Construction contractors are an integral part of both the residential and commercial construction industry, but fraud among contractors is on the rise. In a recent notable case in Washington DC, a home improvement contractor was found guilty of defrauding customers through a series of bad acts, including but not limited to taking payment from government programs when it was not warranted. The contractor operated his construction business under multiple names from 2008 through 2015, and during that time, positioned himself as a licensed home improvement, electrical and HVAC professional. It was found that the contractor not only was not licensed to do such work in the District, but that he negotiated contracts that he was unable to perform in any capacity.
This recent case highlights the rise of contractor fraud throughout the country, which sets the stage for a slew of unfortunate consequences. Construction contractors who operate legally experience negative ramifications when fraud cases run rampant, including a rise in surety bond costs, insurance requirements, and more stringent background checks and reference lists from potential customers. To help fight construction contractor fraud throughout the county, potential customers, both residential and commercial, can be on the lookout for the following red flags.
No Proof of State or Municipal Licenses
In each state, construction contractors are required by law to hold appropriate licenses to conduct business. The licensing process varies from state to state, and in some cases, from city to city, but legitimate contractors will have proof of licensing to show potential customers they are running a legal business. Always ask to see the license or take the time to look up the contractor's information in the state or city’s licensing system.
Lacking Bond or Insurance Certificates
In addition to being licensed in the state or city where work will be performed, construction contractors must also carry a surety bond, and in most instances, some degree of insurance, all meant to protect the customer from shoddy workmanship. A construction contractor bond guarantees that the owner of the job, the customer, has a right to make a claim against the contractor up to the dollar limit of the bond if work is not performed correctly or per the agreement. Insurance differs in that it protects against financial loss should a disaster occur on the job. Asking for proof of bonding and insurance before starting a project is a necessary step in reducing the potential for construction contractor fraud.
Requesting Up-Front Payments
A clear red flag signaling contractor fraud is the request for a significant up-front payment before work has started on a project. Most reputable contractors have a system in place to accept payment in line with specific milestones, which creates a foundation of trust between the contractor and the customer. Up-front payments in full often lead to the uncompleted projects or work that never actually gets started, leaving customers with a construction mess on their hands. In addition to avoiding up-front payments, customers should be wary of contractors who only accept cash payments. Paying in cash makes it difficult to track down the contractor should something go wrong, and there is no way to get reimbursed as there may be with credit or debit card transactions.
While not all contractors are up to no good when dealing with customers, there are increased numbers of fraudsters in the space. On average, construction fraud costs project owners $245,000 in losses, far more than in other industries. Protecting yourself from potential fraud starts with being aware that nefarious contractors do exist, and recognizing the red flags that may lead to a negative outcome on your next project.
If you have questions about this blog or other real estate and construction matters, the professionals in the GPP Real Estate and Construction Services Group are available to help. Contact us at 972-818-5300.
Note: This content is accurate as of the date published above and is subject to change. Please seek professional advice before acting on any matter contained in this article.