How can we neutralise the project fraud threat?

How can we neutralise the project fraud threat?
Bassam Al Samman is CEO of Collaboration, Management and Control Solutions (CMCS).
Published: 11 March 2017 - 6:57 a.m.
By: CW Guest Columnist

Fraud represents a threat in all business sectors, especially during times of economic uncertainty. Construction projects are particularly susceptible to fraud, given the complexity, scope, and costs of associated activities.

A report on fraud in the construction industry, published by Grant Thornton International, estimates median average loss from fraud at $300,000. The authors warn that fraudulent activities and corruption could cost the global construction sector up to $1.5tn by 2025, if left unchecked.

With approximately $2tn worth of projects in the pipeline, the GCC is one of the world’s most lucrative project markets, but low oil prices and funding gaps within some economies mean that fraud is a looming threat. As firms struggle to remain profitable and competitive, our industry must remain vigilant, and adopt defensive measures to minimise risk.

Project fraud can affect numerous market segments, including cost estimates, procurement, scheduling, and risk analysis.

One example is under-reporting. Before becoming involved in projects, investors must be confident that they can bear the costs. Under-reporting undercuts estimates to secure project approval, and by the time investors learn the truth, it is often too late.

Unsubstantiated or overestimated charge orders represent another danger. Major project changes are common in construction markets such as the GCC, and unscrupulous individuals can take advantage by pushing for change orders that deviate from contract agreements, scopes of work, and design reviews, for monetary gain.

Fraud also occurs when substandard materials or services are injected into the project as compliant deliverables. Materials may also be substituted or stolen as projects progress. With so many complex projects ongoing across the GCC, it can be easy to overlook the quality of resources in the absence of sound compliance and monitoring mechanisms.

Other potential dangers include false representation, bribery, billing fraud, irregular compensation payments, delayed approvals, fictitious vendors, money laundering, and tax avoidance.

To mitigate risk, project owners, developers, and managers should understand common construction fraud schemes, and implement robust audit procedures. Other preventative measures include raising project development visibility in a bid to improve scrutiny and, thus, discourage potential fraudsters who know that they are being monitored.

The development of a detailed and complete work breakdown structure (WBS), the preparation of a fraud risk assessment and response plan, the creation of a documented change management process, the establishment of a fraud reporting system, the implementation of stringent internal controls, and the standardisation of performance metrics and reporting, may also prove beneficial. Effective internal controls must cover control activities, control environment, information and communication, monitoring, and risk assessment.

Fraud can prove detrimental to both projects and associated parties, so it’s highly advisable to deploy a project management information system (PMIS). By coherently orgainising all of the information necessary to execute a project, a PMIS will enable the project management team to vastly improve transparency and accountability, enforce governance, and accurately gauge performance.

Firms like Collaboration, Management and Control Solutions (CMCS) provide PMIS solutions for risk management, incident resolution, and fraud-proofing. Our tools support proactive and reactive internal audits, allowing clients to visualise, analyse, predict, and share reliable project-status information, and defend against fraud at all stages of the construction cycle.

Fraud can lead to huge financial losses, legal struggles, and damaged reputations. Although fraud prevention can be daunting, businesses that neglect it could pay a high price. Vigilance 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 in a volatile market.

Click here to add your comment

Please add your comment below
Your email address will not be published