Article #396 How Project Owners Can Encourage Fraud on Their Capital Construction Projects?

When projects’ owners, both in the public and private sector, fail to impose the right policies and procedures to deter fraud on their projects, they are indirectly encouraging those involved in their projects to commit actions that would lead to project fraud. Actions that would lead to increase the chances of project failure by increasing the project cost, delaying the project completion, reducing the project quality, failing to meet stakeholders’ objectives among others.

The tendency to commit a fraud is very much part of every business and projects are no different specially when there is lack of governance and control. Actually, there are more chances to commit a fraud on a project than operational frauds where usually corporate policies and procedures are well enforced and internal or external audit is an on-going requirement.

Actions that could be labelled as “Project Fraud” are many but some of the most common actions include the following:

  • Unsubstantiated project decisions
  • Under-reported estimates of project cost
  • Over-reported estimates of project benefits
  • Unbalanced bids
  • Over-reported schedule performance to hide project delays
  • Wrong forecasting for cost to complete the remaining project scope
  • Unsubstantiated change orders
  • Over-estimated change orders
  • Over-reported quality progress
  • Acceptance of lower-quality deliverables that cannot be used as originally thought
  • Delayed and/or improper approvals
  • Conflict of interest and kickbacks
  • Negligence in protecting client’s interest
  • Non-compliance with the contract’s terms and conditions
  • Creating unnecessary threats by failing to comply with best practices
  • Failing to report threats before they harm the project
  • Failing to report opportunities that could have benefited the project
  • Lost or misplaced project documents
  • Appointing unqualified project team members
  • Intended wrong actions or decisions

So how can project owners stop project fraud and discourage doing the actions that could lead to project fraud?

The first step that a project owner should do is to have a clear policy on project fraud. For example, Zero-Tolerance on Project Fraud. The next step is having a detailed project management standard operating procedures manual that will detail the processes, responsibilities, accountabilities and authorities for performing those procedures.

To project management procedures manual should first identify the organization that will become responsible for managing the organization’s portfolio of projects. This could be the projects department, project management unit or project management office (PMO). The organization chart, roles and responsibilities and job description need to be documented as they will become an integral part of the standard operating procedures manual.

This will be followed by determining the project life cycle stages that will explain how projects will be executed. The project life cycle will also detail the stage gates, or project approval gateways, that the project owner will use to determine if the project should proceed to next project life cycle stage or not.

The next step is to detail the project management procedures that will be needed to manage the delivery of the project. The level of detail of those processes will depend on the level of control that the project owner wants to exert on the project but they would usually include the following processes:

  • Project Due diligence;
  • Project Approval;
  • Formulating of a Client Brief & Approval;
  • Prequalification of Consultants;
  • Appointing Consultants;
  • Budgeting and Budget Approval;
  • Managing the Design Process and Approvals;
  • Managing Design Changes and Approvals;
  • Payment Applications and Approvals;
  • Prequalification of Contractors and Suppliers;
  • Bid Packages Preparation and Approvals;
  • Managing the Procurement Process of Contractors and Suppliers;
  • Formulating Agreements and Contract Authorization;
  • Project Commencement and Contractor’s Mobilization;
  • Construction/Supply Contract Changes and Approvals;
  • Delays, Time Extensions and Application of Penalties/ Liquidated Damages;
  • Submittals and Approvals;
  • Project Taking Over and Approvals;
  • Project Close out and Approvals;
  • Risks and Issues Management; and Others.

The details of those processes will be captured in what is known as the standard operating procedures manual which will provide the guidance on how to perform those processes for those who will become involved in the project delivery. The manual will also detail the steps for executing each process, roles and responsibilities, document templates, tabular and graphical log reports and the process key performance indicators (KPIs). Many organizations opt to develop this manual as per the ISO requirements to attain the appropriate ISO certification on those manuals.

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The problem for many organizations who are serious about curbing project fraud and who have invested in developing comprehensive project management procedures manuals is the lack of having the right project management information system (PMIS) to enable the automation of those processes and make the information from the captured data available for the project team members to have the insight to do better and faster informed decisions.

The automation of project management processes requires first having the different document templates identified in the procedures manual to be available online for the right project team member to complete and initiate the process. This will also require enabling attaching all supportive documents to the document template. Having the document templates online helps in curbing actions that could lead to project fraud as not only it enforces the project team to provide the needed data in complete and correct manner, but also captures the details of who provided this information and when. In addition, it captures the actions of all other project team members who will be involved in the process of reviewing, sharing and approving the process. Most project management information systems (PMIS) also include Audit Trail as one of the default features where it tracks the actions taken by all those who have accessed the PMIS.

