Contractor fraud occurs when an individual or firm engages in illegal activity designed to scam clients during the construction, renovation, or repair work they’ve been hired to complete. While there are numerous means by which contractor fraud can occur, most instances generally fall into one of three buckets—overcharging, lacking the appropriate permits, and bidding collusion.
To spot contractor fraud, you should thoroughly evaluate potential contractors and comparable work, ensure all agreements are stipulated in writing, and determine a payment schedule.
Examples of Contractor Fraud
Given contractor fraud’s broad definition, concrete examples can help provide a better understanding of what to look for. Instances may include:
Materials misrepresentation – A fraudulent contractor may overrepresent the cost of the project’s materials and necessary supplies. Similarly, substitute, lower-quality materials may be used instead of those listed.
Nonexistent work – Much like materials misrepresentation, a fraudster may claim to have completed work that did not occur. The most concerning examples would be during construction projects (or elements thereof) that are not visible once the work is finished (e.g., below ground, hidden by drywall). For instance, a contractor might claim to have removed more debris than was present on a job site.
Bid manipulation or collusion – Bid manipulation primarily occurs when a contractor severely underbids a project. Making a significantly lower offer secures the work, and then “unexpected complications” are inevitably discovered and used as an excuse to increase project costs. Though less common in residential construction, collusion occurs when multiple firms coordinate their bidding to ensure the outcome.
Missing permits – If a contractor does not have the appropriate licenses or permits for a given project, they aren’t operating lawfully. Should this be discovered, it could result in significant penalties and fines.
Signs of Contractor Fraud
Identifying instances of contractor fraud while a project is underway may be difficult, but there are clear indications to be mindful of before and during the construction. As the most commonly victimized, disadvantaged and elderly populations should be especially alert for such signs.
Before agreeing to a construction project, take note of whether the contractor:
Seeks you out with an offer
Severely underbids the project
Cannot provide professional references or examples of past work
Attempts to pressure you into committing
- Doesn’t provide financial transparency, such as:
Unclear overall costs
Requests upfront payment
Offers to connect you with third-party financing
Doesn’t provide their licenses
Attempts to place permit responsibilities on you
Identifying Contractor Fraud During a Project
The most common instances of contractor fraud that occur during a project typically result from “unexpected complications.”
Fraudulent contractors will use these illegitimate opportunities to gain approval for work change orders that raise costs. If your contractor repeatedly presents you with change orders, especially when not in writing, they may be committing fraud.
Reporting Contractor Fraud
Contractor fraud is a serious issue because of the risks posed to clients, their associates, other contractors, and the general public. Aside from the potential of being scammed for substandard construction work, contractor fraud may result in unsafe environments and structures that pose significant health and safety risks. Further, any related injuries pose severe insurance liabilities.
If you suspect you’re the victim of contractor fraud, contact legal representation. If you’ve confirmed contractor fraud, contact your local authorities. Additionally, government offices may provide reporting hotlines or web portals, such as State Attorney Generals or Labor and Industry Departments.
Contractor Integrity with MFS Construction
At MFS Construction, we consider integrity as one of our core values. This starts with clear and transparent client communication and extends to all aspects of project assessment and completion.
Contact us today to learn more about our inventive strategies and innovative solutions provided to clients within the Tri-State area and Puerto Rico.
1 Office of Inspector General, US Department of Transportation. Common Fraud Schemes. https://www.oig.dot.gov/investigations/common-fraud-schemes
2 Investopedia. Contractor Fraud. https://www.investopedia.com/terms/c/contractor-fraud.asp