Are Your Profits Being Stolen?

Throughout my career as a restoration contractor, I have seen literally dozens of multimillion-dollar restoration companies come and go. Most didn’t close their doors by choice but were forced to because they could no longer afford to keep their doors open. One contributing factor that most of these companies suffered from was directly attributed to unscrupulous or dishonest employees.

Every year restoration businesses lose millions of dollars to embezzlement, payroll fraud, collusion, and other forms of employee related misdealings. The financial losses these types of crimes cause can be catastrophic if they aren’t recognized and stopped early on.

The scope of employee theft cannot be understated, and here are a few statistics that underscore the magnitude of this problem:

The Far Side

Although employee related crimes can be perpetrated in any number of ways, I wanted to share some of the most common ones that afflict the restoration industry. Here are a few:

time clock

Timecard Fraud: For employees paid by the hour, theft or misuse of labor time is a common form of theft and can be difficult to spot. This occurs when unscrupulous employees do the following:

  • They fill out timecards to show they worked longer hours than they did
  • They take long lunches or breaks
  • They run personal errands during work
  • They perform side work on the company clock
  • They falsely charge for overtime
  • They leave work early and charge for a full day

Oftentimes timecard fraud is committed by two or more employees who work together so they can cover for each other.  To reduce this, there are a number of solutions:

  • Put your employees on salary and offer incentives for jobs completed on time and under budget
  • Have a supervisor do periodic spot checks on jobs or have a foreman closely monitor suspect employees to see if they are being honest with their time.
  • Place vehicle tracking systems on work vehicles
  • Require periodic check-ins and job status checks
  • Rotate employees periodically so the same ones don’t always work together
  • Start outsourcing or subcontracting more work and rely less on employees

Material Theft: Most every job will have left over materials, which should be returned for credit or brought back to the shop to be used on other jobs. If you aren’t getting leftover materials returned, there is a good chance that they’re being used elsewhere by someone else. Another form of material theft is often perpetrated by project managers or superintendents.  Here is an example:

Joe is a superintendent for ABC Restoration and has a water damage repair job that requires 10 sheets of drywall, 4 boxes of drywall compound, and 10 gallons of paint. Joe orders 20 sheets of drywall, 8 boxes of drywall compound, and 20 gallons of paint he charges to the job, but has the material supplier deliver half of the material order to ABC’s job and the other half to Joe’s home. What the owners of ABC Restoration don’t know is that Joe also moonlights and the materials for Joe’s side jobs are being paid for by ABC.

Theft of Company Tools, Supplies, & Equipment: Unless you have a very comprehensive tool and equipment check out system and a diligent warehouse manager, you will likely lose tens of thousands of dollars every year just in lost tools, equipment, and company supplies. Things like air movers, hand tools, cordless drills, battery chargers,  drill bits and saw blades, paint supplies, etc. often disappear without a trace.

To avert this, a check out/check in system should be established to track who checked out a tool or piece of equipment, what job it is being used for, and when it was returned. If the item is not returned, set up a policy that employees will have the replacement value of non-returned items deducted from their next paycheck. This will help curb sticky fingers.

Company Gas Card Misuse: Here a dishonest employee may use the company gas card for personal vehicle use, to buy snacks, food, or cigarettes at the gas station. He or she may also use the company card to fill up friends or family members vehicles. Giving employees a gas allowance each week or requiring employees to provide itemized receipts can help eliminate this.

Company Credit Card Abuse: This is where an employee turns in receipts and expense reports for fictitious or fraudulent business expenses. One item that is extremely difficult to spot is when a sales or marketing employee purchases gift cards for clients, as giveaways for tradeshows, or uses petty cash to take clients to clubs or casinos. Here it is all-to-easy for an employee to simply pocket the card or cash. To alleviate this, limit how much you allow gift cards to be used or stop doing it altogether.

Reimbursement Fraud: This takes place when an employee makes purchases using cash and turns in a copy of the receipt for reimbursement. Once the employee gets reimbursed by the company, he or she can return the item to the store and get their cash back.   To stop this, don’t allow employees to purchase anything with cash over $20.00. Then make sure when they do turn in the receipt that it is the original and not a copy.

