If yours is like most construction companies today, your profit margins are thinner than usual. To protect the bottom line, it’s critical to implement solid internal controls to minimize fraud, error and waste.

Fraud is a serious problem in the construction industry. In the 2010 Report to the Nations on Occupational Fraud and Abuse, a survey conducted by the Association of Certified Fraud Examiners, construction ranked ninth among all industries in terms of both frequency of fraud and median loss ($200,000).

One of the most common schemes today is also one of the simplest: check fraud. It’s relatively easy to create a forged or counterfeit check with nothing more than a computer, scanner and printer. Fortunately, there are simple solutions to this problem.

Positive pay

Positive pay is one of the most straightforward — and effective — safeguards against check fraud. With each check run, you transmit an electronic file to your bank with a list of check numbers, account numbers, dates and amounts. Bank personnel review checks as they come in. And, most important, they won’t pay a check that doesn’t match the list without your approval.

For added protection, many banks allow you to set up special rules. For example, you might reserve the right to approve checks that exceed a certain amount or have been outstanding for a specified period of time.

If you don’t have time to put together a list of checks each month, find out whether your bank offers “reverse positive pay.” Under this approach, the bank sends you information about checks as they come in, and you approve payments on a check-by-check basis.

Payroll Card

Another way to minimize check fraud is to reduce your reliance on paper checks. Many construction companies use direct deposits for payroll. If you have employees who are “unbanked” — that is, they have no bank account — you might consider using “payroll cards.” Employees can use these cards to withdraw cash from ATMs or, in some cases, as a debit card.

Eliminating paper checks not only reduces opportunities for check fraud, but also decreases your administrative costs. To prevent unauthorized payments, use separate bank accounts for electronic and paper-based payments.

Focus on Prevention

The best strategy for combating fraud is to be proactive. In some cases, your bank may ultimately be liable for unauthorized payments. But a better idea is to work with your bank to prevent check fraud from draining your account in the first place.