Over the last several years, contractor fraud in the construction industry has increased significantly, leaving many homeowners and business owners at a steep financial loss. Contractors are an integral part of the construction business, but as more contractors go rogue and fail to perform the work they promised, reputable construction companies and individual contractors take the hit. In a recent case in Washington, D.C., a residential home improvement contractor was found guilty of making false statements in bankruptcy proceedings and taking undue funds from government programs as part of his contracting business. From 2008 through 2015, the contractor stole from several homeowners by lying about his credentials and skills, requiring many of them to find other solutions for their home improvement needs.
As contractor cases like this continue to make the news, it is imperative for legitimate, licensed and bonded contractor businesses who hire contractors as well as homeowners to recognize the, warning signs of fraudulent individuals. There are several ways fraud can take a toll financially, but those who hire contractors can pay close attention to the following in an effort to stop fraud in its tracks.
Licensing and Bonding Requirements
One of the most important steps in hiring a reputable contractor in construction is checking on the licensing and bonding credentials in place. Nearly all states require a contractor to hold a license, which requires an application and some proof of training or work history. In addition, a surety bond is also mandated by many states. Contractor surety bonds are an expense to the contractor, similar to insurance for a business, except that the surety company promises to pay up to the bond amount should the contractor fail to perform the work up to industry standards. These two critical pieces of information are a telltale sign that a contractor is, at a minimum, able to legally operate in the state where the project will be completed.
It is important to note, however, that simply because a contractor has a license and a bond it does not necessarily mean they will conduct themselves in the most professional manner. Those who hire contractors must also take the steps below to ensure they receive what they pay for without instances of fraud.
References and Work History
Another smart way to check the legitimacy of a contractor is to ask for references and previous work completed. When contractors are willing and able to provide past customer references, be sure to follow up by calling those customers to ask about their experience. In most cases, legitimate contractors offer up references they know will put in a good word for them, which can make it difficult to know if fraud is on the horizon. To spot check these references, do an online search for the contractor or business name to see if there are any negative reviews or fraud alerts. Avoid hiring contractors who have several complaints against them with regulatory agencies or popular online review sites.
Payments and Billing
The final protective step in avoiding contractor fraud may be common sense, but it is arguably the most important. Any contractor who asks for a significant up-front payment on a contract should be questioned as to why there is such a large need. In most cases, a small percentage of the project’s value is due at the time a contract is signed, but not the full amount. Any ask over 20% of the total payment may indicate the contractor isn’t operating legitimately. Large initial payments give no incentive for contractors to come back to complete the work, so it is best to choose a different hire.
Contractor fraud in construction is not completely avoidable, but there are steps consumers and business owners can take to safeguard their bottom line. Always start with a check of licensing and bonding, and follow up with work history and references when possible. Be sure to save the bulk of payment until the contract is successfully completed to avoid financial loss in any construction project.
Eric Weisbrot is the Chief Marketing Officer of JW Surety Bonds. With years of experience in the surety industry under several different roles within the company, he is also a contributing author to the surety bond blog.
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