Defending Against Fraud

A contractor's best defense against fraud is good record-keeping. "It's crucial for contractors to document their firm's best practices for reducing fraud and train employees to follow those guidelines," Maibach says. "We live by the motto: 'You get what you inspect, not what you expect.'"

But how does a business owner know if employees are complying with the guidelines? Maibach says that Barton Malow regularly audits a sampling of its projects. A team is sent to conduct periodic reviews, looking at major risk factors. Additional related costs arising from things like weather delays could create problems. "Even if contractors submit a claim for extra payment, they must be very careful that they aren't seeking money for things already agreed to and paid for," Mithani says. Also, a contractor billing for additional supplies and services should clearly identify the line-item numbers, quantities and other details of the claim. The key is diligent record-keeping, she adds.

A customized program, tailored to the contractor's day-to-day business, is crucial in avoiding fraud risks. "What will matter when somebody digs in is if they can see whether the firm had a real culture of compliance and took steps to avoid particular risks," Sahu says.

"Every company is different. In some places, controls are too loose and/or don't give clear guidance to people at the top," Sahu adds. "In a different business, the project manager could present risk. You must ask: Who are you? Who are the subs you typically work with? What type of work do you do? Who are the people on your jobsite that make you feel less easy? This is a tailored assessment of risk," he says.

While most risk stems from general contractor-sub relationships, Mithani notes that minority business enterprise claims have become more common recently, with firms alleging the MBE performed the work when the contractor actually did the majority of it.

Sahu recommends assigning responsibility for implementing, maintaining and supervising the firm's MBE compliance program. Set up a hotline or other system for reporting misconduct and establish a reporting chain for potential issues. Incentivize people to comply and deal promptly and fairly with any misconduct, he says. "Devote adequate resources—enough to support meaningful compliance," he says.

"As a general contractor, you are expected to have taken a more active role to ensure all your subs are running clean. Some sub will commit fraud—that's life," Sahu says. "We can't avoid misconduct, but we must show we've done everything possible to put an end to it. By meeting the standards of diligence, contractors are more prepared to avoid liability."