Construction may not experience the extent of fraud seen in sectors like healthcare and finance, but the fraudulent activities that do happen in C&E still take a fairly significant bite.
Angela Morelock, managing partner and forensics expert at Missouri-based BKD LLP, told ConstructionDive that approximately 6 percent of construction’s annual revenue is lost to fraud. That amounts to approximately $72 billion every year—certainly nothing to sneeze at, no matter how large the construction industry is. Much of this fraud is preventable, with software and accounting tech solutions being some of the best weapons available in construction firms’ arsenals.
Where Does Fraud Happen?
Nearly half of construction fraud cases (42%) involve corruption, according to ConstructionDive. The instances include bribery, bid-rigging, kickbacks, or money changing hands under the table away from oversight. Another major source of fraud in the industry comes from the billing or accounting departments, where dishonest trickery, such as creating shell companies to submit phony invoices for nonexistent work, may occur. Materials and purchasing are also potential avenues for fraud as criminals can place and approve fake orders.
Nearly half of construction fraud cases (42%) involve corruption.
Any internal system where a single person has ultimate authority in accruing, requesting or spending company money is a potential attack vector for fraud. Many of the technological solutions around fraud prevention center around tightening up processes that open themselves up to criminal activity.
A Software Solution Making Processes More Trackable
Viewpoint Construction Software is one tool used by construction firms’ accounting departments to streamline their processes. Matt Harris, the firm’s chief product and strategy officer, told ConstructionDive that although Viewpoint hasn’t been designed strictly for fraud mitigation, the “tight workflows, approval chains and audit trails for processes” the software facilitates create fewer opportunities for fraudulent activity.
Viewpoint’s system includes technology like encryption, cloud security, more stringent rules around workflow, redundant approvals required for purchases and detailed tracking of payments. Taken together, these measures can go a long way to shoring up weak spots in a company’s workflow, making it less susceptible to fraud, waste and abuse.
“A controller, CFO or owner have reports that tell him or her what was approved that day from a purchase perspective and from a payment perspective. They can see fund flows on a daily basis,” Harris said. “So, if there were to be a problem and the [suspicious] payment was made … to a vendor, at least it’s caught immediately.”
A Fraud-Preventing “Lockbox” for Accounting Departments
One sure-fire way to head fraud off at the pass is to take the human element out of the equation entirely. Cold, hard cash can be a tempting lure for humans. For software? Not so much. Oracle’s Textura accounting software lets subs submit pay requests online. The requests are then compared against the terms of their contracts, which have already been put in the system. This diminishes the risk of excessive billing or processing fraudulent payments through nonexistent companies.
Cold, hard cash can be a tempting lure for humans. For software? Not so much.
Textura even acts as a lockbox or middleman of sorts. It keeps subcontractors’ executed lien waivers under virtual lock and key until payment is received from the general contractor. The system also allows payments to be made jointly to subcontractors and materials suppliers.
“Oftentimes, if the GC is not very cautiously shepherding that check through the process, there have been cases where the prime sub just simply takes the check and deposits it in their own bank account. The bank doesn’t catch it. And now that process has failed,” Mike Antis, vice president of client services for Oracle’s construction and engineering global business unit told ConstructionDive.
“The goal here,” he said, “is to reduce risk for the contractors but also free up their time so that they can focus on things that are more beneficial to their businesses.”