Best Fraud Prevention/Audit Practices for Construction Management
Updated: Oct 11, 2021
Best practices for construction management companies include a combination of fraud detection/prevention measures and audit services. While audit services for the most part are being addressed behind the scenes in the office, fraud prevention measures on the other hand best occur on the job site. Many Certified Fraud Examiners (CFE’s) have advanced degrees with training in accounting, audit, and fraud detection.
1. Fraud Prevention and Site Visits
A clearly marked Certified Fraud Examiner tours the job site, inspects for safety, cleanliness, and organization. Meets with those in charge, inspects materials and equipment, performs a headcount, examines jobsite accounting all the while making their presence as a Fraud Examiner known. An unannounced visit by a Certified Fraud Examiner has much the same effect as a government agent walking into your office without an appointment. People take notice!
2. Examination of Payment Requests and Cost Schedules
Regarding this task, the following documents should be examined for their accuracy and integrity:
· The contractor’s applications for payment
· Owner’s project payments to subs and vendors
· Pay application back up documentation
· Contractor’s costs by major construction phase
3. Reconciliation of Project Expenditures
Reconcile project expenditures by first obtaining all project related financial or accounting transactions that document owner expenditures. Second, reconcile the sum of the total payments made to each vendor to the various contract amounts as adjusted by change orders. Third, review a sample of invoices paid directly by the owner for services, materials or other costs which may have been the responsibility of the general contractor.
4. Direct labor / Prevailing Wage Analysis
Direct labor analysis starts with obtaining payroll registers and certified payroll information. Begin your examination by looking for any activity which may not be legitimate reimbursable costs. Second, compare independent records from the job site to already submitted payroll charges. Determine whether personnel charged to the job may have been working elsewhere for subcontractors or affiliates without appropriate back charges. Complete your labor analysis by verifying the allocation of payroll costs.
If your public works project under construction is subject to prevailing wage rules, be sure to carefully audit the payroll register to ensure workers are paid the local mandated rates. Fraud including kickbacks and workers not being correctly paid can happen when payroll is not properly monitored.
5. Change Order and Pricing Analysis
Change order analysis begins by examining the owner’s schedule of submitted change orders accompanied by detailed supporting documentation.
Calculate and compare the total (dollar amount) of submitted change orders to those which have received the project owner’s approval. Verify the appropriateness of the change order, material pricing and additional labor hours required. Review change orders for completeness and document any irregularities.
Pricing analysis when done correctly will ensure the change order accurately represents a valid and supported change in scope. In your analysis, determine whether any owner provided items may’ve been used and possibly influenced the need for change. In addition, verify through examination and carefully worded interview questions, whether the contractor colluded with the subcontractor to submit inflated change order price proposals.
6. Subcontract Analysis
Subcontract analysis includes examining for comparison a schedule of all base subcontract pricing and subsequent subcontract change orders. During your examination, be careful to segregate the total of paid invoices from the base subcontract to those of the change orders. Additionally, confirm receipt of all lien waivers, unconditional or not.
7. Material Purchases
Examine the contractor’s job cost detail schedule and review competitive quotes obtained from material suppliers. Audit for purchases of excessive amounts of material. Examine material counts, inventory, usage, and inspection reports.
8. Verification of Contracted Scope
Verification of the project’s contracted scope includes the examination of work items and looking for those that appear unusual and in need of independent verification. When examining “Status reports” from the contingency budget, look for supporting documentation. Auditors should make it a priority to look for and determine if any unaccepted alternatives (most likely less expensive materials) have been substituted in-place of what the contract has called for. Finally, review RFI’s and RFP’s associated with any changes in scope.
9. Equipment Rental Analysis
Equipment rental analysis examines what the contractor is paying and what equipment rental rates are charged to the project. Auditors should obtain daily reports and time sheets documenting equipment usage and ensure that the costs charged by the contractor to the project owner are consistent with those in the local area.
10. Bonds and Insurance Analysis
Bonds and insurance analysis begins by obtaining copies of the contractor’s performance, payment bond and corresponding power of attorney from surety. The auditor reviews the insurance certificates to determine if the types, liability amounts, and other special insurance coverage meets the coverage and requirements of the specified project.
11. Quality Assurance and Quality Control
From time to time, or as required, tests must be done as part of the contractor’s or client’s quality management plan, of which parameters are often defined in the contract. These tests are to ensure that materials and structures have either met code and/or have been constructed safely and correctly. Sometimes tests fail. When this happens, work must be redone.
Quality assurance and control auditing includes reviewing the “minutes” from various meetings, inspecting the contractor’s daily logs, engineering field test reports and any other correspondence files.
Information for this blog post has been sourced from the article “Internal Audit Process of an Ongoing Construction Project” by Noel Mades, QA/QC Engineer. Readability and editing by Jerold (Jerry) Ipsen, CFE, MBA