home Insurance Article

10 Ways To Spot Construction Fraud

When dealing with the aftermath of a disaster, 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 — and that’s in general, not specific to natural disasters, when you’ll likely be bombarded with offers from contractors. 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.

If your home (thankfully) just needs repairs, you’ll likely find several door hangers or flyers on your door daily. It’s not uncommon for even legit contractors to start pounding the pavement — that’s an age-old marketing technique. Sometimes, however, it’s the marketing tactic of criminals. Here are 10 things to remember when finding contractors that will help you avoid fraudulent ones, from bids to signing off on work.

1.) Obtain several bids and use discretion.

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 hid 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 (and even criminals) providing free bids just around the corner.

2.) Use local and established contractors if 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.

3.) 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.

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.

4.) Watch out for unprofessional or untrained contractors.

Create a checklist for what professional attributes you should see. Some may not offer all of these, especially new businesses, but failure to have any could be a bad sign. Again, legitimate businesses spend money on business growth. Create a list with these:

  • Professional business cards and letterheads
  • A local telephone number, address, email, and even website
  • Print marketing material if available
  • Be cautious if they’re driving unmarked cars — many legit contractors drive their own trucks depending on company size, so they may not drive vehicles with company names on them.
  • Ask what materials they’ll use. Legit, trained, and professional contractors will provide this information. Complete frauds will skirt around this, or may try to offer discounts by using leftover materials, which could result in a botched job or the contractor leaving as soon as they run out of materials since they don’t want to buy more — they just want your money.

5.) Get a signed contract.

If you’ve hired a contractor and they’ve passed all the above criteria, you’ll need a contract signed by both parties before work begins. Ensure the contract is filled out correctly and fully, that it includes the same information needed on bids, and doesn’t have empty spaces. A fraudulent contractor could fill in things later. Additionally, it should look professional — legit companies have official, printed contracts. You can find examples of these on free document sites. Never sign a handwritten contract or one containing ambiguous language and retain a copy. A good way to determine legitimacy is to tell the contractor you’re going to review it before signing it and will give it to them in a few hours or a day. If they don’t want to do that, something’s probably up.

6.) Only pay a small deposit in advance.

Never pay a contractor in full before work begins. Usually you’ll have to pay a deposit, which is completely normal and should be around 20% or less. If you pay in full, they could take off with your money.

Additionally, if a contractor tells you in the middle of the job they’ve run out of supplies or that say there will be more costs due to severity of damage or because new damage was discovered, don’t pay anything upfront, or worse, pay in full. Verify what they’re saying. If you approve the extra costs, tell them you’ll pay a percentage equal to the percentage you paid initially. For example, if their initial bid was $5K, you paid a 20% deposit of $1K, and they claim to need an extra $2K, pay 20% of the $2K.

7.) Never pay cash.

In general, it’s never a good idea to pay in cash now for anything. They may want cash only so they can rip you off, and by paying cash, they know they’re likely untraceable. Secondly, they’re perhaps committing tax evasion so there’s no record of doing the work and thereby avoiding tax fraud, insurance fraud, or are trying to avoid buying insurance.

Sometimes, your insurer may send you a check for your claim — hold onto it until work is completed. Sometimes policyholders will sign the check over to the contractor, but don’t do this either. It’s best to hold on to the check, deposit it, and then pay via credit card or check — preferably credit card. Many credit cards offer you protection for fraudulent activities, when merchants who refuse to refund you, or when there are unauthorized charges. If you pay by credit card and still do something fishy, you may be protected through your credit card.

8.) Make sure repairs will be covered by your insurance.

Contractors need to be insured too, but check with your insurer to ensure your policy will cover the work. An adjuster should do an estimate of the work that needs to be done too, and this benefits you by providing room for negotiation with contractors.

9.) Have your claims adjuster inspect the work to be done.

The claims adjuster assigned to your case should inspect your home initially after making a claim, and also when you’ve found the contractor you want. Usually insurers will require adjusters to make inspections before they’ll cover claims. The adjuster will affirm what repairs need to be made and you should also ask them to review the contract or bid from contractors. More importantly, if you decide to have extra work done or exceed what your adjuster approved, your insurance may not pay for the repairs at all and/or deny your claim.

10.) Sign off, but only if repairs are satisfactory.

You may feel so determined to get your life back that you sign off on work before it’s even been inspected. However, make sure you’ve done a thorough inspection of repairs made, that they’re satisfactory, and that they meet all standards as outlined in your contract. If you don’t sign off, you could end up having a contractor say you didn’t sign off on the work and use that to say you owe more money. You’ll probably also need proof of signing off for your insurer if they won’t send the claim check until after seeing this.

If you were taken advantage of at any point in the process of finding and working with a contractor, don’t take it sitting down. There are many avenues to take — contact your state’s insurance fraud bureau, state insurance commissioner, the BBB, and local consumer affairs organizations. Experiencing an unplanned, natural disaster is worse enough — experiencing a planned disaster orchestrated by a criminal makes it infinitely worse.

Follow Desiree on Twitter @DesireeBaughman.

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