How to Fight these Top 5 Common Frauds in Construction

Fraud remains one of the most damaging and overlooked risks facing general contractors. Whether it's false injury claims, billing abuse or incomplete work, fraud perpetrated by clients, subcontractors and employees can lead to significant financial losses, project delays and increased insurance premiums.

Occupational fraud amounted to a median loss of $250,000 per incident in the construction industry in 2024, with construction ranking fourth in losses among all industries, according to the Association of Certified Fraud Examiners in its recent fraud report.

As fraud cases increase in the construction industry, it is vital that your business is aware of the types of fraud and how to effectively mitigate losses. Explore these five common types of construction fraud to protect your jobsites and your margins.

Common Types of Construction Fraud and How to Prevent Them

1. Deceptive Bidding or Billing Practices

Subcontractors are a vital part of completing construction projects, often providing necessary specialized services so general contractors can deliver a finished product that meets deadlines and industry standards. However, some subcontractors perpetrate fraud to gain an unfair financial advantage. For instance, they may bid low to win work, then submit inflated change orders or bill for work that was never completed. This illegal practice can leave general contractors financially liable for subcontractors’ actions and lead to significant project delays and disruptions.

How to combat it: Use project management tools to track daily progress, labor reports and material deliveries. Require detailed billing backup and regularly audit job costs. Contracts should clearly define what constitutes an approved change order and require written approval before work proceeds.

2. Non-Cash Asset Misappropriation

While your employees are your most important asset, they might also expose your construction business to significant loss if they commit payroll fraud. A type of occupational fraud, this common scam involves misusing or stealing non-cash resources, such as inventory, equipment or customer information, for financial gain.

How to combat it: Create a strong internal culture of integrity and honesty. Vet all prospective employees closely to ensure they have no prior history of fraud, and implement internal controls, such as segregating duties, conducting regular inventory checks and enforcing a strict code of conduct.

3. Labor and Wage Fraud

This includes underreporting payroll, using unlicensed workers or misclassifying employees as independent contractors. These practices lead to compliance issues and inflate insurance risk.

How to combat it: Establish a formal subcontractor vetting process that includes license verification, insurance checks and confirmation of payroll reporting procedures. Require proof of workers’ compensation coverage and review COIs for accuracy and expiration dates.

4. False or Exaggerated Injury Claims

The construction industry has the highest rate of injuries and fatalities across industries, with many jobsite accidents occurring because of slips, trips and falls, according to the Bureau of Labor Statistics. While most jobsite injuries are legitimate, some workers may fake or exaggerate injuries to collect benefits.

How to combat it: Implement incident reporting protocols that include immediate documentation, witness statements and medical evaluation. Use video monitoring where appropriate and train supervisors to identify red flags such as inconsistent accounts or delayed reporting.

5. Kickbacks and Favoritism

According to the Association of Certified Fraud Examiners, corruption is one of the leading fraud schemes within construction, consisting of scams like kickbacks, bribery and bid-rigging. This type of occupational fraud involves field staff accepting incentives from suppliers or subcontractors in exchange for favorable treatment, which can lead to inflated pricing and quality issues.

How to combat it: Promote a strong ethics policy and provide anonymous reporting channels for employees to report suspected misconduct. Rotate responsibilities when possible and perform random audits of purchasing decisions and subcontractor selections.

How Alliant Construction Can Help You Tackle Fraud Head-On

Fraud can take many forms but all of them lead to the same result: higher costs and greater risk for your business. With the right mix of contract language, vendor oversight and site-level controls, you can reduce your exposure and protect your profitability. Alliant Construction understands how to actively manage fraud risks and can help design customized insurance and risk management programs that reduce your exposure. Reach out to Alliant Construction for more information to protect your business from common scams.