Unfortunately, fraud is a persistent threat in the construction industry. Billing fraud, subcontractor and contractor fraudulent invoices, bait and switch tactics affecting material quality — it’s all too common. How big is fraud in the construction industry? It’s estimated that in the commercial sector, fraud accounts for 10% of all construction costs.
That’s a staggering number in an industry already known for tight margins and unpredictable cash flow. With projects often spread across multiple sites and vendors, fraudulent billing schemes can slip through even well-managed operations.
The Scope of Contractor and Billing Fraud
Fraud in construction takes many forms. Some of them are deliberate, while others show up because of a lack of oversight. Typically, contractor fraud follows a few similar patterns. These include:
- Overbilling for work or for work not done
- Falsifying documents
- Inflating material costs
Billing fraud often appears as duplicate invoices, unauthorized change orders, or padded labor hours. It can happen when you hire a contractor or subcontractors as part of the equation. Because projects often involve multiple subcontractors, suppliers, and third parties, there are plenty of opportunities for fraud to multiply. The larger the project and the longer the timespan, the more opportunities for contractor fraud and billing fraud to happen.
Stopping Contractor Fraud and Billing Fraud
Executives often learn about fraud only after it’s already cost you money or hurt your reputation. When there’s a lack of transparency throughout the process, it can be challenging to make sure everything’s legitimate.
So, how can CEOs strengthen their oversight to prevent contractor fraud and billing fraud?
Strengthen Vendor and Contractor Due Diligence
Preventing contractor fraud starts before you sign a contract. You should treat vendor verification with the same seriousness as customer credit checks. Go beyond licenses and insurance certificates and verify:
- Business credit and financial stability
- Tax ID and ownership history
- Legal standing, liens, or prior defaults
Incorporating business credit checks and background verifications into your vendor onboarding is critical to uncover problems you might not otherwise know about. Even if there is no history of dishonest behavior, financial stress often precedes fraudulent activity. For example, a contractor with a recent credit downgrade or unpaid vendor liens might be tempted to overbill to try to cover cash flow shortfalls.
Monitor Billing and Payment Patterns for Anomalies
Billing fraud often starts small. You might see slightly inflated hours, smaller material markups, or repeated change orders. These are the kinds of things that can go unnoticed.
Besides manual checks, automation can be a big help for ensuring invoice matching and making sure every invoice matches project and contract requirements. This can help uncover:
- Duplicate billing for the same service or materials.
- Payment requests that don’t align with project milestones.
- Unapproved changes or inconsistent pricing.
Here’s a common scenario where billing fraud occurs. You engage a commercial builder and agree on premium-grade materials. A subcontractor, however, uses cheaper products. This might go under the radar unless you’re using automated invoice matching that checks project deliverables with underlying supplier documentation.
Validate Material Purchases and Quality Control
Fraud can do more than just hit your financials. It can also create safety and liability concerns when sub-standard materials are used or poor-quality control occurs. Requiring delivery verification and quality signoffs at key stages can help. So can:
- Random on-site inspections with photographic proof.
- Material documentation that matches invoice details (product ID, grade, and quantity).
- Approval workflows that require project and procurement sign-off before payment.
These quality controls help prevent fraud and protect you from liability in case of structural or compliance failures down the road.
Establish a Fraud-Resistant Culture
CEOs must lead by example, making ethical conduct and fraud awareness part of the company’s identity. When you take an active role in ensuring integrity with everyone you do business with, you create a culture of accountability to help prevent fraud.
When contractors know that you require transparency and will scrutinize billing carefully, they are significantly less likely to commit billing fraud.
Leverage Credit Data and Account Monitoring
Leveraging credit data and credit account monitoring can help you spot the warning signs of financial distress that often open the door to deceptive practices. Utilize ongoing credit monitoring to track the financial health of contractors and their key suppliers.
Command Credit’s data-driven insights help executives monitor vendor financial health and payment reliability at scale. With access to on-demand business credit reports, background investigations, and ongoing account monitoring, the credit experts at Command Credit can help you mitigate the risk of contractor fraud.
Construction fraud doesn’t announce itself- but the warning signs are there if you know where to look. See how Command Credit’s contractor and supplier intelligence helps construction CEOs identify fraud risks before they drain project budgets.
