Contractor fraud is a real issue in the construction industry, and with rising costs and the increasing difficulty of securing capital, it’s more important than ever to identify and prevent these nefarious and profit-draining misdeeds.
Even if your firm insists on conducting honest business, fraud can be prevalent among contractors and vendors alike. Becoming vigilant and doing your due diligence helps you avoid falling victim to fraud and being held liable, protecting your business and workers.
Here’s how we define construction fraud, how to prevent it, and how the SmartBarrel device acts as a solution that saves you money in the long run.
What is construction fraud?
Construction fraud is defined as any illegal business practice that results in damages or liability when building and renovating properties. In other words, any time you receive equipment, materials, or labor that’s intentionally different from what was paid for (or nothing at all for the money you gave), you’ve become a victim of fraud.
While it’s not uncommon for homeowners to be scammed by construction firms, for our purposes, we’ll be focusing on fraud committed by contractors.
Contractor fraud results in lost revenue and significantly impacts profit margins, affecting everyone down the line. Plus, if not dealt with promptly, you could be held liable for damages even if you weren’t directly involved. Lawsuits are costly and can permanently tarnish your construction firm’s reputation.
Common types of fraud in the construction industry
Here are some of the most common types of fraud in the construction industry.
Completely falsifying payment requests
Whether a project manager or an electrician on the field, a common payment scam involves issuing invoices or requesting payment for work that wasn’t actually done. Making up work allows contractors to charge extra, which can end up costing your company hundreds of dollars over time if left unchecked.
Inaccurate billing
Inaccurate billing sees contractors artificially inflating the cost of materials or labor compared to their actual market value. Exaggerating costs lets contractors pocket extra money at the company’s expense.
Subcontractors, for example, may charge a journeyman’s rate for work that an apprentice completed, or increase the bill to charge for 15 units of labor when it only took 10 units of labor to finish the job. They may also contract their work to undocumented workers for cheaper labor, despite claiming that the work was completed by certified professionals (who are typically more expensive and can adhere to safety standards).
Regardless of the method, improper wage rates are a type of contractor fraud that can impact your construction firm’s profit margins.
Personal equipment use
From stealing tools to charging you a rental price for a piece of equipment they own to billing you for equipment that they then use for their own project, personal equipment use is another type of contraction fraud that can cost companies a significant amount of money over time. Any equipment you pay for should only be used for your job.
How to prevent contractor fraud
So how do you prevent contractor fraud? Here are some measures you can take to do your due diligence.
1. Conduct background checks
Before hiring any contractor, consider doing a background check on the individual or contracting group you’re thinking of working with. Initial screening can be something as simple as a single Google or Better Business Bureau (BBB) search.
Once you’ve decided to get in touch with a contractor, you can ask for references to ensure you’ll be working with someone who’s qualified and reputable. It’s also important to verify certifications whenever necessary to prevent liability.
2. Negotiate contracts
After hiring a contractor onto the job, make sure you’re negotiating and drafting a contract that specifically outlines the expected scope of work, extra charges if applicable, and so on to ensure that all payments will be accounted for. You’ll want a contract that’s airtight to avoid disputes.
3. Audit equipment
To prevent construction fraud pertaining particularly to equipment, you’ll want to verify that all the equipment purchased is necessary for the project. Remember to also check when it’s being used and whether it’s been returned to you after the project is completed.
4. Request receipts and documentation
Having documentation and receipts handy can be useful when disputes do arise. It’s also just a good practice to have in general to avoid liability. Create transparency by requesting receipts for any incurred expenses—any honest contractor will have no problem providing these.
5. Consider hiring a Chief Compliance Officer (CCO)
It can be difficult and time-consuming to verify every aspect of an invoice, so hiring a CCO ensures that there’s someone specifically designated to monitor expenses and detect contractor fraud.
A CCO typically reports directly to an owner of a business or construction company, and is responsible for auditing payroll, invoices, and contracts, as well as investigating claims and verifying documentation.
6. Invest in technology
If you prefer a more automated solution and would like to save on labor costs, technology is also a great option, simplifying the process of auditing expenses and checking documentation. Incorporating new tools and software into your workplace will help prevent fraud and make your job site more efficient.
SmartBarrel: the solution to contractor fraud
The SmartBarrel device is a technological solution that helps mitigate the risk of contractor fraud in the construction industry. LTE-connected, weatherproof, and solar-powered, SmartBarrel’s sturdy plug-and-play box makes worker check-in fraud-free, headache-free, and excuse-free through biometric facial verification.
Verified check-in means accurate timekeeping, saving you the time and liability of managing and maintaining timecards. You can also instantly generate daily logs to share with general contractors, summarizing daily work, weather observations, and reported incidents.
Field workers such as project managers, superintendents, and COOs benefit from remote job site supervision—see all workers on-site, organized by trade, at any time from anywhere for error-free manpower tracking.
The SmartBarrel device and its many fraud prevention features let you rest assured, saving you and your company money in the long run. Looking to upgrade your job site? Request a demo with SmartBarrel today!
