Narrow by location

Innocent Mistake or Construction Fraud?


Most people associate fraud with Ponzi scams, motor vehicle insurance fraud and other clearly identifiable criminal acts. However, fraud occurs on a daily basis in the construction industry.

The difference is many contractors are unaware that fraud is occurring because they do not believe their actions are criminal. They think they are necessary to keep the company and themselves profitable.

The consequences for committing fraud in construction projects range from significant administrative fines to huge jury verdict awards, and can even result in criminal convictions. Therefore, it is important for contractors to understand how fraud occurs in the construction industry and how to best prevent it.


In order to properly understand how contractors can be held liable for fraud, it is important to understand the essential elements of a civil fraud claim. While the term fraud is broadly used to define deceit or trickery, an actual claim must prove that one alleged of fraud:

  • made material misrepresentations of fact;
  • intended to deceive the recipient of the information;
  • the recipient of the information reasonably relied on the statement and was deceived; and
  • that as a result of the reasonable reliance on the false statements, the recipient of the information sustained damages.


Contractors know that landing a government contract, whether it is at the state or municipal level, can be lucrative and can open the doors for future projects. Governmental entities often are bogged down by bureaucratic red tape and may fail to properly administer and regulate construction projects once a contractor’s bid has been accepted.

As a result, many contractors take advantage of the governmental entities lack oversight and cut corners in order to finish the work on time or ahead of schedule and to reduce their overheard. For example, many contractors will overlook or ignore governmental contracts requiring utilizing a workforce containing a certain percentage of minority- or women-owned contractors. In many instances, the municipal or governmental client deals directly with the general contractor and does not focus on subcontractor agreements. Rather, the governmental entity trusts that the general contractor will abide by contract provisions and will hire subcontractors accordingly. Unfortunately, some contractors that adhere to the governmental requirements will cost them more money and thus opt for non-confirming alternatives.

One recent example involves a large construction company that was awarded a governmental contract by the metropolitan transportation authority (MTA). The terms of the contract with the MTA required that the general contractor utilize a certain percentage of minority- and women-owned subcontractors. The general contractor hired a subcontractor to whom it is alleged that it paid tens of millions of dollars to to serve as a front in order to comply with the minority requirements. It is alleged that the actual work was done by the general contractor and that the subcontractor had no employees or equipment. Ultimately, the general contractor was investigated and indicted for fraud. As part of the settlement agreement, the contractor paid $19.6 million to resolve the fraud claims.

Fraud is extremely common in public works and government agency construction projects. It is important that contractors abide by the specific terms, conditions and requirements of the government contract.


While some contractors might consider aggressive billing to be industry standard and a way to cover administrative costs, the fact is that billing practices need to adhere to industry standards in order to avoid violating the law. Some ways that unscrupulous contractors manipulate billing include charging premium prices for goods and services required during the course of construction in excess of what was agreed in the contract. Another common practice is to bill owners for new materials while actually using salvaged or nearly new materials. In one case, a contractor billed premium prices for materials, including salvaged steel beams. The owner trusted the contractor and had no reason to inspect basic construction materials. After nearly finishing the project, code violations triggered extensive investigations, ultimately revealing that the materials used in the construction were salvaged or reclaimed. Upon learning of the deceptive practices by the contractor, the owner filed suit alleging fraud. The contractor settled the case prior to trial and although no criminal charges were filed, the contractor was banned from any additional projects with the owner or developer.

Material substitution is fairly common and needs to be avoided. The use of reclaimed materials also can expose a contractor to negligence claims that extend beyond the fraud allegations. For example, contractors may use salvaged or reclaimed materials that are not the correct measurements. They are often rigged to fit. A thorough inspection of the building can reveal the improperly measured or substandard materials and trigger additional claims.


In general, an estimate or quote is exactly that, a best guess of the cost based on the contractor’s reasonable degree of construction knowledge. If a project goes over budget, it often is not the result of fraud, but rather due to the natural course of unforeseeable circumstances.

However, some contractors deliberately underbid or underquote projects in order to win the job. They intend to deceive the owner into believing that quoted price will be close to the actual cost. Unfortunately, many of these unscrupulous contractors know that the project will require additional work not clearly defined in the initial scope of work.

For example, a contractor was awarded a bid to complete a $12 million parking structure. The bid was the lowest bid provided during the course of the contractor selection period. The contractor knew that significant excavating and site preparation was required due to the current site conditions. He intentionally did not disclose this fact to the owner during the bid process. Once construction began, the extensive site excavation was ultimately 100 percent over the initial site preparation budget provided. The contractor reasoned that the owner would likely just pay the additional monies because he had already engaged a large portion of the work. In this case, the contractor was wrong. The owner launched an investigation into the construction company’s quoting process. The investigation resulted in a lawsuit and during the discovery phase, documents were identified illustrating that the contractor was well aware of the extensive site work that needed to be done prior to providing the quote.

In order to avoid the significant penalties associated with fraudulent activity, it is important that contractors adhere to contractual provisions and are transparent and honest with their clients. What may seem like an innocent statement may actually provide the basis for a fraud claim that can result in the loss of millions of dollars, future contracts and potentially criminal charges.

Onboarding’s Effect on Employee Engagement

By Chris Lennon, Construction Executive As one of the most underrated elements of the employee lifecycle, onboarding might... »

Is Arbitration Final and Binding?

By Jeanne M. Harrison, Smith Currie Parties involved in a dispute may face a choice between arbitration and... »

The Business Side of Family

By Joanna Masterson, Construction Executive Forging Community-wide Legacies, Generation by Generation It’s usually pretty easy to get people... »

Cultivate Strategic Thinking in Construction

By Jeremiah Hayes, Construction Executive Construction has reached a critical milestone. Over the last 100 years, the pace... »


Your email address will not be published. Required fields are marked *