Fraud is an ever-increasing issue in the construction industry, with 26% of UK construction companies reporting fraudulent activity in 2023.
However, statistics show that two in five construction companies did not report fraudulent activity to the police, meaning it is far more prevalent than authorities think.
The most common type of fraud is changing the quality of materials, with three in five companies experiencing this in 2023, and this problem was (and continues to be) exacerbated by material shortages following Brexit and the Covid-19 pandemic.
Additionally, bid rigging, falsifying expenses, invoice fraud, bribery and stealing tools for other projects are frequent occurrences.
What is Fraud?
According to the Oxford English dictionary, fraud is the crime of cheating someone in order to get money or goods illegally. This includes people pretending to have qualities or abilities that they don't have, in order to cheat other people.
This extends to criminal inquiries taking place in relation to people forging their CVs and pretending to have better qualifications than they actually hold, for the purpose of obtaining highly paid jobs in advanced positions.
This is not a new thing, and as far back as the Middle Ages, traders combined valuable spices with fillers like ground nutshells and seeds to increase their supply and pass it off as having a greater value, in order to make more money.
Particular risk factors for project owners are during the procurement process, when facing 'bid rigging' i.e. over inflation of costs by several contractors working together or collusion in awarding projects.
Key areas of financial fraud impacting contractors are asset misappropriation and labour and wage compliance violations.
Consequences of Fraud
Last year, three in five small companies were close to bankruptcy due to fraud, with a quarter of medium-to-large companies saying their industry reputation was tarnished by illegal activity. Employees also suffer as a result, with half of construction companies with more than 100 people losing employees as a result of fraud.
Construction fraud further increases during periods of economic uncertainty.
Solutions to Protect Your Business
- Incorporate detailed cost estimates throughout the construction lifecycle;
- Perform risk-based vendor due diligence;
- Implement enhanced oversight of high-value assets;
- Incorporate centralised oversight for labour compliance, and
- Set expectations of a project cost audit.
In brief, closely monitor costs and assets throughout the project and be sure to carry out appropriate levels of due diligence, taking into account the specific risks involved with each case.
This topic was discussed in our webinar 'International Fraud – Beware! & Subcontracting under JCT and NEC with Keith E Oliver and Sinead Clarkson in November 2023. Click here to view the webinar and presentation.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
