Corruption, Fraud and Theft in Construction

Construction
By Paul Netscher | 11 minute read

A study by PwC of public contracts in 8 countries in the European Union in 2010 identified that the direct public loss encountered due to corruption in public contracts accounted for 18% of the overall project budgets concerned, of which 13% can be attributed to corruption and 5% due to mismanagement. Imagine, for every dollar spent 18 cents disappeared. A $1 million project will cost an on average $200,000 extra. In the US the FBI places public corruption as one of their number one priorities, even though the US is considered to be the 18th least corrupt country in the world.

Unfortunately, corrupt practices occur throughout the various construction project phases and can be perpetrated by any of the project stakeholders. This corruption is due to direct and deliberate corrupt practices as well as mismanagement. Unfortunately, mismanagement of construction projects occurs far too frequently. I’m sure we can all relate stories of theft, corruption, fraud, and mismanagement that occurred on a project. I’ve previously related a story of how half a million dollars of cement was stolen from one of my projects.

Whether you are a project owner, an investor, project manager or contractor it pays to be vigilant to avoid corruption on your project. Not only does corruption result in someone realizing less value, but it can also impact reputation, and even result in fines and prison time. Being vigilant together we can prevent corruption and fraud.

Corruption, fraud, and theft on construction projects can be perpetrated by:

Owners

  1. Pay bribes to local authorities for relaxation of zoning, or to authorities to waive permit conditions or relax conditions.
  2. Receive bribes from contractors to award the project to them.
  3. Construct projects to favor particular stakeholders (for instance their electorate), or to satisfy their egos, often disadvantaging others in the process.
  4. ‘Bid shop’, sharing the price of other bidders with their favored contractor so that their favored contractor has the opportunity to lower their price to beat the other contractors’ prices.
  5. Knowingly allow the project to damage the environment.
  6. Knowingly construct a substandard project to sell on to unsuspecting customers.
  7. Construct projects which blight the neighborhood and the landscape.
  8. Construct projects to launder the proceeds of crime.
  9. Don’t pay contractors and others for completed work, or deliberately withhold money for spurious reasons, or pay contractors late.

Project managers and principle agents

  1. Accept bribes from contractors in return for:
    1. Awarding the project to a particular contractor.
    2. Accepting non-compliant work.
    3. Approving spurious and inflated variation and progress claims.
  2. Pay bribes to permit and other authorities and individuals to ‘smooth’ processes.
  3. Refuse to accept variation claims from the contractor which are due to the project manager’s or principal agent’s fault.
  4. Are lazy, or inept, resulting in:
    1. Them not checking and verifying that the construction work satisfies the quality requirements and standards.
    2. Not checking the contractor’s invoices are correct and the work has been completed.
    3. Poor management of the project, resulting in the project suffering delays and additional costs.
    4. Them agreeing the contractor’s variation claims without verifying that the contractor is entitled to the claim.
    5. Them not adjudicating contractors’ prices properly, which could result in a substandard contractor being appointed, or a contractor whose price has hidden additional costs.
  5. ‘Rig’ bids (arrange or organize) to ensure a particular contractor is awarded the project. This is done by:
    1. Bid shopping, where their favored contractor is given the lowest bidder’s price and told to beat it.
    2. Manipulating the requirements to price a project, so that the requirements favor a particular contractor and even disqualify other bidders.
    3. Providing the pricing documentation to their preferred contractor before it’s supplied to the other contractors, and then not allowing the other contractors sufficient time to price the project.
    4. Providing their favored contractor with additional information (not given to other contractors) which could allow them to submit a cheaper price.
  6. Invoice the owner more than they are entitled to, which could include billing for people not on the project, charging hours in excess of what was worked, and charging at higher hourly rates than was agreed in the contract document.

Designers

  1. Are lazy or inept, resulting in:
    1. Them not checking the quality of the contractor’s work.
    2. Them producing a poor design, which has errors, isn’t the most economical design, hasn’t considered the operating and maintenance costs, or a design that is ugly and blights the landscape.
    3. Designs and drawings being issued late, causing delays to the project.
  2. Take bribes to:
    1. Accept substandard work.
    2. To specify particular suppliers’ products.
  3. Where they are paid in accordance with the value of the finished project, they deliberately specify more expensive products or design structures that are more complex or require more material to construct, which increases the cost of the project and thus their fee.
  4. When they are paid by the hours spent on the project, the bill for hours that they weren’t working on the project, or for people who didn’t work on the project, or they charge higher hourly rates than they should have or add in additional charges which aren’t legitimate.

Contractors

  1. Pay bribes to:
    1. Owners, project managers or principle agents to:
      1. Secure a project.
      2. Turn a blind eye to substandard work.
      3. Have their inflated invoice, or variation claim, accepted.
    2. Permitting authorities to issue permits and permissions which shouldn’t have been granted because the work did not satisfy the regulations.
    3. Testing authorities to manipulate test results so that failed tests are made to pass.
    4. Various authorities to ‘smooth’ processes.
  2. Accept bribes from subcontractors and suppliers to award them work, or to accept substandard work.
  3. Submit bogusly, or inflated, variation claims and invoices.
  4. Deliver substandard work.
  5. Deliberately omit items from the project. This could include omitting reinforcing from structures or constructing concrete structures of a smaller profile than specified.
  6. Knowingly incorporate substandard materials and equipment into the project.
  7. Falsify test results.
  8. Don’t pay subcontractors and suppliers for work and items that have been supplied in accordance with the contract, or pay them late, or withhold monies for spurious reasons.

Subcontractors and suppliers

  1. Deliberately, or knowingly supply substandard products.
  2. Invoice for work or materials that weren’t delivered.
  3. Deliver a lesser amount of product than their delivery document states.
  4. Pay bribes to secure contracts.
  5. Falsify test results.

Other

  1. Theft from construction sites is widespread. Theft can delay the project when critical materials and equipment are stolen. Often thieves damage other items when they steal items that have already been installed in the project, which then results in rework and delays.
  2. Owners who have existing facilities on the project site are exposed to theft from their facilities during construction. Often security is compromised by the construction work and there is personnel from various contractors coming and going from the project. Owners should be vigilant and ensure their security systems aren’t compromised during construction.
  3. Computer hacking and fraud are on the rise. This takes many forms including:
    1. The theft of personal data and sensitive project information which is then:
      1. Used to defraud individuals or companies.
      2. Only released to the owners after a ransom has been paid.
      3. Released to the general public to create bad publicity.
    2. The use of computer ransomware which freezes computers until the owner pays a ransom.
    3. In some cases computer files are deliberately damaged in a malicious computer hack, often resulting in delays to the project.
    4. Hacking into newly installed technology and systems in the finished facility. This could be to create havoc, gain access to the facility, cause embarrassment and bad publicity for the owner, or for more sinister reasons.
    5. Competitors gaining access to other contractors’ pricing documentation which could give them an advantage and inside knowledge so that they can submit a lower price.

Conclusion

Corruption, fraud, and theft must be stamped out at all levels of the project delivery process. Everyone involved in the project processes should be vigilant and act against corruption. Measures must be in place to deter and prevent corruption, fraud, and theft.

Have you had a project impacted by corruption, fraud or theft?

Do you have adequate safeguards in place to protect your project from corruption, theft, and fraud?

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