Neutralizing project fraud threat in construction sector

Bassam Samman /
Special to Emirates Business

Fraud is always a possibility in any type or size of business, more so during times of global economic uncertainty. Projects are particularly susceptible to fraud given the complexity, scope and huge cost of construction and engineering activities. A report on fraud in the construction industry issued by global advisory firm Grant Thornton International estimates median average loss from fraud at USD 300,000 and warns that fraud and corruption could cost global construction around USD 1.5 trillion by 2025 if left unchecked.
With approximately USD 2 trillion worth of projects in the pipeline, GCC countries form one of the world’s most lucrative project markets. However, factors such as a persistent oil price and funding gaps in some economies make fraud a looming threat, as construction firms struggle to remain profitable and competitive. Industry needs to be constantly vigilant and adopt the necessary measures to avoid being victimized.
There are many types of project fraud and can be related to various factors such as cost estimates, procurement, schedule or risk, among others. One example is under-reporting. One of the reasons for investors to pick up a project is if they are confident that they can shoulder the total costs. Under-reporting undercuts cost estimates to secure project approval. The unsuspecting project investor realizes the actual cost once the project is already at an advanced stage.
Another form of fraud involves unsubstantiated and overestimated change orders. Major project changes are common in dynamic construction markets such as the Middle East. Unscrupulous individuals can take advantage of such situations to push for change orders that deviate from the contract agreements, scope of work, design reviews and the likes for their monetary gain.
Project fraud also occurs when substandard materials or services are injected into the project as compliant deliverables. Materials may also be
substituted or stolen as the project progresses. With many complex projects ongoing across the GCC, it can be
easy to miss out on the quality of resources used if weak or no sound compliance and monitoring mechanisms are in place. Other potential incidents involve false representation, bribery, billing fraud, irregular compensation payments, delayed approvals, fictitious vendors, money laundering and tax avoidance.
To mitigate fraud risks, project owners, developers and managers should understand common construction fraud schemes, implement robust audit procedures and other fraud-deterring mechanisms, and learn from related incidents in the field. These involve a wide range of actions, the first being to raise the visibility of project development to improve scrutiny and thus discourage potential fraudsters who know that they are being closely watched.
Other measures include developing a detailed and complete Work Breakdown Structure (WBS), preparing a detailed fraud risk assessment and response plan, creating a documented change management process with the appropriate approval levels, setting up a fraud reporting system, implementing more stringent internal controls in areas such as segregation of duties and documentation, and standardizing performance metrics and reporting. For any internal control to be effective, it must cover the five essential components of control environment, risk assessment, control activities, information and communication, and monitoring.
Fraud can be very damaging not only to a project but to an entire organization, so it is highly advisable to deploy a Project Management Information System (PMIS) which coherently organizes all the information needed to successfully execute projects. A PMIS is a valuable tool for the Project Management team and experts to vastly improve transparency and accountability, enforce governance, and accurately gauge performance.
We at Collaboration, Management and Control Solutions (CMCS), one of the leading Project Management consultancies in the Middle East, have served more than 2,500 clients in over 40 countries in the Middle East, Asia, Europe, Africa, Australia and the Americas. For more than 30 years we have encountered and assessed all types of project fraud and can propose tailored PMIS solutions for managing risk, resolving incidents and fraud-proofing the entire construction cycle integrating products from leading developers such as PMWeb, Deltek and Nomitech.
CMCS solutions support proactive and reactive internal audits on construction projects. We enable our clients to visualize, analyze, predict and share a single, reliable version of project status, health and performance. Our experiences dealing with fraud have shown that PMIS provides robust defense against fraud at all points of the construction cycle.
Fraud can lead to huge financial losses, legal struggles, and damaged reputations that can be irrecoverable not only for the project but for the organization involved as well. Although fraud prevention can be daunting, non-practicing businesses can pay a high price. Vigilance, awareness, and enforcement supported by advanced tools such as PMIS are the orders of the day as regional and global construction players fend off project fraud amidst today’s volatile markets.
Bassam Samman is the CEO of Collaboration, Management and Control Solutions (CMCS). His insights on ‘Fraud in Construction Projects’ were recently featured in Deloitte’s GCC Powers of Construction 2016 report.