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  • Writer's pictureJerry Ipsen, CFE, MBA

Be Wise to Fraud

Fraud can be committed by: contractor employees; owner employees; contractors, subcontractors as well as consultants.


COMMON CONSTRUCTION FRAUD SCHEMES


· False applications for payment

· Billing for work not performed

· Change order manipulation

· Manipulation of the schedule of values and contingency accounts

· Substituting or removing material

· Diverting lump sum charges to time and material costs

· Diverting purchases and theft of equipment or tools

· Non-payment of subcontractors and material suppliers

· False representations


FRAUD RED FLAGS


· Application for payment form that is unusual in presentation or structure

· Missing or disorganized billing documentation

· Material costs that seem inflated compared to their market value

· Use of contingency funds without proper or timely explanation of usage

· Changes in the schedule of values without proper or timely explanation of changes

· Subcontractor complaints regarding delays in payment

· Missing subcontractor lien waivers

· Unusual bid patterns

· Unsuccessful bidders hired as subcontractors

· Unauthorized changes in or missing time records

· Report of improper wage rate and categories

· Related parties and/or common ownership


BASIC FRAUD TESTS


· Schedule out and reconcile the pay applications comparing them to the contract and to the job cost report

· Compare actual to budget on a line item basis with the contract

· Track changes in the schedule of value and contingency account and get supporting documentation for those changes

· Compare change order signature dates to when the work was completed

· Take inventory of lien waivers

· Take an inventory of equipment and inventory left on site to what is expected

· Perform supplier confirmations of billings and payments

· Reconcile subcontractor bills to pay applications

· Make sure payment applications match work orders

· Request receipts for items a contractor or subcontractor is billing you for

· Review the subcontractor bid selection process and documentation of selection


FRAUD PREVENTION PROGRAM OFFERED BY IPSEN DUE DILIGENCE


The monthly 2 hour fraud prevention program affords project owners and general contractors who want to retain our services as a fraud prevention measure. The program covers a visit to the jobsite, speaking with employees, subcontractors, and material suppliers. In comparison to the costs associated with possible losses, the fraud prevention program (2 hours a month) is a very inexpensive way of letting others know that fraudulent billing as well as other dishonest acts will not be tolerated.


Having Ipsen Due Diligence as part of your team will let others know that you’ve engaged the services of a Certified Fraud Examiner and that fraudulent actions will not be tolerated.

Your contract should have a “Right to Audit” clause that allows for closer scrutiny should suspicions arise.





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