• Dave Strang

How to Avoid Construction Fraud and Disputes

Rightly or wrongly, home contractors have been given a bad rap. While it’s unfair and untrue to paint the entire industry with a wide brush, sadly, fraud does happen. Here’s what you need to know about construction fraud and disputes and how to protect yourself.

What is construction fraud?

Home construction fraud occurs when contractors or homeowners act illegally and unethically. This type of fraud also occurs when homeowners pay for work not completed or not completed to a satisfactory level, or when materials are paid for but not received. This type of fraud can occur at any stage of a home renovation project.

Homeowners aren’t the only ones affected by construction fraud. Contractors can also be on the receiving end. When you’re working on larger home renovation projects, especially larger ones, it’s important to protect yourself and your reputation at every stage of the process.

Types of construction fraud

There are different types of construction fraud. Here are some common types to watch out for:

1. Falsifying invoices

This is the most common type of fraud in the industry. It can occur when the costs of materials or labour are inflated to boost margins. It can also occur when subcontractors bill for underperformed work or have an apprentice complete the work but charge for a fully qualified tradesperson.

2. Bid-rigging

This type of fraud is something home contractors who solicit bids from subcontractors should be aware of. Bid-rigging occurs when there’s collusion among prospective subcontractors. Another spin on big-rigging is bid rotation, where competitors agree to take turns on winning a project by submitting the best bid.

3. Materials fraud

Materials fraud can include substituting lower-quality materials for high-end counterparts, billing for materials or tools used for other projects, billing for materials that were never delivered, or having materials or tools stolen by other contractors.

Why do clients refuse to pay?

Contractors are susceptible to construction fraud when clients refuse to pay or make a payment with fraudulent cheques. Dryden Pauls, President of Blackburne Inc., says one of the reasons clients refuse to pay is because the contractor doesn’t set clear boundaries at the beginning of the project on securing a deposit and setting milestones. With no set boundaries, it becomes a dangerous place to be in. Other clients might feel they have a right to take advantage of home contractors if they feel the work isn’t what was agreed to or don’t like how a job looks once it’s completed.

How to protect yourself as a contractor

Here are some steps you can take to protect yourself and your business from construction fraud:

1. Properly prepare client quotes

Taking the time to properly prepare a quote for each client will help ensure you receive payment for the work you’ve done. By outlining the full scope of work and including a payment schedule, including initial deposit and work milestones, you set out your expectations to the client and, in turn, help establish trust. The more detailed your quote is, the harder it is to dispute.

2. Document scope changes

When it comes to home renovation projects, unexpected problems can show up once the work begins, and scope changes become necessary. Your clients may already be wary of “scope creep,” so it’s important to document changes once they arise. Let the homeowner know by text and follow up with an amended quote. Ask clients to sign off in writing agreeing to the changes – that way; you’re protecting yourself.

3. Screen subcontractors

Before you hire a subcontractor or contract work out to another company, conduct a background check. Start with a simple internet search and look for things such as lawsuits, liens, and legal judgments. If you’ve never worked with a particular sub-contractor before, ask for their business license number and proof of insurance.

How to protect yourself as a sub-trade

What if you’re a sub-trade working for a general home contractor, how do you protect yourself from fraud?

Skip the “gentleman’s handshake” and clarify how much you’ll be paid – and when – in writing before working on a home renovation project. It’s also important to establish how you’ll be paid. Renoshield is an easy mobile payment app designed to protect contractors and sub-contractors. It’s backed by RBC, so you know your money will be safe. After all, it’s important you feel good about the contractor you’re working for.

As outlined above, if you’re a subcontractor, it’s equally important to do your diligence and screen the contractor before agreeing to do the work. In addition to a quick Google search, ask for references, then follow up.

How to prevent deposit theft

Unfortunately, it’s not uncommon for clients to have their deposits stolen or hear stories of others who have been stung by fly-by-night operators. Put yourself in the homeowners’ position: before the work even begins, you’re handing over a substantial amount of cash to someone you’ve may have never worked with before. Renovations are stressful enough.

As a contractor, you can help put homeowners’ minds at ease by explaining ahead of time why a deposit is necessary and how that money is spent before the work even begins. Another way is to offer a secure payment method, such as Renoshield, so homeowners aren’t placed in a position of paying with cash or cheque (which also protects you!)

Help protect your business against construction fraud by using Renoshield – a payments app designed exclusively for the construction industry in Canada. Sign up for Renoshield.

This article offers general information only and is not intended as legal, financial or other professional advice. A professional advisor should be consulted regarding your specific situation. While the information presented is believed to be factual and current, its accuracy is not guaranteed and it should not be regarded as a complete analysis of the subjects discussed. All expressions of opinion reflect the judgment of the author(s) as of the date of publication and are subject to change. No endorsement of any third parties or their advice, opinions, information, products or services is expressly given or implied by Royal Bank of Canada or its affiliates.