General contractors usually have good relationships with their subcontractors. But fraud happens in every industry. As a risk management measure, it’s important to recognize typical subcontractor fraud schemes so you can protect your construction company both financially and legally.
Here are a few common types subcontractor fraud to pay attention to.
Don’t let fraud prevent your construction company from growing.
Bid rigging and price fixing occur when subcontractors collude to control who wins a project, undermining the competitive bidding process and driving up job costs. This often occurs through the following schemes:
A subcontractor can also “go rogue” and perpetrate fraud all on his or her own. Among the most common ways is billing for unperformed work by overstating units of production, units of labor or equipment used.
In addition, beware of subcontractors billing for higher-grade materials but using lower-grade ones instead. Doing so can lower project quality and even cause costly, dangerous structural failures. Also, keep an eye out for subs removing materials, tools or equipment from jobsites for their own use or to sell.
If a subcontractor pushes for a change order, proceed cautiously. It may be a valid response to changing conditions, but it may also be an attempt to expand the base contract’s scope to earn the subcontractor more money. Review the proposed change carefully, considering the contract terms and design specs.
Best practices when it comes to subcontractor fraud
There are various best practices for preventing subcontractor fraud schemes.
We broke down a list of ways to help reduce your fraud risk.
Pay attention to subcontractor fraud in your construction company
Again, under most circumstances, working relationships between general contractors and subcontractors are based on mutual respect, trust and teamwork. But that doesn’t mean you should operate under the blanket assumption that “fraud could never happen here.” It could — unless you take steps to stop it.
There are many things to worry about when it comes to running your construction company. Don’t let fraud be one of them.