Fraud is a growing concern for construction companies, with external scams costing the industry up to $1 billion annually. These schemes often exploit high-value materials, tight project deadlines, and complex supply chains. Beyond financial losses, scams disrupt operational efficiency, delay projects, and strain relationships with clients and suppliers.
Construction companies are particularly vulnerable to fraud during times of uncertainty, such as supply chain disruptions or after natural disasters. In these situations, the pressure to meet deadlines can lead to rushed decisions and overlooked security protocols, providing fraudsters with opportunities to exploit weakened systems.
To safeguard their businesses, construction companies will want to understand common scams and take proactive steps to mitigate risks. Below are four of the most frequent scams targeting the industry, along with real-world examples and practical prevention tips.
Material Theft and Diversion
Every year, nearly 13,000 instances of theft are reported by construction companies in the U.S. Criminals target supply depots, warehouses, and construction sites, exploiting vulnerabilities to steal high-value materials such as copper wiring, lumber, and specialty tools. They even charge thousands of dollars of materials to another contractor account and pick up the materials for their own use. Many of these schemes rely on impersonating authorized contractors or presenting forged documents to bypass security protocols, resulting in significant financial losses and project delays.
Example: An individual arrived at a supplier claiming to be authorized to pick up materials for a contractor. This person provided details of the job to appear legitimate. However, the branch manager found the situation unusual, as the contractor typically called directly to confirm pickups. Upon verifying with the contractor, it was revealed that no one had been sent, successfully averting the theft. Authorities were contacted, but the individual could not be prosecuted due to jurisdictional challenges.
Prevention Tip: Strengthen material pickup protocols by requiring photo identification, written authorization, and direct verification with contractors before releasing materials. Increase site security by installing surveillance cameras, using secure fencing, and limiting access to authorized personnel only. Additionally, utilize electronic inventory tracking systems to monitor material movement and reduce vulnerabilities.
Check Fraud
Check fraud involves stealing and altering checks to redirect funds. This is not a new technique but is still going strong in the construction industry. These bad actors often employ techniques like check washing to remove original payee details and increase the payable amount. This type of deception not only causes financial losses but also disrupts vendor relationships.
Example: Checks sent to suppliers were stolen from a company’s mailbox and altered to change the payee and increase the amounts. While many fraudulent checks were cashed, a vigilant banker noticed irregularities and contacted the company, helping to prevent further losses.
Prevention Tip: Switch to electronic payment systems to minimize the risk of stolen checks. For essential check payments, use secure mailing options such as tamper-evident envelopes and locked mailboxes. Leverage bank tools like Positive Pay, which matches issued checks against those presented for payment, flagging unauthorized changes.
Phishing and Payment Fraud
Phishing schemes target employees with deceptive emails that mimic trusted sources, such as executives or suppliers. Fraudsters use these tactics to manipulate employees into transferring funds or updating payment details to redirect money into fraudulent accounts.
Example 1: During her first week on the job, a new controller received an email appearing to be from the company president, asking her to urgently wire funds to an overseas account. The email was highly convincing, replicating the president’s usual language and signature. Without established verification processes, the transfer was made, resulting in a financial loss.
Example 2: A university working on a new building project was contacted by someone posing as their construction contractor. The bad actor claimed there was a banking issue and provided new ACH details for payments. Believing the communication to be legitimate, the university updated the payment details and sent multiple payments to the fraudulent account. Two months later, the actual contractor stopped work due to non-payment, and the deception was discovered. The university and the contractor worked with the authorities to find the bad actor.
Prevention Tip: Train employees to recognize phishing attempts, such as unexpected payment requests or urgent messages. Require verbal confirmation for all financial transactions and implement multi-factor authentication for sensitive approvals. (Learn more from PBMares’ Webinar Recording | Cybersecurity in Construction & Real Estate: How to Mitigate Risks from Ransomware, Social Engineering, and Beyond.)
Fake Supplier Scams
Fake supplier scams involve imposters creating fictitious supplier entities or impersonating existing vendors to solicit payments for materials or services that are never delivered. These scams often exploit procurement teams by presenting fake credentials, competitive pricing, or fabricated references.
Example: A construction company placed a large prepaid order with what seemed to be a legitimate supplier offering discounted materials. After a few small successful deliveries that built trust, the supplier disappeared after receiving payment for the bulk order.
Prevention Tip: Vet new suppliers by verifying business credentials, checking references, and conducting independent background checks. Start with small transactions to establish credibility before committing to large orders. Centralize procurement processes to ensure all new vendors are reviewed and approved by multiple stakeholders.
The Value of Human Oversight
Automation and technology have transformed the construction industry, streamlined processes, and improved efficiency. However, even the most advanced systems can’t replace the intuition and vigilance of human oversight. Fraudsters exploit weaknesses in automated systems, relying on the lack of strong internal controls and personal verification to carry out their schemes.
Taking the time to verify payment requests, confirm material pickups, and question irregularities with a real person can make all the difference in preventing fraudulent scams. Establishing a culture where employees and clients feel empowered to double-check and ask questions ensures that technology works in tandem with human judgment — not as a substitute for it.
In a world of automation, sometimes its best to have a real person to talk to.
Looking Ahead
Fraud and deception schemes targeting construction companies are increasingly sophisticated, causing financial losses, project delays, and operational inefficiencies. By understanding these common scams and implementing preventive measures, businesses can reduce their exposure to risk and maintain operational integrity. To learn more about protecting your construction business, contact Jennifer French or Ryan Paul, Partners on PBMares’ Construction & Real Estate team.
