel Green, WI). “Constant education and open communication are key. We also share alerts with other locations. Oftentimes, fraudsters will try to find a weak link and continue to make fraudulent purchase.”

Here are some of the most common forms of fraud and what red flags might alert credit managers to fraudulent activities.

Bid rigging

Bid rigging is when contractors and subcontractors fix the bidding process to help one company win despite their inflated bid price. There are a few different ways companies may collude to rig the bidding process. Bid suppression entails competitors agreeing not to enter a bid or to withdraw, making an often inflated bid the winner of the contract by default. Companies could enter in very high bids to make one designated bid look better by comparison despite being inflated. Often these companies collude together and receive a subcontract or payoff in return or create a bid rotation system wherein they take turns being the lowest bid.

According to Koltsov, looking out for red flags like unusually high or low bids, strange bidding patterns, an unusually small number of bidders and suspicious relationships between bidders, such as shared ownerships or joint ventures, can help credit managers catch bid rigging early.

Payroll fraud

Falsifying timesheets, whether through ghost employees or inflating hours, can lead to big financial losses for the company footing the bill. Red flags include duplicate or missing information on timesheets, excessive overtime and unexplained pay increases, according to Koltsov. Employing advanced payroll software can help identify these inconsistencies and prevent any serious loss in funds.

Bribery and kickbacks

Bribery can take many different forms, with the bribe not necessarily being money and a kickback is a bribe paid off incrementally. A contractor might bribe a project manager with kickbacks that total a percentage of the total contract’s worth.

Look out for suspiciously close relationships between businesses, undisclosed business interests, strange payments and unexplained increases in wealth, according to Koltsov. This type of fraud normally occurs between procurement and closeout. Two ways to mitigate risk are to establish a vendor due diligence program and confidential reporting channels.

Improper material substitution

When a contractor supplies materials that do not match the requirements laid out in the contract, it is improper material substitution, a form of fraud. The product could be used, not properly manufactured or untested despite specific contract requirements. Koltsov advises credit managers to look out for red flags like missing documentation, last-minute substitutions and inconsistencies between the specifications and submitted documents.

Spoofed calls

Spoofing is when a caller falsifies the information in their caller ID, allowing fraudsters to take on the identity of a company and place erroneous orders. D’Ann Johnson, CCE, credit manager at A-Core Concrete Cutting, Inc. (Salt Lake City, UT), once received a phone call from an A-Core number, but she did not recognize the person on the phone and when she pressed them for more information on the company, it became clear that it was a spoofed call.

“About 10 minutes later, another credit manager, who happens to be a product seller, called me and said, ‘Have you guys been ordering products from us?’” Johnson said. “And I said, ‘Not that I’m aware of.’ And he said, ‘Do you know this person who works for you guys?’ And I said, ‘No.’”

Johnson was able to report the incident to her company’s IT Department, who worked on blocking these calls, while a notice was sent to all their project managers to reach out to their vendors who may provide materials to alert them to possible fraudulent orders. 

The bottom line: Fraud can take many forms and can cause substantial damage to a company when left unresolved for too long. To mitigate the adverse effects of fraud, it is best to stay vigilant and detail-oriented during each stage of the construction process.

To learn more about the various types of fraud and how it impacts credit management, download NACM’s FREE white paper The Evolving Threat of Fraud in B2B Trade. For all of your construction credit needs, visit Secured Transaction Services.