Fraud is pretty common in the construction industry in South Africa, it can be found on construction sites big and small. That’s not to say that the industry is full of bad people – rather, it’s just an industry where the few bad apples that are determined to commit fraud might have an easier time getting away with it.
This is largely because of the very nature of the work: the average construction project is a study of controlled chaos. Read on as we take a closer look at construction fraud, and how to combat common types.
The biggest Concern of Construction fraud identified by SAPAC is Substitution or Removal of Materials or Equipment .
To most people the biggest concern with regards to construction fraud is most probably money.
However this is true money is the major secondary issue in reality. SAPAC has identified that major concern with regards to construction fraud comes down to substitution, removal of material or equipment that in actual fact defrauds insurance for one and that exposes occupants to hazards that may not be known at first.
It’s also possible that a contractor or subcontractor promises to use a certain grade or brand of material, or a certain piece of equipment, then substitutes it with a cheaper one – pocketing the difference.
Sometimes this can be an honest mistake on the part of a subcontractor who didn’t read the specification or schedules or who thinks they’re making a better decision than the architect. This type of fraud is a simple one for subcontractors to avoid; simply make a substitution request. If approved go ahead.
Another way to take advantage might be to over-order materials or equipment, then move the excess from the project site for use on another job – causing the customer to pay for materials they won’t even benefit from. Example ordering paving in excess and moving a pallet to another project.
Finally, contractors and sub-contractors might simply exaggerate what materials or equipment have been ordered or delivered to the job site in order to be reimbursed, then pocket the excess over what was actually purchased
Inherently, when Substitution or Removal of Materials or Equipment takes place it means that Building codes and Standards related to SAN Standards goes out of the equation. And that the end product will most probably be a sub standard project completed.
Therefore it is essential to carefully select project managers and perform the required due diligence with SAPAC. This includes engineers, any engineer on any project should never mention that they do not take ownership over a certain aspect that is related to the engineering sphere.
"True engineers will insist and ensure that all project requirements are adhered to and be driven down the ranks. That is what makes a true engineer."
Completed reports signed off by an engineer should validate that all standards have been adhered to and that over inspection has been performed. Therefore in essence, when if an engineer has been involved you know that no substitution or removal of materials has taken place.
Therefore the structure should be in effect on par with SAN Standard and regulations.
But it’s impossible to detect fraud or develop effective means of avoiding it without understanding the most common types of fraud and how to identify them before it’s too late. Let’s look at some common forms of construction fraud.
Unsurprisingly, bid-rigging occurs during the bidding process. It involves any type of price fixing or collusion amongst the prospective contractors and subs. This form of construction fraud occurs whenever contracts are awarded by soliciting competitive bids. When bidders coordinate beforehand, or when the bidding is somehow tainted, it undermines the whole process (and it’s also illegal). If you keep up with current events, then you know that it’s common for bid-rigging schemes to involve public authorities. There are four main bid-rigging tactics that may be employed:
1. Bid Suppression
Bid suppression is pretty self-explanatory – it’s when bidders are threatened, bribed, or otherwise convinced not to bid on a particular job. It could be through lucrative pay-outs, mutual agreement, or even by threat of violence or some other action.
2. Complementary Bidding
Similar to bid suppression, but with complementary bidding, competitors predetermine who will win the bid. The other bidders will submit unreasonably high bids or bids with unacceptable additional terms to enhance the illusion that there is genuine competitive bidding. Honestly, it can be seen as a creative version of bid suppression.
3. Bid Rotation
Each participating competitor will take agree to take turns to be the winning/lowest bid on a project. They will know each others’ pricing to guarantee the desired outcome.
4. Promising Subcontracts in Exchange for Coordinating Bids
Another potential way bids might be fraudulently rigged is for one party to convince other bidders to intentionally lose their bids or withdraw in exchange for large subcontracts on the job. So, where there’s only one winner to the contract at hand, whoever wins that contract might promise their contemporaries large subcontracts under that agreement.
How to Identify and Combat Bid Rigging
When soliciting bids, include non-collusion affidavits as a bid document requirement. These documents should be clear and standardized to help with evaluation. You should also reserve the right to reject any and all bids if you feel there is unfair competition. Sure, this safeguard might be ignored, but it will provide extra ammunition in the event fraud is discovered on the project – and it might make a bidder think twice if they’re participating in a fraudulent scheme!
There are a few red flags to look for when accepting bids. Be sure that it isn’t the same contractor that is consistently winning bids. Or, look out for contractors that bid and never win (due to unusually high bids or questionable proposed terms).
Other practices may cause concern after the bid is accepted – like when the losing subcontractors are hired for other roles on the project.
Some of these issues can be avoided by using the SAPAC - South African Professionals and Contractors platform that has a solid pre-qualification procedure for all potential bidders. Prequalifying contractors and subs will instantly provide their bids. Be sure that all of your request and selection documents are clear, simple, and standardized to help in the evaluation process before submission through the SAPAC platform - South African Professionals and Contractors.
If any concerns is identified SAPAC can handle it immediately.
Falsifying Payment Applications and Invoices
The most common type of fraud in the construction industry is the falsification of payment applications and invoices. This accounts for over half of all fraud in the industry, and it can occur at any level of the payment chain. The following are the four most common methods of manipulating payment applications.
1. Inflating Labor or Material Costs
This can occur anywhere along the payment chain. Those on the bottom of the chain may inflate costs or percentage of work completed. By doing so, they’ll boost their profit margin on the job. Plus, a party may try to hide or exaggerate what’s being paid to their subs and suppliers – pocketing the difference once payment is made. In a worst-case scenario, by the time these payment apps reach the top level, it’s possible that the labor or materials costs might fluctuate multiple times.
