Employee Fraud: How Vulnerable is Your Construction Company?

With construction work picking up in some parts of the country, the incidence of employee theft is also likely.

Roughly 5 percent of revenue is lost to fraud annually – usually through spending schemes – with small organizations the most likely target.

To make matters worse, 85 percent of those committing fraud are first-time offenders, many of whom have been long-term, trusted employees. So why would they begin stealing now?

Long-term employees – the ones who survived personnel reductions over the past few years but also had their pay cut or frozen – may feel under-appreciated and underpaid, especially when their workloads have increased while their compensation has remained the same.

There may be bills stacking up at home, a newfound gambling or addictive substance habit, or another reason that employees feel the drive to begin stealing.

Often, it begins small. When they get away with a theft, their confidence grows, and they begin stealing larger amounts. They may eventually get sloppy, or someone discovers the theft accidentally and reports it. Or, they may never be discovered at all.

Three factors are present in almost every fraud: Opportunity, motive and rationalization.

You can’t control people’s motives or their rationalizing that they deserve the money (or will pay it back). But you can limit their opportunity to commit fraud. Contractors must recognize the areas where they are most vulnerable and put the right controls in place to prevent or detect fraud.

Here are some areas where contractors are likely to experience fraud and some suggestions for what can be done to stop it.

Small tools, reported lost or stolen

Your tools may be populating employees’ home workshops or used in work they do on the side. Keep an inventory of tools per truck or toolbox, and assign responsibility to specific employees to account for them. If certain employees repeatedly report shortages, take note.

Materials and subcontractors

• Waste or overruns, especially of copper pipe, wire or other valuable commodities Employees can routinely pull a little more wire than needed, pocket the scrap and sell it for a profit. Monitor material usage variances and where they occur. Once again, if certain employees appear in these cases, they may be either incompetent or dishonest, both of which would qualify for termination.
• Non-job related costs, especially on cost-plus or profitable jobs All kinds of construction materials can be used around the house for walls, landscaping, remodeling and more projects that can be buried into job costs. Be sure to read invoices for what is being purchased and where it is being delivered to make certain it is for YOUR jobs.
• Fictitious vendors It is easy to set up a bogus company and send an invoice to your company. Look for post-office box addresses, addresses of employees or even fake addresses if checks are to be hand delivered. Control who has the ability to add an approved vendor, and segregate that duty from the invoice approval process. The person cutting checks should not be the person assigned to mail them once they are signed.
• Inferior product substitution While value engineering can legitimately save both the owner and the contractor money, inappropriately substituting a lower-grade product can line the pockets of fraudsters. Match purchase orders and receipts to be sure you received what you think you purchased.
• Kickbacks Employees responsible for purchasing may funnel work to those who scratch their backs “off the books,” and you end up paying for it. Knowing the going rate of purchases is one way to avoid being taken. Consider requiring periodic independent bids – at least three bids –for materials and supplies.

Vehicles and equipment

• Maintenance on personal items Employees may get work done on personally owned items by providers. Most contractor software packages have equipment modules that can track maintenance expenditures for each vehicle and piece of equipment. Use those modules to get detailed invoices for all work done so only your equipment is getting fixed. Address cases with equipment or vehicles showing excess repairs.
• Gas for personal use Gas cards or company gas tanks may “leak” into employee wallets. Monitor usage against expected monthly travel (MPG/vehicle miles) or activity (gallons used/hours run), and control who has access to each.

Employees

• Inflated wage rates Compare pay rates to individuals used, noting proper invoicing for apprentices, journeymen, prevailing wages, etc.
• Extra hours Hour overruns can quickly kill job profitability, especially when paying for hours not worked. Closely monitor both overtime and productivity standards, and investigate negative variances.
• Extra checks and extra employees Payroll personnel can slip extra checks to themselves or fictitious employees into payroll if it’s not monitored closely. Question the unknown, and perform surprise mini-audits, or check distribution by owner or project manager of weekly paychecks to verify amounts paid.

Anyone in the company can commit fraud, from management and accounting to sales, service and operations.

Knowing where you are most vulnerable, and limiting the opportunities for fraud, will protect you, your company and your employees from turning temptation into trouble.

For additional information or guidance related to this article, contact Andrew Donohoe at aad@vlcpa.com or Stephanie Allgeyer at sallgeyer@vlcpa.com or call 800.887.0437.