Vendor Collusion: This is probably the most common form of theft in the restoration industry and is typically committed by project managers or superintendents who run multiple jobs. Typically, this occurs when a project manager gets kickbacks from subcontractors in the form of cash or services to be applied to the project manager’s home or side jobs. A devious project manager will take the construction budget given to him and allow his subs to charge as much as they want as long as the job is still marginally profitable. If the sub takes too much and the job becomes a loser, he knows the owners or management staff will look deeper into the job to try and find out why it didn’t make money. Here are some tips to help avoid this from happening:

  • Watch your job costing and budgets like a hawk
  • Require more than one sub bid for every trade
  • Rotate subcontractors so the same sub doesn’t get all the work
  • Periodically spot check sub bids, especially large dollar contracts
  • Set profit minimum thresholds and offer profit sharing incentives for jobs that make great profit margins. If profit sharing is spread out to the project manager, superintendents, estimator, and salesperson, there will be a far greater level of accountability since everyone involved will have a stake in the game.
  • Do peer review of job budgets with the estimators and production staff
  • Hold the subcontractors legally accountable in your subcontractor agreements

woman and man at desk

Client Piracy: I left the worst one for last and this can wipe out a company faster than any of the previous issues mentioned. Client piracy is usually perpetrated by employees who make close relationships with adjusters, property managers, agents, or other key sources of work. Salespeople, estimators, and project managers are often the ones in the best position to steal clients and this often happens when a disgruntled employee wants to start his or her own restoration business or take business to a competitor for better compensation.

Here are a few tips to help prevent this from happening:

  • Select and vet your employees very carefully! Do extensive background checks and drug screening, get industry references, verify the information on resumes, and do your homework.
  • Set up compensation strategies to reward hard working salespeople, estimators, and project managers. Keep in mind that salespeople bring in the work, estimators get the dollars to do the work, and project managers make sure the work is profitable. Without each of them working together in harmony, you won’t have a business for very long.
  • Have more than one salesperson or estimator share accounts and relationships as much as possible. Business owners should also get acquainted with their key clients and build strong relationships with them.
  • Have a backup plan. You never want to let one person control all the important accounts or get into a position where they become indispensable.
  • Keep your ears open, watch what is posted on social media, and talk with your clients regularly. You would be surprised what you can find out about your own staff through the grapevine.
  • Meet with your sales, estimating, and project management staff weekly and listen carefully to what their needs, wants, and concerns are. Oftentimes restoration business owners overlook or don’t listen to what their key people are saying, which can lead to poor morale and losing staff.
  • Make it hard for your key people to want to leave. This can be in the form of bonuses or advancements for milestones reached or loss of benefits if they decide to leave. Having a strong employment contract can save your neck if one of your key people decides to go rogue.

exclamation point

Warning Signs: Although you may think you have hired perfect employees who would never do anything to hurt the company, sometimes life choices or circumstances can turn them into nightmares. If an employee exhibits any of the following traits, there may be trouble brewing:

  • Addictions to gambling, drug use, alcohol or pornography
  • Financial debt or personal bankruptcy
  • Divorce or infidelity
  • Delinquency making child support payments
  • Personality changes (aggressiveness, mood swings, rudeness, etc.)
  • Changes in appearance or hygiene
  • Signs that the employee is living beyond their means (buying expensive toys, cars, boats, etc.)
  • Repeatedly late for work or not showing up
  • Fraternizing with competitors
  • Unusually close association with vendors or customers

For more information on employee theft and fraud statistics, visit: https://www.jwsuretybonds.com/blog/employee-theft-statistics

Sean Scott

Sean Scott has more than four decades of experience in the restoration and construction industry and has published numerous books, papers and articles including Secrets of The Insurance Game and The Red Guide to Recovery – Resource Handbook for Disaster Survivors. If you have any questions, would like to inquire about training or would like to speak to Mr. Scott, feel free to contact him at 858-453-6767 or email info@championconstructioninc.com.

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