2. Payment Applications
That Fall Outside the Scope of Work No matter the size of the project, the top of chain parties will be receiving any number of payment applications, processing them as they come in. But this is where attention to detail can protect you from fraud. Parties might manipulate payment apps by completely making them up, or by adding additional work to their original scope.
3. Improper Wage Rates or Categories
Many times, a sub will try to charge a travel rate for work that was performed by an apprentice. Or they may charge you equipment rental fees for equipment that they already own. i.e. Hire of drill, or something ridiculous.
4. Billing for Unperformed Work
This type of fraud is pretty self-explanatory, and hopefully easier to keep in check with proper oversight. Contractors and subs can overstate the units of production, labor, or equipment actually used on the project. Manipulating Change Orders or the Schedule of Values Change orders are usually given less scrutiny than the initial bidding and contract award process. This makes change orders very dangerous and susceptible to fraud if not properly monitored.
Change orders can be issued for a base contract’s work scope or not include a proper scope of work at all. They can include excess charges or improper price reductions for substituted work or materials. Change orders can stack up fast, and fraud can breed quickly in the chaos. This can even occur before actual construction even begins.
Consider a contractor who is acting in collusion with the contracting party. They could submit an extremely low bid, then once awarded the contract, the official will approve multiple change orders to increase the contract price, allowing the contractor to recover a profit quickly and continue to line the pockets of project officials. Seriously, it happens!
The schedule of values is another aspect of a project that could be manipulated. Failing to regularly update your schedule of values, can lead to problems down the line. When changes or buyouts are made, this can increase the likelihood of cover-up or fraud.
How to Combat the Change Order
Any time a change order is issued, be sure to track and document any changes. The schedule of values is the financial backbone of a construction project. When change orders are issued, the effect on both the schedule of values and the contingency accounts should be taken into consideration. Another useful tactic is to compare the change order signatures with the actual date of completion, to be sure you are not being over-invoiced for labor hours. Diverting Lump-Sum Costs to Costs for Material and Time This may happen when a project’s budget includes an item (like a piece of equipment) in its lump sum calculation, but then that item is also billed later on by a contractor or sub on a time and material basis. Since this work was already accounted for in the budget, then billed again later on, it results in double-dipping.
How to Combat Lump-Sum Cost Diversion
The best way to protect yourself against this type of fraud is close monitoring and oversight on the project. Before sending out payments, be sure to compare the actual costs to the budget on a line item basis. Always refer to your schedule of values!
How to Combat the Materials / Equipment
Fraud Anytime material or equipment is delivered to the job site, not only should you request receipts from your subs, but it’s also a good idea to get confirmation of the quality (or brand) and quantity directly from the supplier. Trust, but verify.
That way you know when and which materials were delivered. Also, keep track of any and all equipment needed for the project. Whether it be equipment already owned, purchased, or leased – keep an accurate, running inventory to keep track.
A false representation is sort of a catch-all category of contractor or construction fraud. This occurs anytime you receive something different from what you paid for. This is achieved in a number of different ways. Contractors or subs could be charging for more laborers than the job actually took. They might claim that they were using a team of skilled workers, and may have been using undocumented workers for cheaper labor. This could even be silence when failing to comply with any building or environmental regulations.
How to Combat the False Representations Fraud
A simple way to combat any general false representations by selecting SAPAC Professionals and Contractors and when you deem required perform an audit during the construction phase. Having a right to audit clause not only helps control the bottom line, but keeps your subcontractors aware of your presence on the project. The audit clause should include the right to conduct surprise onsite audits and access to your subcontractor’s books in case you smell trouble.
Simple, Effective Ways to Protect Against Any Type of Construction Fraud
The best way to combat fraud on a construction project is careful oversight by both the owner and the management team. Here are a few easy ways to protect your team from fraud.
Do your due diligence insist on hiring a SAPAC Professional or Contractor for the Job. Try to hire local and established contractors that is all ready on the SAPAC Panel to reduce the possibility of fraud. Perform background checks on everyone, see their profiles for their references, or at the very perform a verification to see if they are truly on the SAPAC Platform. Inform yourself about the local market conditions, availability of competition, and bid pricing of comparable projects in the area. It’s also a good idea to familiarize yourself with their business structure. Many times contractors will be subsidiary companies therefore contact SAPAC to assist you.
So you know who you are working with. Designating a Chief Compliance Officer Performing your due diligence on everyone is a lot to ask. Many construction companies elect to designate a Chief Compliance Officer, to act as a communication point between contractors on the project and the owner/management team. Your compliance officer should not only conduct initial investigations but also conduct regular ongoing reviews as well.
Continuous monitoring is a simple way to decrease the likelihood of fraud. Your Chief Compliance Officer should have the mandate and power to conduct periodic audits and be able to review payrolls, invoices, and contracts. Staying Alert Fraud occurs when people stop paying attention. Implementing some of these measures early on will help in the long run, but as a baseline action, all ways use SAPAC and staying alert will help ward off construction fraud. Litigation costs money, violations can lead to lawsuits, and a history of fraud can destroy your company’s reputation. Always be vigilant!
How to Use this Resource
We hope these articles help you understand your rights as a consumer. You can scroll through the titles, or scroll by heading. You can also use the search feature to locate information by keyword when you visit the front of https://sapac.co.za for a self help video watch this VIDEO
Share this post
- Tags: NEWS