Scammers are everywhere these days, no matter what industry you work in you will come across someone trying to scam you for money. Just like every other industry, construction also has its fair share of frauds and scammers. You need to know what type of tricks these people have up their sleeves to be able to avoid falling prey to them. The following are some of the most common types of construction industry scams that you need to be on the lookout for when working as a contractor or equipment dealer.
Falsifying Payment Applications
False payment applications and invoices are the most common type of scam in the construction industry. These scams account for more than 50% of the scams in the construction sector and they can occur at any level of the payment chain. The most common methods of manipulating payment applications include:
- Inflating labor or material costs
- Improper wage rates and categories
- Payment applications that fall outside the scope of work
Billing for Unperformed Work
Contractors and sub-contractors can overstate labor and material costs, and manipulate units of production and the time duration of equipment used. Overstating these variables is considered a false claim under the federal False Claims Act. If a contractor passes on the subcontractor’s false claim, then he will also be treated as guilty. Vigilance and careful oversight can help prevent this error.
Subcontractor Collusion
Another common type of scam to watch out for is price fixing and bid-rigging. Contractors and subcontractors often secretly team up to rig the bids. This prevents fair competition and results in higher prices for contracts. When subcontractors are working together, they can also fix the prices for contracts which again results in higher-priced contracts.
Bid rotation, bribes, kickbacks, inflated change orders, and phantom subcontractors that use buyout savings are various types of scams included in subcontractor collusion.
Manipulating Change Orders
Change orders are generally given less scrutiny and monitoring compared to the initial bidding process. This lack of supervision and monitoring gives birth to scams in change orders. A common type of change order scam is not including a proper scope of work. Excess charges or improper pricing for substituted work, construction equipment and materials is a common phenomenon in manipulating change orders.
Another loophole for scams to brew is in the form schedule of values. Failing to regularly monitor and update your SOVs can create problems down the line.
Substitution or Removal of Materials and Equipment
A common form of construction scam is the removal or exaggeration of materials being used. A common practice is that contractors agree to use a certain grade or quality of product, or a piece of equipment, but substitute it with a lower-quality product that is cheaper and pocket the difference. Another form of this scam is to order excessive materials or equipment and then use it on other personal projects of contractors. The customer ends up paying for materials and equipment, which are never used for his projects.