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Legal advice on fraud in the construction industry

Insights
29th Sep 2024

Fraud in the UK construction industry is a significant concern, with a substantial impact on both public and private projects.

The construction sector is vulnerable to a variety of fraudulent activities, both internal and external. The combination of high-pressure projects, resource constraints, and economic uncertainty creates an environment ripe for fraud and bribery.

Fraud and corruption in the UK can lead to increased project costs, delays, and a loss of public trust.   Fraud can have devastating consequences for businesses. In a survey carried out of construction companies that have fallen victim to fraudulent activity in 2022 the findings were that:

  • 26% of UK construction companies have been targeted by fraud in the past year.

  • Larger companies are significantly more vulnerable, with nearly double the likelihood of falling victim to fraudulent schemes."

  • 40% nearly faced closure due to the financial impact of fraud.

  • 30% lost employees as a result of the incident

Many cases of fraud go unreported, making it challenging to assess the true extent of the problem.

Common types of construction fraud

  • Bid Collusion - contractors conspiring to manipulate the bidding process, often resulting in inflated prices and reduced competition.

  • Materials Substitution - using inferior or cheaper materials than specified in the contract.

  • Mandate Fraud - fraudsters may pose as suppliers or the organization itself to divert payments to unauthorized accounts.

  • Expense and Invoice Fraud - employees or suppliers may submit false or inflated claims for reimbursement.

  • Bribery - offering or accepting bribes in exchange for preferential treatment or contracts violates the Bribery Act 2010.

  • Asset Misappropriation - theft or misuse of company assets, such as equipment or materials.

  • Payroll Fraud - falsifying time records, claiming excessive overtime, or creating fictitious employees.

  • Secondary Work and CIS - the growing prevalence of flexible work arrangements increases the risk of employees engaging in conflicting activities and tax evasion.

Preventing construction fraud and mitigation

  • Implement a transparent bidding process with clear evaluation criteria.

  • Encourage open bidding and discourage restrictive practices.

  • Use independent third-party evaluators to minimise bias.

  • Establish a rigorous change order approval process requiring multiple signatures.

  • Require detailed cost estimates and supporting documentation for all changes.

  • Conduct regular audits of change orders and associated costs.

  • Verify invoices against work orders and supporting documentation.

  • Conduct regular audits of invoices and payments.

  • Implement a system for tracking and reconciling all financial transactions.

  • Require prior approval for all material substitutions and clearly define material specifications and quality standards.

  • Conduct regular inspections and testing to verify compliance.

  • Enforce strict conflict of interest policies.

  • Require disclosure and approval of all vendor and subcontractor relationships.

  • Implement a whistleblower protection programme.

Options for legal action for fraud

Construction companies facing fraudulent activity can pursue various civil legal actions to recover losses and deter future misconduct. There is also a tactical decision to be made about reporting the fraud to the police, the possibility of a private prosecution and other important considerations. Here are some common options:

  • Employee theft and potential dismissal

  • Private Prosecution

  • Damages claim for deceit - if the fraudulent actions involved a deliberate misrepresentation of facts that induced the company to suffer a loss, they can sue for the tort of deceit.  

  • Breach of contract - if the fraud was committed by an employee or contractor under a contract, the company can sue for breach of contract and seek damages.

  • Injunctions - the court can order the defendant to take specific actions to rectify the harm caused by the fraud.

Get in touch

If you would like to speak with a member of the team you can contact us on:

020 3540 4444


George Kampanella

Partner - Business Crime and Regulatory

George has expertise in representing individuals and businesses subject to investigations and prosecution by the Serious Fraud Office (SFO), Crown Prosecution Service-Serious Economic Organised Crime and International Directorate (SEOCID), His Majesty’...

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