There are a variety of red flags to look for when trying to determine if someone is trying to commit fraud with a change order. Some of the more common conditions that can lead to or be indicators of change order fraud include:
Now that we have discussed why change orders are susceptible to fraud and how to identify change order abuse, let's discuss a few tips and techniques to deter and detect these situations.
Studies have shown that people often do not report fraudulent behavior for fear of retribution or simply because of apathy. One remedy for this issue is to establish an anonymous project 'hotline' to report fraud. This outlet should be made available to all project stakeholders, including project officials, the design team, general and trade contractors, and even material suppliers and other vendors.
This information should be made readily available and instructions made clear to potential informants to provide specific information and the ability to be contacted anonymously if necessary:
In addition, it is important to evaluate the internal controls and processes over the change order management process. Again, it is imperative that there is an appropriate level of segregation of duties and a requirement for multiple contracting officials to approve change orders, particularly those over a certain dollar threshold.
These individuals must have the necessary level of experience and understanding of the construction and change order process or otherwise must obtain these resources by employing the services of professionals such as a certified construction industry financial professional (CCIFP) and/or architects/engineers, who are independent of other project stakeholders.
For project owners who are involved in numerous and/or recurring construction projects, an analytical approach may also prove beneficial in preventing and detecting change order fraud.
This includes the review and evaluation of the following factors and documents:
To learn more about change order fraud and how to combat it, click on the button to download Meaden & Moore’s presentation. You can also reach out to a Meaden & Moore representative in the event you have additional questions.