Thu, Aug 16, 2018

Fraud in Construction on the Rise

Matthew Weitz, Associate Managing Director, Kroll and Michael Milton, Director, Kroll, take an in-depth look at how fraud is adversely affecting the UK construction sector and suggest ways to avoid the issue.

In recent years, an increasing number of companies in the construction industry have suffered large scale co-ordinated internal frauds that have resulted in losses in the millions. Considering the UK industry is now worth £100bn a year1, the rewards for fraudsters and corresponding risks to corporates are substantial.

A recent report2 found that in 2017 the construction sector experienced the greatest year-on-year increase in fraud incidents across all sectors. 83 per cent of respondents in the construction sector reported that they had experienced a fraud in the previous 12 months, an increase of 13 percentage points from the 2016 report.

The study indicated that more than a third of respondents (34 per cent) reported losses of seven per cent or more of company revenues from these fraud incidents – losses that can be crippling in a sector operating at low margins. Furthermore, the resulting reputational and relationship damage can also have a devastating impact on future revenues.

When margins are narrow, timescales are increasingly tight but expectations of quality continue to rise, and it can be a challenge for project managers to keep track of all the moving parts in a complex project. In this high-pressure environment, when quick thinking and innovation can make the difference between the success and failure of a project, managing fraud risks can fall by the wayside, leaving companies exposed.

Another contributing factor to heightened fraud risk in the sector is that key decision making and procurement powers are often devolved to individuals on site. As a result, a high degree of autonomy can be assumed by local site managers, who often escape senior management scrutiny and adherence to company policies and procedures. In addition, information such as project monitoring data and details of tenders is often held locally and in physical form, which hinders the ability of head office to analyse the data for possible red flags.

With a multitude of contractors all reliant on earlier project deadlines being met to deliver their work, site managers often assume authority to approve additional costs or new suppliers without the required level of due diligence or senior approval. This can give fraudsters the opportunity to take advantage of the situation to route consulting fees through their own companies, change order quantities or channel funds to personal accounts.

One of the most common fraud risks in the sector is collusion between suppliers and management. This type of fraud is most likely to take place amongst contractors regularly working with the same project teams. Inflation of prices, manipulation of variation orders and embezzlement of funds through suppliers set up by or related to employees involved in the project are common practices which can easily go undetected, given the number of suppliers involved in modern projects.

Savvy construction companies are tackling these growing issues by implementing a combination of preventative measures and ongoing detection and monitoring. Preventative measures include proactive reviews of tender procurement files for any evidence of wrongdoing or bid-rigging, and using data analytics to identify any unusual payment patterns and fraud red-flags within accounting and payment data. When employing data analytics, companies need to consider exactly which data is available for monitoring, how it can be cross-referenced to identify possible red flags, and how it can be standardised to allow risks to be identified in real-time.

By taking a proactive approach to tackling fraud risks that encompasses techniques like these, companies have the ability to respond quickly as potential issues arise and focus resources where they are needed most.

This article originally appeared in Construction Industry News

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1 Source – Office of national statistics (2016)
2 Kroll Global Fraud & Risk Report