Contractor fraud on the rise: What you need to know

Contractors in the construction market make up a large portion of the overall employment statistics for the industry. There are more than 6 million employees who work in construction each year across an estimated 650,000 employers, many of which represent themselves as independent contractors. Without construction contractors, many residential and commercial projects would remain unfinished. However, not all contractors in the construction industry are created equal.

In a recent case brought in Washington, DC, an individual home improvement contractor was found guilty of defrauding customers and avoiding personal and business creditors through misleading statements in bankruptcy court. The case found that the contractor neither had the skills nor the intention to complete the projects he was paid to do, leaving homeowners at a significant financial loss. More and more of these cases are brought to light, even for contractors with the right licensing and bonding requirements in place. As contractor fraud continues to rise, it is important for homeowners to recognize the common types of fraud and warning signs.

Common types of fraud

Construction contractor fraud comes in many forms which makes it difficult to spot from the start. However, the most common types of fraud include the following:

• Fraudulent billing schemes – some contractors make up payments to suppliers and vendors on paper and pocket the funds, while others charge an excessive amount for materials or equipment.
• Theft – contractor theft can be costly and it is fairly common in the industry. Contractors can take materials and supplies paid for by the customer that are difficult to track down to recoup after the fact.
• Equipment use – another contractor fraud that takes place on many job sites is the use and abuse of equipment. Tools, construction equipment, and vehicles may all be used for personal gain instead of the job at hand, leading to higher costs over time.

Any combination of these common fraud types may be a challenge to see as a project progresses. This makes it difficult for homeowners and small businesses to know that they are being taken advantage of until after the work is complete. The worst types of fraud involve a contractor promising to complete a job but instead, taking the payment and never looking back. Individuals in need of a construction contractor can look to the possible warning signs below to help protect against fraud.

Warning signs

Construction contractors who ask for upfront payment, in full, should signal a red flag for homeowners and business owners. In many cases, receiving full payment for a new project gives little to no incentive for bad actors to come back and complete the job, and if they do, it may not be up to building standards. In addition to receiving up-front payments, contractors without the appropriate licensing through the state or city, or the right type of surety bond in place should not be hired for a project. Surety bonds are required for nearly all construction contractors, and the price paid for having this peace of mind in place is minimal for most. Contractors who are unwilling to provide these details should not be trusted.

Additionally, contractors who do not present the customer with a contract to sign before starting a new project may require more review. A contract helps protect both the customer and the contractor, and without one, there is no proof that a job was agreed upon. Finally, contractors who fail to provide references from satisfied customers or those who have little to no online presence or business location may not be trustworthy.

Protecting your investment

Homeowners and business owners can take certain steps to protect their investment in a construction contractor, starting with understanding common fraud types and the warning signs mentioned above. A contractor should be willing and able to provide documentation of licensing, bonding, and insurance, as well as references from past customers or online reviews. If these items are not readily available, check with the state or city’s licensing board to see if a contractor is listed. If he or she is nowhere to be found, it is possible there is no intention of completing the work requested.

Take care to select a contractor that checks the right boxes before asking for payment, and keep an eye on the progression of work as agreed upon in the contract. These small actions can make a significant difference in getting a construction job done correctly and in-budget.

Eric Weisbrot is the Chief Marketing Officer of JW Surety Bonds. With years of experience in the surety industry under several different roles within the company, he is also a contributing author to the surety bond blog.