Protecting Yourself from Contractor Fraud

Protecting Yourself from Contractor Fraud

Contractor fraud is a serious issue that can have devastating consequences for homeowners and property owners. While most contractors are honest and reputable, there are unfortunately a few bad actors who engage in fraudulent practices, leaving their clients with subpar workmanship, financial losses, and legal headaches. 

What Is Contractor Fraud?

Contractor fraud refers to illegal business practices committed by individual contractors or contracting firms hired to renovate, repair, or build residential or commercial properties. These fraudulent practices can occur at any stage of a construction project and may involve various parties, including contractors, subcontractors, and suppliers.

Common Types of Contractor Fraud

• Billing for work not done or materials not delivered: This type of fraud involves a contractor charging a client for services that were never performed or materials that were never delivered to the project site. For example, a contractor may submit invoices for hours worked by nonexistent employees or claim reimbursement for materials that were never purchased or used in the project. This deceptive practice results in financial losses for the client and undermines the integrity of the contractor-client relationship.

Typically, we see this kind of fraud in cost-plus contracts in two different forms. We see unscrupulous contractors charging for time for workers who were not actually working on site, or inflating their hours. Review your contract with your contractor carefully for what they are allowed to charge you: unless your contract specifies that you are to be paying for worker’s travel to site or lunch breaks, your contractor cannot charge you for them

The other form of fraud we see with respect to materials is where a contractor alleges certain materials were purchased for a certain price but does not provide receipts. We have noticed that contractors sometimes bill clients for materials they bring over from another job, which have already been paid for by the owner of that other job.  If the materials are used, the contractor is not entitled to charge you full price for them. And if you paid for the materials, the contractor is not permitted to take those materials off site for use on another job (unless your contract says so). 

Again, these are very common frauds committed by contractors and the only way to prevent them is to closely monitor your contractor.

• Substituting cheaper materials for those specified in the contract: In this scenario, a contractor agrees to use specific materials of a certain quality or grade as outlined in the contract but then substitutes them with inferior or cheaper alternatives without the client’s knowledge or consent. This allows the contractor to cut costs and increase their profit margins while delivering substandard workmanship that may compromise the structural integrity or longevity of the project. This risk arises most often in fixed price contracts where the contractor has an incentive to reduce his costs, especially where he underbid the job. The best way to avoid this risk is by ensuring that all of your specifications are clearly set out in your contract. It is a laborious process to detail all the minutiae of a building design, but your efforts will be worth it if they help you avoid the stress and cost of a dispute with your contractor.
  
  
• Inflating invoices beyond actual costs: Contractors engaging in this form of fraud intentionally inflate the invoices submitted to the client, charging higher prices for labor, materials, or other project-related expenses than what was actually incurred. This deceitful practice allows the contractor to unlawfully extract more money from the client, often without providing any additional value or justification for the inflated costs.
  
  
• Using forged documents such as false invoices and insurance certificates: Fraudulent contractors may resort to forging documents such as invoices, purchase orders, or insurance certificates to deceive clients and conceal their illicit activities. For example, they may fabricate invoices from suppliers or subcontractors to justify inflated charges or provide false insurance certificates to falsely demonstrate compliance with legal or contractual requirements. Such forged documents can mislead clients into believing that the contractor is operating legitimately when, in fact, they are engaging in fraudulent practices.
  
  
• Failing to obtain necessary permits for the project: Contractors are typically required to obtain permits from local authorities before commencing construction or renovation projects to ensure compliance with building codes and regulations. However, some unscrupulous contractors may attempt to bypass this requirement to avoid scrutiny or expedite the project timeline. By failing to obtain the necessary permits, these contractors not only violate legal obligations but also expose their clients to potential safety hazards, regulatory fines, and legal liabilities.
  
  

How to Protect Yourself from Contractor Fraud

1. Research and gather information: Before hiring a contractor, research their reputation, check for complaints or negative reviews on websites like the Better Business Bureau or Google, and verify their credentials, licenses, and insurance.
   
   
2. Ask for references: Request a list of local references from the contractor and follow up with them to inquire about their experiences.
   
   
3. Obtain multiple quotes: Shop around and get estimates from multiple contractors to compare prices and ensure you’re getting a fair deal.
   
   
4. Get it in writing: Always insist on a written contract that includes detailed descriptions of the work, timelines, payment arrangements, and dispute resolution procedures. Detail everything in the contract and leave nothing up to the contractor’s discretion.
   
   
5. Verify licenses and insurance: Confirm that the contractor has the necessary licenses and insurance coverage to work in your area and protect yourself from liability.
   
   
6. Confirm building permits: Ensure that the contractor obtains the required permits for the project and include a clause in the contract stipulating that final inspections must be completed before final payment is made.
   
   
7. Think about future service issues: Consider warranty coverage and how service issues will be addressed after the project is completed.
   
   
8. Arrange a payment schedule: Avoid making full payments upfront and stagger payments according to project milestones or completion stages.
   
   
9. Always stay ahead of payments to your contractor: Make sure you are never paying more money to the contractor than the work is worth. Don’t pay deposits to the contractor unless you can verify where the money is going. Use a quantity surveyor or engineer to ensure you are not paying more than the work is worth.
   
   
10. Get a receipt: Obtain a receipt marked “Paid in Full” once the project is completed and you’ve made the final payment.
    
    

What Can You Do If You Have Been Scammed by a Contractor?

If you believe you have been the victim of contractor fraud, it’s essential to take action promptly to protect your rights and seek recourse. Consider the following steps:

1. Document everything: Keep detailed records of all communications, contracts, invoices, and receipts related to the project.
   
   
2. Contact the authorities: Report the fraudulent activity to local law enforcement agencies or consumer protection authorities.
   
   
3. Seek legal advice: Consult with a qualified construction law attorney to explore your legal options and determine the best course of action.
   
   
4. Pursue legal remedies: Depending on the circumstances, you may be able to pursue legal action against the contractor to recover damages and hold them accountable for their fraudulent practices.

Contractor fraud is a serious problem that can have significant financial and legal consequences for unsuspecting homeowners and property owners. By understanding the common techniques used by fraudulent contractors and taking proactive measures to protect yourself, you can minimize the risk of falling victim to these scams. If you believe you have been scammed by a contractor, don’t hesitate to seek legal advice and take appropriate action to protect your rights. Contact the expert team of construction lawyers at ATAC LAW, we’re here to help you navigate the complexities of construction law and pursue justice in cases of contractor fraud.