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  • Writer's picturePeter Lamont, Esq.

Understanding the Impact of Construction Fraud

When most people think of fraud they associate it with Ponzi scams, motor vehicle insurance fraud and other clearly identifiable criminal acts. However, in the construction industry fraud occurs throughout the country on a daily basis. The difference is many contractors are unaware that fraud is occurring because, their minds they do not believe that their actions are criminal or fraudulent but rather necessary in order to keep their company and themselves profitable. The consequences for committing fraud in construction projects range from significant administrative finds, huge jury verdict awards and can even result criminal convictions. Therefore, it is important for contractors to understand how fraud occurs in the construction industry and how to best prevent it. This article will not present a comprehensive overview of all of the types of fraud occurring in the construction industry but will focus on the primary types of fraud.


People use the term fraud all the time without fully understanding the legal elements behind a claim for fraud. 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, in order to establish an actual claim for fraud one must prove that one alleged of fraud (1) made material misrepresentations of fact, (2) intended to deceive the recipient of the information, (3) the recipient of the information reasonably relied upon the statement and was deceived; and (4) that as a result of the reasonable reliance upon the false statements the recipient of the information sustained damages.


Contractors know that landing a government contracts, whether it is at the state or municipal level, can be lucrative and can open the doors for future projects. It is often a fact that governmental entities are bogged down by bureaucratic red tape and often fail to properly administer and regulate construction projects once bidding has been awarded to a contractor. As a result, many contractors take advantage of the governmental entities lack oversite 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 work force 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 sub-contractor agreements. Rather, the governmental entity trusts that the general contractor will abide by contract provisions and will hire sub-contractors accordingly. Unfortunately, some contractors that adhering 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. The terms of the contract with the MTA required that the general contractor utilize a certain percentage of minority and women owned sub-contractors. The general contractor hired a sub-contractor 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 sub-contractor had no employees or equipment. Ultimately, the general contractor was investigated and indicted for fraud. The contractor as part of a settlement agreement paid $19.6 M to resolve the fraud claims.

Fraud is extremely common in public works and governmental agency construction projects. It is important that contactors abide by the specific terms, conditions and requirements of the governmental 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 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 similar to the example provided above is fairly common and needs to be avoided. The use of reclaimed materials can also 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 upon the contractor’s reasonable degree of construction knowledge. If a project goes over budget it is often times not the result of fraud but due to the natural course of unforeseeable circumstances.

However, there are contractors who deliberately underbid or underquote projects in order to win the bid. 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 $12M 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. They intentionally did not disclose this fact to the owner during the bid process. Once construction began engaged in the extensive site excavation which ultimately was 100% over the initial site preparation budget provided. The contractor reasoned that the owner would likely just pay the additional monies because they 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 law suit and during the discovery phase documents were identified evidencing the fact that the contractor was well aware of the extensive site work that needed to be done prior to providing the quote.


Fraud occurs on a daily basis throughout the construction industry. In order to avoid the significant penalties associated the 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.



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