Most contractors are no strangers to supply chain problems. Slow deliveries, out-of-stock items, wrong orders — what else could go wrong? Well, fraud, for one.

How does it happen?

The sheer volume of ordering and shipping transactions conducted by busy construction businesses can provide cover for dishonest workers or outside parties to hide criminal acts. Examples of supply chain fraud include:

• Falsified billing and payment schemes (for instance, an employee submits duplicate or inflated invoices for materials and pockets the difference),
• Misrepresentation of goods or services provided (such as a supplier that knowingly fails to meet contract specifications),
• Embezzlement or other financial crimes, and
• Theft of tools or materials (sometimes by substituting lower quality items for stolen ones).

Dishonest employees may act alone. However, multiple staff members often band together to commit crimes or collude with outside parties, such as supplier reps.

Where should we start?

Preventing supply chain fraud begins with strong internal controls. These are policies and procedures to help ensure efficient operations, reliable financial reporting, and compliance with relevant laws and regulations. Examples include physical restrictions on assets, regular account reconciliations, and segregation of job duties.

Appropriate internal controls depend on your construction company’s size, specialty, and the number and dollar value of projects you typically undertake. As the business grows, you’ll likely need to update your internal controls and add new ones.

What else?

Internal controls are fundamental, but don’t stop there. A best practice to consider is conducting annual targeted risk assessments of your supply chain.

One newer element to assess is cybersecurity. With networked technology becoming increasingly common on construction projects, hackers and internal bad actors are a constant danger. Look closely at the hardware and software you use to manage your supply chain. Identify access points that could expose you to wrongdoing and tighten up safeguards as necessary.

In addition, investigate any recent abnormalities in supply chain management — especially incidents that occurred suddenly and didn’t adhere to company policies and procedures. Maybe you reached a critical point in a job and were short on key materials. Perhaps your project manager handled the crisis by quickly finding a new supplier. That may have solved the problem in the short term, but you still need to backtrack and vet the replacement supplier.

Who can help?

Your construction business can’t operate at its best without an efficient, trustworthy supply chain. Fraud can slow it down or even bring it to a grinding halt. Work with your CPA to reinforce your internal controls and conduct targeted risk assessments of supply chain transactions.

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