Diverted funds, materials misuse, padded bills and hidden cost overruns are among the ways that construction firms lose money every day to fraud perpetrated by employees, contractors, subcontractors and venture partners, says the report. “Despite media headlines and stereotypes, construction companies are often the victims of fraud rather than the perpetrators,” it says.
Construction numbers remain strong in Canada, and particularly in Toronto, which is estimated to have more skyscrapers and high rises under construction than any other North American city. From businesses in commercial construction to individuals involved in residential construction, it’s critical to understand fraud, says Grant Thornton.
The new white paper, Construction fraud in Canada—understand it, prevent it, detect it - outlines the severity of fraud, lists the most common types of fraud schemes and shows how to prevent and detect it.
It details the 10 most common construction fraud-related schemes:
- Non-payment of subcontractors and material suppliers
- Billing for unperformed work
- Manipulating the schedule of values (SOV) and contingency accounts
- Diverting lump-sum cost to time-and-material costs
- Substituting or removing materials
- Change-order manipulation
- Falsifying payment applications
- Subcontractor collusion
- Diverting purchases and stealing equipment or tools
- False representations
The report also highlights red flags that may be helpful in identifying fraudulent activities, allowing companies to take action or implement controls to prevent fraud.
“For example, does one person dominate or control an entire process?” it asks. “Are subcontractors complaining of delayed payments? Are there unusual bid patterns?” For these and other examples, Construction fraud in Canada suggests preventative measures to improve operations, reporting and governance, and help lower the risk.
“A strong fraud strategy can help companies reduce the risk of fraud loss, of course, but the benefits extend far beyond,” said Grant Thornton LLP senior partner, fraud and investigative services David Malamed. “Fraud has a host of additional costs, such as penalties for violating industry standards or regulatory requirements, project delays or cancellations, escalating costs and reputational risk. A good fraud prevention program may even prevent injury or loss of life if the fraud involves the use of substandard or unsafe materials.”
Given current levels of construction activity and investment, the construction industry needs to implement proactive, preventive measures for fraud. “Individuals and organizations need to invest the time and money to put a fraud prevention and detection plan into action before they become a victim,” said Bo Mocherniak, National Leader, Construction, Real Estate and Hospitality, Grant Thornton LLP. “The push for fraud prevention requires strong governance and leadership, and must start at the very top of the organization.”
A free copy of Construction fraud in Canada - understand it, prevent it, detect it can be downloaded from http://insights.grantthornton.ca/i/109829.
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