This is a big and difficult topic to discuss. Unfortunately, it is very common in this industry and it is very widespread. There will be those out in the construction industry, especially the smaller Mom and Pop shops that have been performing conscientious and honest work for many generations, that will adamantly disagree with my overall statement that contractor fraud is common. However, I have been in the commercial end of the business, as well as the residential end, and there is blatant fraud being conducted by contractors all over the world.

Obviously this topic could be discussed and analyzed in-depth, and the presentation would require books of information. Within this article, we will focus on basic elements of your initial agreement with your contractor, to reduce the opportunities for contractor fraud on your specific project and protect your investment.

This information is presented with the base knowledge of a contractor who has substantial experience with managing fraud and defending against fraudulent claims and situations. Any information within this article is not based upon formal, legal advice or data. This discussion is from a contractor’s viewpoint only and will offer some particular suggestions that will, hopefully, help you if you are in the middle of a fraudulent situation, or are anticipating a situation in the near future.

1.) Reputation
The most important aspect of selecting a contractor to work with is reputation. Although the value of the work, or price, is a significant factor, the reputation of your contractor should override any small difference in price. Legal issues later in the project, with a contractor that is less reputable, will far overshadow any cost savings obtained at the onset of the project.

2.) Formal documentation
Formalization of your contractual agreement is important. We would suggest that you have a professional legal consultation prior to signing any documents. The contract between you and your contractor will become a very significant document if you should reach an impasse in negotiations during project completion.

3.) Clear contracts
Contract documents should be as clear and concise as possible. You should be aware of all the specifications and details shown by the documents, which include drawings, sketches, written specifications, catalog cuts, etc. All items that identify the expectations of your agreement make up the contract documents.

4.) Schedule
Formalize the schedule. Do not allow the contractor to informally indicate that your project should take a period of time. Make sure you have formalized the schedule time table and include this in the contract. How long will it really take, write it down and sign it.

5.) Move-in / move out
Formalize your expectations for moving out, and moving back into the space that is subject to the renovation or new work. Clearly identify the date you will make the project available as well as the date you expect to take ownership of the space. Do not allow the contractor to keep these dates in a verbal type of agreement only, again, write it down.

6.) “We will do the best we can…”
Do not allow the contractor to answer your questions with the all-encompassing, we will do the best we can. No, this is not acceptable, and a real date is required for when items will be completed, when you can move back in, etc.

7.) Formal payment schedule
Clearly indicate in the contract documents, the payment schedule that you expect. Do not allow the contractor to randomly invoice you as the owner, and expect payment. The payment schedule should be clearly noted within the documents that are part of the contract.

8.) Important items list
Insist on formal presentation of all priority items, such as kitchen equipment, cabinets, heating, and cooling equipment, etc. Formal presentation should include catalog cuts of the intended products as well as the awareness by the contractor, that approval by the owner is required, prior to installing any priority items on the project. It is a good idea to formally list all of the items that you consider important and will need to be approved, prior to installation.

9.) Consultants / advisors
If the budget allows, and we strongly suggest that this cost is automatically included within your construction budget, hire a professional to watch your back. This professional can be an architect or a construction consultant that has a reputation around the area and you can trust. Although your intentions are good, there is only so much you can anticipate and manage, especially when you do not have the experience or history of multiple projects. It is well worth the money to hire an advocate that will manage the project for you.

10.) Site visits
Visit the job on a random basis. Do not visit the same time every week, so that the contractor can anticipate your arrival and modify the conditions on the project to relate to your visit. Random visits will keep the contractor aware of the possibility of you visiting the project at anytime. This is much healthier for you as the owner.

11.) Regular meetings
Schedule weekly job meetings on the project. Do not allow the contractor to schedule meetings in their office. You need to be on the project to efficiently solve issues and problems. This should be a weekly event, even though the contractor will attempt to make them less frequent.

12.) Pre-payments
Do not allow the contractor to convince you of early payments, or payments for products that are not on the jobsite. In commercial work, if a contractor wants a payment for windows, they need to show the windows on site, have insurance on the windows and specifically invoice the windows to allow proper financial documentation. Do not allow the contractor to convince you that down payments are required, unless you have certified invoicing from the supplier indicating same.

Review more tips and warning signs here.

In general, your greatest defense against contractor fraud is to anticipate the problems prior to signing an agreement. If the legal documents are detailed and professionally created, your ability to solve fraudulent issues or activities on the project will be strengthened. If you simply allow the contractor to convince you that a contract is not needed, or they understand what you want, without adequate documents, etc. you are exposing yourself to fraudulent activities.

Unfortunately, there is no guarantee of properly managing a construction project to ensure that there is no fraud. You can only do your best, and hope that your contractor will value the relationship enough to minimize any issues on the project, and will not perform any fraudulent activity.

Author Bio

Peter Arcoma has been in construction for over 40 years.  He currently works for Manafort Brother in Planville, CT. You can read more of his construction insights on his personal website here.

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