How to prevent construction fraud
Fact-checked with HomeInsurance.com
When dealing with the aftermath of a disaster or doing a home remodel, the last thing people should have to worry about is being taken advantage of. Those who have lost homes, personal property, and worst of all, loved ones, shouldn’t have to put up defenses when restoring their lives. Unfortunately, that’s exactly when most need to.
According to the Better Business Bureau (BBB), residential contractor fraud is the number one complaint by homeowners. Construction fraud is a growing crime, and if it’s something occurring often at ANY time, imagine how much it increases during disasters when lots of work needs to be done and when criminals know their targets are in need.
How to spot construction fraud
Construction scam artists are sneaky and often have hard-to-detect ways of cheating you out of money. Stay alert when dealing with contractors, use common sense, and be sure to take the time to read the fine print on any contract.
Here are a few signs of fraudulent contractor behavior:
- They want you to pay for a bid
- They don’t have a local address, phone number, or marked truck
- Their place of business is a hotel or other location for transients
- They ask for full payment up front
- They can’t give you a certificate of insurance or workers comp documents when asked
- Their bid is considerably lower than any others you’ve gathered
How to prevent construction fraud
Preventing construction fraud is possible if you take the proper care with your building project. Don’t settle on the first bid you receive and do some background research on your chosen contractor. Check with the BBB or get referrals from neighbors or others whom you trust. And be wary of fly-by-night contractors who show up at your door after a disaster offering a special price on the work.
If the work that’s being done will be paid by your homeowners insurance claim, keep your insurance adjuster in the loop as you gather bids and assign the work. They may be helpful in providing advice in the process, since they do this for a living.
Obtain several bids and written estimates
No matter who the contractor is or what estimate they give you, get several bids — at least two or three. Often a potential scam can be easily spotted just from a bid. Unfortunately, this is too often noticed after a scam.
The bids should list all repairs, exact costs for labor and supplies, details about the work, any guarantees or warranties, and a time frame for completion.
Watch out for low bids, often hidden behind “deals” for natural disasters, like “Hurricane Special” or “Tornado Deals,” that are limited time offers. Homeowners may think they should act fast before the deal ends or that it’s considerate of the contractor. Use extra caution if you see low bids. Fortunately, these are easier to identify if you get several.
Also, never pay for bids. Legit contractors don’t charge for bids — they know they’ll make money when hired. If you pay for bids, they could take your money and run, especially without contracts. There are too many legit contractors providing free bids just around the corner.
Contact the Better Business Bureau
The Better Business Bureau (BBB) exists to protect consumers, and it’s a resource you can utilize when you are contracting to have work done. The BBB can tell you if there are complaints registered for your potential contractor, and they have resources to help you determine if a contractor is on the level or a fraud.
Another good resource is Angie’s List, which offers a free limited membership. You’ll find tons of reviews from your neighbors and others in your town on local contractors and more.
Ask to see licenses and proof of insurance
Contractors are required to carry state and/or municipal licenses, and professional, legitimate companies will carry insurance to protect themselves. They should have contractors/small business liability insurance and workers compensation insurance if they have employees. Ask for these even when getting bids. Check the BBB for registered complaints and verify licenses numbers and insurance. Also ensure that your contractors are handling any necessary permits required for the work on your house.
Additionally, ask about sub-contractors. Some companies have employees while others use self-employed sub-contractors/workers. If non-employees or sub-contractors are used, ask for their licenses, information, and proof of insurance as well. They should carry their own and probably aren’t covered under the main contractor’s insurance. Sub-contractors could also make claims on your homeowners insurance if injured since they can’t make workers compensation claims — perhaps another part of a fraudster’s plan.
Use local and established contractors when possible
This is a great time to use consumer-driven review sites like Angie’s List. After natural disasters, contractors often show up from other states or “become” contractors for such opportunities. To watch out for those crooks, be careful if you see:
- Door-to-door contractors (local ones usually have offices with local numbers).
- Arriving in unmarked vehicles — especially with out-of-state plates, which you should always write down. Many fraudulent contractors will come from another state so they’re harder to track after taking your money, or are transient workers who — no surprise — keep moving around because they’re bad employees, untrained, unlicensed, or aren’t contractors at all.
Don’t sign anything you don’t understand
It’s easy to skip over the fine print when you sign a contract or other document, but don’t. Even if it takes extra time to read the entire document. If possible, hang onto it overnight and return it the next day. If you find language you don’t understand, ask about it.
One example is an Assignment of Claim (AOC) document, also referred to as an Assignment of Loss (AOL) or Assignment of Benefit (AOB). This is not a fraudulent document, but it indicates you are giving authority to the contractor to collect the claim check from your insurance company and negotiate on your behalf with them. If you trust your contractor, there’s no harm in it, but be wary of signing this much control to a contractor who is new to you.
Never hand over final payment until you’re sure the work is complete
You probably paid a portion of the final amount due at the beginning of the process, and maybe made an additional payment in the middle of construction if it was a large job. But the bulk of the payment should remain in your hands until the work is done to your satisfaction. Inspect it yourself whenever possible, or have someone who understands construction check it over.
Ensure that the contractor has paid his subcontractors and suppliers by checking any lien releases, so you won’t be holding the bag if he has shorted anyone. Insist on a certificate of completion, and check with your insurance adjuster that all paperwork has been properly completed. Finally, make sure your contractor hasn’t made off with leftover materials for his own use — you purchased them and they belong to you.
The takeaway: With vigilance and care, you can avoid construction fraud.
- After a disaster, con artists may try to scam you into doing sub-standard repairs
- Get several free bids from local, established contractors for the work
- Check potential contractors with organizations like the BBB and Angie’s List
- Insist on proper paperwork throughout the process
- Don’t sign off on payment until you’ve inspected the final work
The last thing you want to deal with after a disaster hits your home is a shifty contractor who takes your money but does sub-standard work. Don’t settle for the first person to show up on your doorstop offering cheap repairs. Look for a local company with solid credibility and trustworthy references. When you get several bids, don’t necessarily accept the lowball one. Do your homework, and you’ll find a contractor who will do quality work for a fair price.