Construction business
Construction business
Avoiding Fraud in Commercial Construction

The commercial construction industry is no stranger to the risk of business fraud. With a large number of entities involved, construction is more susceptible to risk than many other trades. According to a recent article by ENR Southeast, fraud accounts for 8% of the U.S. GDP. With construction making up 5% to 10% of the national GDP, the impact of fraud hits hard for the industry.

How can your construction business reduce the risks of fraud? ENR outlines steps general contractors can take to protect themselves and their business from potential fraud.

  • Know your subcontractors. Most risk can be attributed to the relationship between a general contractor and subcontractors. Do you truly know them? A large portion of your success hinges on the work of subcontractors. Building strong relationships and taking an active role in your subcontractors’ work can reduce fraud risk. Keep communication lines open to alleviate any tensions, and promote a team environment.
  • Record-keeping. Diligent record-keeping can make the difference between catching fraud or letting it slip through the cracks. Construction fraud often happens when documentation is lacking. Keeping a paper trail throughout the design-build process adds a sense of accountability. Being aware of how contracts and policies read can also prevent misunderstanding between subcontractors, clients, and employees.
  • Separating tasks. An integral part of reducing risk with documentation lies within segregating financial responsibilities. Be sure whoever is responsible for invoices is not responsible for receipts as well. The classic principle of checks and balances can prevent misrepresentation of funds and safeguard against fraud.
  • Conduct audits. ENR cites the motto, “You get what you inspect, not what you expect” as a best practice for lessening fraud risk. Audits should include reviewing paperwork for discrepancies and reviewing onsite practices. If reviews and audits are conducted independently and on a regular basis, commercial construction businesses will be able to readily identify risk factors and areas of improvement.

Taking a more active role as a general contractor will reduce the risk of fraud drastically. Fraud, unfortunately, may still occur; but by taking certain measures, contractors can be more prepared to avoid business fraud and encourage compliance.

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