It should be of no surprise when one finds that many project team members would object on having a project management information system implemented on their projects. Excuses like effort and skills needed to input data, cost associated with having such a system, unwilling of contractors and consultants to provide data among others are quite common. Nevertheless, it is no different than saying that all the benefits we are getting today from automating the different government, banking and other processes are not true and we had better times when all of those processes where manual processes. The ugly truth is that those project team members want everything but transparency and governance on what they should be performing on daily basis.

Using an integrated project management information system (PMIS) like PMWeb does not limit project fraud actions to data capturing only but also limits the actions that could occur when there is a requirement to integrate projects data that are stored at different locations. When an organization is faced with what is known as “Data Silos”, one should expect project fraud actions to occur when this data integration needs to be done manually.

Financial ambiguity is one of the very common project fraud actions that occur on projects when the project commercial and financial data are not captured in an integrated format. For example, it is very common to have the project cost estimate, project budget, project bids, project awarded contracts, proposed, pending, approved and disputed change orders, progress invoices, actual payments, funding authorizations, funding release among others are stored in separate data silos. What even makes it worse, is that a project financial status cannot be viewed in isolation from other project management processes like risk management among others.

A PMIS like PMWeb provides the platform to capture all project’s data on a single web-enabled platform to enable anywhere anytime access for the authorized project team members. This will not only eliminate the “Data Silos” syndrome but will also enable creating the status and performance dashboards to provide a real-time single version of the truth of the project financial status. The dashboard will provide the needed measures and key performance indicators (KPIs) to provide an objective analysis of how the project is performing from the financial aspect. The same approach needs to be done to measure and report the project performance as it relates to schedule, deliverables, quality, safety, documents approvals among many others.

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A PMIS will also help the project manager and other executives to have a real-time single version of the truth on how the project, program or portfolio of projects status and performance. This will help in curbing project fraud actions that could result when this information is manipulated, not complete or delayed. Those executives will now have the confidence when it comes to making decisions as they are now assured of the quality of the information and data provided to them. This will assure that all made decisions are substantiated with the needed project records and documents.

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In addition, a PMIS will help those executives on reporting on the status of the made decisions by maintain a real-time log of those decisions and associated actions. The log will report the status of those decisions and their impact on the project objectives. One of the proven project management processes used to manage decisions is what is known as “Issue Management”.

Accordingly, for project owners who are serious about discouraging fraud on their projects, there should be a commitment from top for this to happen. This needs to be translated to a clear policy on “Zero-Tolerance” when it comes to project fraud as well as have the right project organization setup and project management procedures that will enforce the implementation of this policy. This should be coupled with an integrated project management information system that will help in promoting transparency, governance and real-time single version of the truth reporting and visualization of the projects performance.

About the Authorfounder

Bassam Samman, PMP, PSP, EVP, GPM is a Senior Project Management Consultant with 40-year service record providing project management, project controls services and project management information system to over than 200 projects with a total value in excess of US $100 Billion. Those projects included Commercial, Residential, Education and Healthcare Buildings and Infrastructure, Entertainment, Hospitality and Shopping Malls, Oil and Gas Plants and Refineries, Telecommunication and Information Technology projects. He is thoroughly experienced in complete project management including project management control systems, computerized project control software, claims analysis/prevention, risk analysis/management (contingency planning), design, supervision, training and business development.

Bassam is a frequent speaker in topics relating to Project Management, Strategic Project Management and Project Management Personal Skills. Over the past 40 years he has lectured at more than 350 events and courses at different locations in the Middle East, North Africa, Europe and South America. He has written more than 300 articles on project management and project management information systems that were featured in international and regional magazines and newspapers. He is a co-founder of the Project Management Institute- Arabian Gulf Chapter (PMI-AGC) and has served on its board of directors for more than 6 years. He is a certified Project Management Professional (PMP) from the Project Management Institute (PMI), a certified Planning and Scheduling Professional (PSP) and Earned Value Professional (EVP) from the American Association of Cost Engineers (AACE) and Green Project Management (GPM).

Bassam holds a Masters in Engineering Administration (Construction Management) with Faculty Commendation, George Washington University, Washington, D.C., USA, Bachelor in Civil Engineering – Kuwait University, Kuwait and has attended many executive management programs at Harvard Business School, Boston, USA and London Business School, London, UK.


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