By some accounts, losses from corruption in the global construction industry range from 10% to 30%. This is especially true in infrastructure projects, which overshadow national and global efforts to upgrade infrastructure.
Transparency International, a leading anti-corruption organization, reported that bribery was most likely in public works projects and construction. There are examples from across the globe. Observers point to kickbacks and embezzlement, escalating construction costs for the 2014 Russian Winter Olympics Games from $12 billion to $51 billion. Middle Eastern countries tried over 60,000 people associated with corruption during a five-year span, and the European Commission reported that half of the respondents to its survey cited corruption as a problem in the region’s construction sectors.
State Level Corruption
Corruption is well linked to construction through infrastructure and government. That’s because construction activities provide many opportunities for graft and bribery. If you live in a state that values money, construction, highways, correction, police protection, and wages at the expense of the social sectors like public welfare, education, and health, then your state likely has higher levels of corruption, according to a multi-year study published in 2014.
States with more corruption will naturally have higher per capita spending on construction, especially for infrastructure items like highways. And, overall government spending in the most corrupt states was $1,308 higher per person over the years analyzed in the study, than in states with average corruption.
There is little recent evidence of aggressive and far-reaching U.S. industry initiatives to combat corruption. So other than individuals resisting and reporting corruption, reducing corruption will depend on the electorate, legal, and legislative efforts.
Project Level Corruption
But beyond corruption at government and national levels, there is corruption at the project level. The range of corruptive activities is so vast that there are many instances where people are unknowingly drawn into corruptive activities. There are at least 45 different ways for corruption to show up on construction projects.
Here are typical schemes during the bid, or tender phase:
- A ‘loser’s fee’ is when bidders collude with each other so losing bidders recover their costs of bidding.
- Price fixing occurs when competing contractors rig their bid prices so they take turns winning the bids.
- Design manipulation happens when a designer and a contractor collude to create a design only the colluding contractor can deliver.
- Receiving bids just for price comparison is when an owner favors one contractor, but gets competing bids from other contractors. When the competing bids are lower, the owner requires the favored contractor to match the lower bid.
Here are some potential schemes that could occur during the project phase:
- A supplier substitutes inferior materials and bills for the materials of the proper specification.
- Contractors and subcontractors collude to falsify the amount of work performed.
- An owner promises payment while knowing they can’t make the payment.
- Contractors and inspectors collude to hide defective work.
- An inspecting authority requires payment before approving work in place.
Corruption also creeps into construction during disputes.
- A claimant in a dispute submits false information like claiming more lost time than actually lost, or claiming incorrect expenses.
- Someone in a dispute withholds information that will prejudice a claim against a claimant.
- A party to a dispute supplies false documents or employs false witnesses.
- Businesses and individuals bribe witnesses or blackmail them.
- Law firms bill excessively.
Company Level Strategies
Some construction companies join international efforts like the Global Infrastructure Anti-Corruption Centre and the World Economic Forum (WEF) Partnering Against Corruption Initiative (PACI).
By subscribing to zero tolerance toward bribery and corruption and having broadly based anti-corruption policies for employees, they help replace the potential “grey areas” of corruption with knowledge and understanding. This helps avoid unknowing complicity in corrupt activities, while also helping people to see instances where corruption is possible, or is happening.
Besides having clear policies, and training employees to recognize corruptive activities, companies are also closely monitoring contracts and jobsite activities to detect suspicious transactions. Not only can this uncover corruption and bribery, but it also helps with overall project transparency.
Another strategy for dealing with corruption is to have written procedures on how to handle reports of bribery and corruption. These help to protect your company from errors or omissions if investigations and court cases follow. You should consult with legal counsel when creating your procedures.