Manage fraud risks in data center construction

Five risks for fraud or cost overruns

Data center construction can experience the following risks either through fraud and compliance failures, or as cost overruns, schedule delays, tax credit exposure, contractor failures and unexpected budget variances.

1. Procurement fraud and vendor manipulation: How speed defeats vendor diligence

When owners need to break ground in months rather than quarters, prequalification windows collapse, second-source bids are waived and beneficial-ownership reviews are deferred. The same controls that worked for three projects per year do not survive at thirty. Common risk areas include:

• Bid steering
• Undisclosed related-party relationships
• Vendor kickbacks
• Inflated pricing
• Circumvention of procurement thresholds
• Fictitious vendors or shell entities

When project teams prioritize speed over diligence, procurement decisions can create significant downstream exposure.

2. Change order manipulation: When CO volume overwhelms surface-level reviews

On high-velocity projects, change-order volume routinely runs three to five times historical baselines. At that volume, owners’ reviewers cannot perform substantive testing on every change and increasingly default to reasonableness checks, creating cover for hidden markups, scope shifts between cost codes and duplicate billings passing through undetected. Potential issues include:

• Unsupported labor or material costs
• Hidden markups
• Duplicate billings
• Scope shifting between contracts
• Delayed disclosure of overruns

Without disciplined change management, costs can escalate long before leadership recognizes the magnitude of the issue.

3. Contractor collusion and bid rigging: How capacity scarcity breeds coordination

Capacity-constrained markets give a small number of qualified bidders disproportionate pricing power and an information advantage. The fewer the credible bidders for transformer packages, MEP scopes or specialized civil works, the easier it becomes for those bidders to share signals, intentionally or not. Examples include:

• Bid suppression
• Market allocation
• Coordinated pricing
• Sharing of confidential procurement information

While these arrangements can be difficult to detect, they can significantly increase project costs and create substantial legal exposure.

4. Construction billing fraud: Where contractor backlog pressure meets owner blind spots

Contractors carrying record backlogs with compressed margins face increased financial incentive to accelerate revenue recognition and front-load schedules of values. Without owner-side analytics that test billings against physical progress and supporting documentation, the gap is invisible until closeout, when leverage is gone. Common schemes include:

• Inflated quantities
• Duplicate invoices
• Front-loaded schedules of values
• Billing for incomplete work
• Equipment overcharges
• Cost transfers between projects

As contractors manage larger backlogs and tighter margins, financial pressures can increase incentives for aggressive billing practices.

5. Labor compliance and tax credit risk: How speed to operational erodes documentation

Projects pursuing the IRA's enhanced credits must meet prevailing wage and apprenticeship (PWA) requirements throughout the construction period, but the sprint to energize often causes a slip in weekly certified payroll review, apprentice ratio tracking and wage-determination updates. The financial consequence is asymmetric: A small documentation gap can imperil the entire enhanced credit. Risk areas include:

• Worker misclassification
• Inaccurate payroll reporting
• Apprentice utilization deficiencies
• Incorrect wage determinations
• Weak subcontractor oversight
• Inadequate documentation

For many projects, the financial consequences of noncompliance may not emerge until years after construction is complete, when remediation options are limited and costs are significantly higher.

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Early warning signs

Fraud and compliance failures rarely appear without warning. Organizations often encounter worrisome operational indicators such as growing budget variances, escalating change orders, contractor performance issues, procurement disputes or increasing cash flow pressure.

While these issues do not necessarily indicate misconduct, they can suggest that project complexity is beginning to exceed existing oversight capabilities.

Several warning signs consistently appear in projects that later experience significant financial, compliance or fraud-related challenges:

• Change-order growth significantly exceeding physical progress
• Frequent revisions to cost-to-complete forecasts
• Repeated requests for accelerated payment terms
• Significant subcontractor turnover
• Procurement activity occurring outside established controls
• Declining labor productivity despite increased staffing
• Incomplete support for labor, equipment or subcontractor billings
• Resistance to audits or documentation requests

In one engagement, a critical subcontractor became insolvent during construction, resulting in substantial schedule delays and cost overruns. More robust financial diligence during procurement likely would have identified concerns regarding the subcontractor's ability to perform.

In another matter involving a large-scale data center project, a contractor manipulated billing and change-order processes to conceal cost overruns. The issue remained undetected because oversight efforts focused primarily on schedule performance rather than transactional testing and supporting documentation.

The common thread was not necessarily fraud. It was inadequate governance relative to the scale and complexity of the projects being delivered.

Strengthen cost controls

The organizations that emerge strongest from this cycle will not necessarily be those that build the most projects. They will be those that scale governance at the same pace they scale construction.

Several actions can materially reduce exposure.

Strengthen procurement due diligence

Contractor and supplier evaluations should extend beyond price alone.

Key considerations include:

• Financial health
• Working capital and liquidity
• Bonding capacity
• Historical performance
• Compliance history
• Ability to support projected growth

A low bidder that cannot perform often becomes the most expensive contractor on the project.

Incorporate market constraints into planning

Budgets and schedules should reflect current market realities, including labor shortages, equipment lead times, escalation pressures, and contractor capacity constraints.

Many project challenges originate from assumptions that were unrealistic from the outset.

Implement continuous monitoring

Effective oversight should continue throughout project execution rather than occurring only at project milestones.

This often includes:

• Change-order analytics
• Billing reviews
• Procurement testing
• Contractor financial monitoring
• Labor compliance reviews
• Data-driven anomaly detection

Organizations that identify issues early typically have more options to correct them before they become disputes, investigations, or material losses.

Monitor prevailing wage and apprenticeship compliance throughout the project lifecycle

For projects pursuing federal tax incentives, compliance should not be treated as a year-end exercise.

Ongoing monitoring should evaluate:

• Worker classifications
• Payroll accuracy
• Apprentice utilization and ratios
• Wage determination applicability
• Subcontractor compliance
• Documentation completeness

Waiting until project completion to evaluate compliance often increases both remediation costs and financial exposure.

Deploy risk-based audits

Not every project requires the same level of scrutiny, but higher-risk projects should receive targeted reviews focused on procurement integrity, billing practices, labor compliance, tax incentive requirements, and regulatory obligations.

The objective is not additional bureaucracy. It is identifying issues early, before they become disputes, investigations, or project failures.

Invest early in scalable risk and project controls technology

Manual oversight does not scale. Owners building multi-project, multi-region portfolios should stand up shared technology infrastructure — integrated procurement, payment application, change order, and labor-compliance systems with embedded analytics — before portfolio complexity outpaces spreadsheet-based controls. Common capabilities include:

• A single source of truth for vendor master data and prequalification status
• Automated extraction and normalization of payment application and change-order data across contractors
• Continuous anomaly detection across cost, schedule, and labor data
• Centralized PWA documentation repositories with audit trails and exception flagging
• Portfolio-level dashboards that aggregate exceptions across projects for governance committees

Organizations that retrofit these capabilities after problems emerge typically pay a multiple of the cost of building them at portfolio launch.

The bottom line for owners and investors

The data center and energy construction boom represents one of the most significant opportunities the industry has seen in a generation.

But periods of extraordinary growth have historically exposed weaknesses that remain hidden during normal market conditions.

For owners, developers, contractors, and investors, the challenge is not simply delivering projects faster. It is ensuring that governance, oversight and accountability evolve alongside growth.

Organizations that succeed over the next decade will be distinguished not only by what they build, but by how effectively they manage risk while building it.