Tips For 2025 | Look Out For Fraud In Construction

The residential remodeling market in 2024 faced some shifts due to economic conditions. Key drivers of the pullback included high mortgage rates and limited housing inventory, which have caused homeowners to become more cautious about renovation spending amid economic uncertainty. As sales slow down, it's important to identify and mitigate fraud risks in 2025. Here are several red flags to watch for:

Inconsistencies in billing in change orders

• Unusual frequency or large number of change orders. An excessive number of change orders, especially those without clear justification or supporting documentation, can indicate overcharging or padding of costs.
• Duplicate invoices. Receiving duplicate invoices for the same work, materials, or services may indicate false billing, where subcontractors attempt to bill for more than what was delivered.

Labor expenses

• Overstated hours by internal employees and subcontractors. Employees or subcontractors might log excessive hours for work that wasn’t performed. Monitoring overtime and verifying labor hours are key to identifying this red flag.
• Overstated reimbursements. Employees might request reimbursements for materials or mileage that was not applicable to work completed or for personal use.

Discrepancies in Project Progress Reporting

• Overstated project progress. Subcontractors may overstate progress to receive premature payments. This is especially risky in frontloading schemes, where funds for incomplete work are drawn early, potentially stalling a project when future funds are exhausted.
• Delayed or missing documentation. Regular delays in delivering required documentation, such as permits, licenses, or project progress reports, can be a red flag for fraudulent activity or cover-ups.

These red flags are key indicators of potential fraud in construction. Companies can mitigate these risks with regular financial and documentation reviews, checks and balances, and project budget reviews.