Compared to the risks a construction company faces on the job every day, fraud may seem like a relatively small danger.

It isn’t.

copper pipes

A construction company that falls prey to fraud experiences a median loss of $330,000, according to the Association of Certified Fraud Examiners. In other words, your entire bottom line could be wiped out (and then some!) by fraudulent activity.

So, what types of fraud are hot right now? Three in particular to watch for are:

1. Scrap Metal Scams

Scrap metal is a valuable commodity, especially during periods of economic uncertainty. You may keep a close watch on what leaves your job sites, but do you watch what comes in?

Acting in collusion with an accomplice in the scrap or junkyard business, an unscrupulous employee can order more metal – copper is particularly in demand – than you need, hide the cost in job reports and sell the excess to the accomplice for cash.

To prevent this type of fraud, make sure no one person is responsible for both ordering materials and approving their costs. Additionally, someone other than the person who orders materials should check them in when they arrive at job sites.

2. Phony Equipment Repairs

Another fraud that requires collaborative effort is that of false equipment repairs. In this scam, an outside mechanic submits phony maintenance and repair invoices. An employee then approves them and splits the resulting payment with the mechanic.

Again, oversight is the key to preventing such schemes. Someone other than the employee who approves maintenance costs should review invoices. If a cost seems off-base, the reviewer should check with equipment operators to see when – or whether – the work was done.

3. Dead Vendors

In this scam, someone sends you invoices bearing the logo and letterhead of a company that’s closing because the owner has very recently died or retired, or the company is no longer operating. Before you’re aware the company is “dead,” you’ve paid the bogus charges and the perpetrator is off to another scam.

To prevent this one, pay close attention to the invoices that come in, and make sure you’re paying for something you actually ordered.

Proactive measures

In addition to these frauds, construction companies are subject to the same billing, payroll, vendor and customer frauds that all businesses must guard against. To protect yourself, be proactive.

Establish internal controls and, in particular, segregate incompatible duties, such as access to both cash and accounting duties.

Make it difficult for dishonest employees to succeed, and adopt a “zero-tolerance” policy toward any type of unethical behavior.

Make background checks a routine part of your hiring procedures, and incorporate the basics of fraud deterrence in your employee training programs.

Tips are the most common way fraud is discovered. So invest in a third-party tipline and make sure all workers know their responsibility in reporting suspicious behavior.

In addition, work with your site supervisors, financial adviser and office administrators to identify and address weaknesses in your operations that could lead to fraud.

If the same person who pays the bills also approves purchase orders and reconciles accounts payable, for example, it would be easy for that person to write fraudulent checks undetected. By assigning the job of reconciling accounts payable to someone else, fraud becomes much more difficult.

An unwelcome guest

Fraud is here to stay, but there’s no need for you to make it anything other than an unwelcome guest.

Accepting that fraud can affect any business is the first step to preventing it. The second is putting safeguards in place to protect against it.