Legal advice on fraud in the construction industry

Fraud in the UK construction industry is a significant concern, with a substantial impact on both public and private projects.

The construction sector is vulnerable to a variety of fraudulent activities, both internal and external. The combination of high-pressure projects, resource constraints, and economic uncertainty creates an environment ripe for fraud and bribery.

Fraud and corruption in the UK can lead to increased project costs, delays, and a loss of public trust.   Fraud can have devastating consequences for businesses. In a survey carried out of construction companies that have fallen victim to fraudulent activity in 2022 the findings were that:

• 26% of UK construction companies have been targeted by fraud in the past year.

• Larger companies are significantly more vulnerable, with nearly double the likelihood of falling victim to fraudulent schemes."

• 40% nearly faced closure due to the financial impact of fraud.

• 30% lost employees as a result of the incident

Many cases of fraud go unreported, making it challenging to assess the true extent of the problem.

Common types of construction fraud

• Bid Collusion - contractors conspiring to manipulate the bidding process, often resulting in inflated prices and reduced competition.

• Materials Substitution - using inferior or cheaper materials than specified in the contract.

• Mandate Fraud - fraudsters may pose as suppliers or the organisation itself to divert payments to unauthorised accounts.

• Expense and Invoice Fraud - employees or suppliers may submit false or inflated claims for reimbursement.

• Bribery - offering or accepting bribes in exchange for preferential treatment or contracts violates the Bribery Act 2010.

• Asset Misappropriation - theft or misuse of company assets, such as equipment or materials.

• Payroll Fraud - falsifying time records, claiming excessive overtime, or creating fictitious employees.

• Secondary Work and CIS - the growing prevalence of flexible work arrangements increases the risk of employees engaging in conflicting activities and tax evasion.

Preventing construction fraud and mitigation

• Implement a transparent bidding process with clear evaluation criteria.

• Encourage open bidding and discourage restrictive practices.

• Use independent third-party evaluators to minimise bias.

• Establish a rigorous change order approval process requiring multiple signatures.

• Require detailed cost estimates and supporting documentation for all changes.

• Conduct regular audits of change orders and associated costs.

• Verify invoices against work orders and supporting documentation.

• Conduct regular audits of invoices and payments.

• Implement a system for tracking and reconciling all financial transactions.

• Require prior approval for all material substitutions and clearly define material specifications and quality standards.

• Conduct regular inspections and testing to verify compliance.

• Enforce strict conflict of interest policies.

• Require disclosure and approval of all vendor and subcontractor relationships.

• Implement a whistleblower protection programme.

Options for legal action for fraud

Construction companies facing fraudulent activity can pursue various civil legal actions to recover losses and deter future misconduct. There is also a tactical decision to be made about reporting the fraud to the police, the possibility of a private prosecution and other important considerations. Here are some common options:

• Employee theft and potential dismissal

• Private Prosecution

• Damages claim for deceit - if the fraudulent actions involved a deliberate misrepresentation of facts that induced the company to suffer a loss, they can sue for the tort of deceit.

• Breach of contract - if the fraud was committed by an employee or contractor under a contract, the company can sue for breach of contract and seek damages.

• Injunctions - the court can order the defendant to take specific actions to rectify the harm caused by the fraud.