In 2006, occupational fraud cost U.S. businesses about $600
billion, or roughly $4,500 per employee, according to the
Association of Certified Fraud Examiners. Building contractors
rank second in the list of targets, after retail stores. Most
builders already know how field employees can skim money
(padding their hours, for instance, or fueling their personal
vehicles with the company credit card), but few are aware of
the many ways that a dishonest bookkeeper can rip them
Small contractors leave themselves open to fraud by not paying
attention to the books. This isn't surprising: People become
contractors because they like doing construction; they're often
so ecstatic when they find someone reliable to track the
numbers that they walk away from that part of the business.
They put their complete faith and trust in the bookkeeper, and
assume that person is watching their back. But while most
bookkeepers are honest, there are clearly enough who aren't to
make fraud a serious problem — and spotting the bad ones
is not always easy.
To protect yourself, make sure your software has an audit
trail. This feature keeps a record of all entries and changes,
and the users who made them.
Case in Point
For instance, I once worked with a company that never seemed to
have enough cash. I dug into the books and found that the bank
statements had not been reconciled in quite a while. When I
presented this problem to the bookkeeper, she started coming in
at 6 a.m. to do the reconciliations. But she was never able to
balance them, and eventually made a teary confession: She had
been stealing money for three years, but she didn't think it
was more than $100,000. She was wrong — it was actually
This bookkeeper was married to the owner's best friend, and was
the last person the owner would suspect of cheating the
That particular scheme was an unusually long-lived one; a
typical case of fraud takes 18 months to solve. But because
fraud usually announces itself only when the thief gets greedy,
someone who's content with stealing small amounts can hide it
for a long time.
Reading the Signals
In one of the most common schemes, the person keeping the books
sends an invoice to the client, then deletes the
accounts-receivable entry and pockets the cash when the check
comes in. This is often the reason a small company doesn't have
as much money in the bank as its work volume says it
Fraud tends to first come to light as unexplained bookkeeping
anomalies. One of my clients received three job-cost reports on
the same job: one with $20,000 in plumbing, the next with no
plumbing costs, and the third with $30,000 in plumbing. That
kind of anomaly could be a sign of incompetence, or it could
signal fraud in process. Either way, something is wrong and
it's absolutely critical to find out what.
The best way to protect yourself is with an early-warning
system. Your software should have an audit-trail feature and
everyone in your company should be accountable to someone. The
audit trail (see example, previous page) keeps a record of
every entry and every change, even the smallest ones. If a
check never makes it to the bank, you can confirm that an
invoice actually went out and see if someone tried to delete
Everyone who has access to the books should have a unique user
name and password, so that the audit trail can keep track of
who made each change. QuickBooks 2005 (and older) lets you turn
off the audit trail, so if you're using an older version I
recommend upgrading to a new one.
Other steps you should take to protect yourself against fraud
include the following:
• Have a certified tax professional review your financials
on a regular basis, in June and again in December, before the
end of your financial year. This sends a message to your
bookkeeper that someone else is watching the books — even
if that person isn't necessarily looking for fraud. (And, as a
side benefit, you'll have someone who can also help you make
wise business decisions.)
• Segregate duties. The person who cuts the checks
shouldn't be the same person who reconciles the bank
statements, even in the smallest office.
• Review your bank statement before the bookkeeper gets
it. Make sure the check amounts make sense to you. You may want
to look at your check register, too, and verify the payee of
any check that exceeds a specific amount.
• Review other financial records on a regular basis.
If all of this seems overwhelming, hire an internal controller
or simply have an outside professional come in to check the
books periodically. One company hired me to do just the bank
reconciliation. Could the controller have done the bank
reconciliation? Absolutely. But I came in and asked a lot of
questions, and everyone knew that someone else was reviewing
The point is that you need to have controls in place —
and you need to trust those controls, not the people. This
doesn't signal a lack of faith; it's simply good business
practice. Everyone needs to be accountable to someone.
Leslie Shiner is a financial and
management consultant for builders. Her office is in Mill
Recognizing Client Types
by David Getts
If you've been in business for a while, you've probably had
clients who left you thinking, "Why am I working with this
person? I should have known better!"
After years of trial and error, I've learned how much better it
is to ask the questions before taking on a project. Now I ask
myself "Is this a person I want to work with?" when I meet with
prospects — a pre-emptive strike, so to speak, rather
than a post-calamity reaction.
Then, once I'm working with clients, I try to tailor my
approach to their personality. The key to this approach, of
course, is being able to recognize various types of clients and
understanding how to deal with them.
Over time I've come to identify four personality types, each of
which tends to behave in fairly predictable ways during
projects. I call them The Grinder, The Retentive (as in
anal-retentive), Miss Lonelyhearts, and Joe Six-Pack.
The Grinder is easily recognized — he's a control freak.
The first time you meet him he'll lay out his demands. I had
one Grinder at a meeting pull out a three-ring binder with
tabbed sections of expectations for each trade. Grinders want
total control of the project. They're often wealthy or
successful people accustomed to getting their way.
