A survey report on fraud in the construction industry reveals the most common experiences and negative impacts on businesses in the UK.
Data collected from the Fraud in the Construction Industry – Survey Report shows that a quarter of UK construction companies have experienced fraudulent activity over the last year. The common experience of fraud takes the form of changing the quality of materials, which has affected three in five companies surveyed.
A third of firms have fallen victim to invoice fraud, and one in every five companies have been affected by falsified expense reimbursements, false billing, contractors lying about qualifications, purchase fraud or stealing tools for other projects.
Although a quarter of these companies have experienced fraud in the last year, two in five didn’t report it to the police.
“The substitution, removal, or simple exaggeration of materials used on a project is becoming a frequent type of construction fraud. Contractors, subcontractors and tradesmen may utilise a particular grade or brand of material, or a specific piece of equipment, only to replace it with a less expensive one and keep the difference.”
CEO and Partner, Forensic Procurement Partnership Ltd
A fifth of the 39 companies surveyed had also encountered bid rigging, bribery or another form of corruption.
Bid rigging can also take the form of cover bidding, where firms agree to submit bids that were deliberately priced to lose the tender, resulting in customers paying higher prices or receiving lower quality services. This was the case in June 2022, when the Competition and Markets Authority discovered that ten construction companies have been involved in “illegal cartel agreements” when submitting bids.
They provisionally concluded that the firms colluded on prices through illegal cartel agreements when submitting bids in competitive tenders for contracts worth over £150 million, involving demolition work at the Met Police Training College, Selfridges and Oxford University, amongst others.
Declan Rate, CEO and Partner at Forensic Procurement Partnership Ltd, defined some of the other most common forms of fraud in the construction industry:
“The construction industry has always been vulnerable to the threat of fraud and cybercrime, particularly account diversion. This is where a company receives a notification of a change of bank account email purporting to be from a legitimate construction company, when in fact, it is from someone attempting to defraud them.
“Due to the current economic crisis, fraudsters are taking more desperate measures. The substitution, removal, or simple exaggeration of materials used on a project is becoming a frequent type of construction fraud. Contractors, subcontractors and tradesmen may utilise a particular grade or brand of material, or a specific piece of equipment, only to replace it with a less expensive one and keep the difference.
“We recommend “taking 5” prior to answering any emails or entering into any transaction to ensure it’s a genuine transaction. Lack of vetting and screening could potentially cause long-term financial and reputational harm. We’d also suggest doing your due diligence when hiring anyone on a project. Check work history, and confirm qualifications and certifications. Ask yourself: Can you perform more background checks? Do they have recent references you can request?”
Recognising the Signs of Fraud in the Construction Industry
- Scrutinise any last-minute changes to invoices or materials
- Examine the details of expensive purchases
- Supervise workers to make sure they have the skills and health & safety knowledge required
- Watch out for unusual working practices, such as someone taking on duties they wouldn’t normally perform
- Ask your accountant to inspect your accounts
- Beware of resistance to anti-fraud measures