How to Recognize Combat Construction Fraud

Construction fraud – a shockingly common occurrence among contracting firms of all shapes and sizes. Just in 2016, 70% of surveyed construction companies reported at least one incident of fraud.

Whether the fraud occurs in the owner to contractor relationship or in the contractor to subcontractor relationship, fraud causes crippling consequences for the victim(s).

If you have just earned your contractor license, or are in the process of earning it now, you are especially vulnerable to incidence of fraud.

Don’t let yourself be a target. Look for the following signs to recognize construction fraud and arm yourself with knowledge on how to combat it.

5 Signs of Construction Fraud

Unfortunately, construction fraud is all too common and while some perpetrators are successfully caught and punished, not all of them are stopped.

To make sure you don’t get tangled up in a fraud situation, either as the subcontractor or contractor, or as the owner hiring the workers, look out for these following signs of fraud:

1. Beware of the low bid: if a contractor of subcontractor provides you with a low bid that seems too good to be true, it probably is. They may plan to add on lots of “unexpected” additions as you go, have hidden fees, or may plan to not actually do the work in the first place.

This is why it is good to get multiple bids so that you can compare and more easily identify suspicious bids.

2. Beware of the unlicensed/uninsured contractor or subcontractor: while yes, there are workers who are incredibly skilled that may not have the license to go with it, but a contractor license and insurance coverage prove a level of legitimacy and reliability. This is especially important for someone who is new to the business and doesn’t have references for you to check.

Furthermore, a lack of insurance coverage could leave the property owner at risk should injury or accident occur, which could be the actual intent of a fraudster. It is important you are confident in who you hire.

3. Beware of no contract or incomplete contracts: a lack of a professional contract, or a contract that has ambiguous languages or blank portions is an easy method to commit fraud. An incomplete contract can function like a blank check – the fraudulent individual can complete it after you have signed it and make it appear that you have agreed to a price or conditions that you did not.

4. Beware of unclear/falsified payment applications: if a contractor or subcontractor brings you an ambiguous payment application, one that you cannot clearly match with a work order or does not fit the scope of the project, hold off.

Many fraudsters, knowing that firm owners or customers may be too busy or too eager to get work complete, will slip in ambiguous payment applications for seemingly real vendors, but they end up being the actual receiver. Or they can be charging for material or equipment they will use on another project other than yours.

5. Beware of poorer quality materials: many fraudulent contractors and subcontractors will accept your payment for top quality materials, purchase poorer quality materials, and keep the remaining cash. If you see materials of questionable quality, don’t hesitate to investigate.

5 Ways to Combat Construction Fraud

While the above and more practices are shamefully common, there are some very basic steps you can take to protect yourself and your business from being victimized by them. Following are 5 steps you can take:

1. Require references and proof of qualifications: don’t hire employees, contractors, or subcontractors without some sort of proof of their qualifications, preferably including references. There are too many individuals out there looking to scam construction and contracting companies.

At best, their inexperience and underqualification could lead to an honest mistake on your job site that you are still held responsible for. At worst, they could do a lot of deliberate damage.
2. Request receipts for items a contractor of sub-contractor is billing you for: don’t just pay a payment application to move things along. Asked for itemized payment applications and ask for receipts if you are paying a contractor or subcontractor for materials. It is your right to ensure that what they are charging you is accurate.
3. Make sure payment apps match work orders: check payment applications and make sure they match with work orders. If you get an ambiguous payment request, you have a right to clarify it and ensure it is legitimate. It could be a false request, and someone could be trying to get free money from you.
4. Get third-party help on the books: make sure you have very trusted people working your books. It is best to have someone who won’t be on the field working with your customers, or a completely outside source, checking them to insure there are no inside deals going on and that there are no suspicious, unexplained charges.
5. Carefully review project budgets and spending: it will be tedious, but it could mean saving your business. Regularly check spending on a project with the budget planned for the project. Employees or contractors could be sneaking small overcharges, or charging for items not used on the project. The more you keep an eye on these activities, the more likely you will catch it should it occur.

Get the Professional Development You Need

Clearly, running a contracting business is a lot more than knowing your trade. There is a huge business end that has to be managed and will either sink your dream or make it fly. If you need help learning how to run your contracting business, then the Contractors Institute can help!

Find out today how you can learn more and develop a truly successful contracting company.