The best way to deal with Grinders is to confront them
immediately, because if you give them the upper hand you'll
never get it back. Grinders will fight you on design, cost,
material choices, construction details, and anything else you
allow them to. They view every situation as a competitive
challenge; if you back down they won't respect you.
If you suspect that a prospect has strong Grinder tendencies,
you have two choices: Either politely decline to work for them,
or make it very clear that as the contractor, you'll be in
charge of the project. If they act up while the job is in
progress, you'll need to confront them in a brutally honest
One Grinder client of mine tried to take control of the job
after signing a large change order. His feeling was that since
he was paying me so much to do "blue-collar work" I would need
help managing the subcontractors. I immediately confronted him
on this and explained that both the subs and the project as a
whole were my responsibility (as outlined in the contract). If
he had a problem with this, he needed to find another
contractor to finish the job. Surprised by my candor, he let go
of the reins and began to treat me like the professional that I
am. The confrontation helped our relationship and he has since
had me back to do several more projects.
Retentives are perfectionists — not just about
craftsmanship but about the whole process of building.
Obviously there's nothing wrong with doing high-quality work
and having a good building process, but Retentives are
concerned about these things in a rather neurotic way. This
behavior reveals itself in two forms: obsession with peripheral
issues and absorption with job specifications and
Many Retentives have a hard time separating their personal
habits and routines from the concerns of the job. They don't
leave the front door open and can't see why you should either
— even if you're stocking 12-foot sheets of drywall. They
don't wear shoes indoors and may request that you follow suit
— even though it's a construction site and the floor has
been protected. Sometimes the issue involves working hours:
They arrive at work the same time every day and can't accept
the fact that you or your subs might need to stop by the supply
house or visit another job site.
It's one thing if customers make these requests while you're
bidding the work — but what if they spring them on you
after you've begun the project? Your best bet is to prepare
clients in advance so they know just what to expect. Tell them
how you plan to do the job and explain that even though you'll
do your best to accommodate their routine, some disruptions are
simply part of the construction process.
Other Retentives become so absorbed in the details of the job
they want to know the whys and hows of everything. I had one
client who did so much research she would instruct the subs and
me about the best way to install products. It wasn't so much a
matter of needing to be in control — she actually
couldn't sleep at night unless the product was installed
exactly the way the manufacturer said.
Clients like that can drive you crazy — but they can also
provide a service. I had such a client on a project where the
architect specified some brand-new products and various
conventional materials used in unconventional ways. Recognizing
my client's thirst for perfection, I asked her to research the
products and installations. She produced a ton of good
information and found a couple of local installations with
similar details for us to visit. We kept her so busy
researching the unusual items she left us alone while we
handled the routine aspects of the project.
Miss Lonelyhearts is the agreeable client — so agreeable
you often fail to charge enough and maybe even throw things in
for free. These personality types can be nice, yet so needy you
find yourself wanting to take care of them. This has nothing to
do with whether they can afford your services — some
clients, even wealthy ones, are just magnets for unpaid
I had one client who was a socialite: wealthy, well-traveled,
and apparently living the kind of life most people can only
dream of. But beneath the faade, she was lonely and
starved for attention. She may not have been concerned about
price, but if you think that made her the answer to a
contractor's dreams, think again. In addition to not charging
enough, I found myself working on this client's honey-do list
(tasks I don't normally perform) just to please her. When all
was said and done, I spent a lot of time working for not much
I've been sucked into this dynamic of wanting to please Miss
type clients too many times. Some folks are just very good at
recognizing and exploiting their contractor's impulse to be
helpful. I have finally learned to recognize this client type,
to make sure that the relationship remains all business, and to
remember that I'm there to make a profit.
Joe Six-Pack is just an average guy who is interested in hiring
you to do a particular job. I like Joe because he's like many
tradesmen: He understands what it means to do hard physical
work and believes in paying a fair wage for it.
Joe can be a great person to work for, but sometimes he suffers
from an overly narrow view of the world. He works for wages and
may not appreciate your need as a businessperson to make a
profit. All too often, his idea of a fair wage is whatever he
earns per hour, and his idea of a fair price is whatever the
big-box store charges.
This is the kind of person who tells you, "I would do the job
myself if I had the time." I try to avoid clients who have that
attitude, because they typically expect to pay bottom dollar
and want to scrutinize every line of the contract and every
cost on the job. This is not someone you want to work for on a
Pay Attention, and Your Business Will Benefit
Many contractors focus too much on the type of job and not
enough on the type of client. In my experience, the client is
just as important as the job.
Remodeling a kitchen for a Grinder is much different from
remodeling a kitchen for Joe Six-Pack. And while most of us
would agree that framing an addition is totally different from
installing fine cabinets, the expectations for both projects
might be the same if you're working for a Retentive.
I tend to do more work for Grinders and Retentives than I do
for Joe Six-Pack and Miss Lonelyhearts types. In my case it's
simply a matter of economics: I'm able to make a greater profit
with those temperaments. But whoever I'm working for, I pay
close attention to the kind of people they are in order to
better manage my business.
David Getts owns David Getts Designer
Builder, Inc., a remodeling company in Seattle.