Skip to content
SuperMoney logo

Contractor Fraud: What It Is and How To Avoid It

Last updated 02/21/2023 by

Andrew Latham

Edited by

Fact checked by

Summary:
Contractor fraud is when unscrupulous contractors or service providers intentionally or recklessly misrepresent themselves, their qualifications, or their services in order to secure work or payment from a client or business. Steps you can take to avoid being scammed by fraudulent contractors include conducting background research, asking for references, verifying a contractor’s license and permits, and keeping records of payments.
Contractor fraud is a serious issue that can have a damaging impact on businesses and customers alike. Fraudulent contractors will intentionally misrepresent their services and qualifications in order to secure a job or gain payment from a business or client. For businesses, this can result in lost revenue, legal fees, and damage to a company’s reputation, while for homeowners, it can lead to financial loss, property damage, and even physical harm.
There are multiple types of contractor fraud to watch out for — for example, unlicensed contractors may perform work without the proper permits, or a contractor may lie about a previous job or an affiliation with a reputable company. The good news is that there are often signs to help you identify contractor fraud and steps you can take to prevent becoming a victim of a contractor’s scam.
In this article, we’ll go over the most common types of contractor fraud and the strategies you can use to detect and prevent these scams, as well as the steps you should take if you encounter a fraudulent contractor or have already become a victim of a contractor’s unscrupulous practices.

Get Competing Home Improvement Loan Offers

Compare rates from multiple vetted lenders. Discover your lowest eligible rate.
Get Personalized Rates
It's quick, free and won’t hurt your credit score

Common types of contractor fraud

Contractor fraud takes many forms, including home improvement scams, the use of substandard building materials that put a homeowner at risk, and a lack of necessary qualifications, experience, permits, or insurance to do a job.
The following are the seven most common types of contractor fraud to be aware of:
  1. Unlicensed contractor scam: A contractor offers their services without having the proper licensing or insurance. They may also use low-quality building materials and fail to follow building codes. This can result in property damage and financial loss for the homeowner.
  2. Home improvement scam: A contractor offers their services door to door, often quoting a significantly lower price than more reputable contractors will offer. The contractor will request a large down payment upfront, then either deliver poor-quality work or disappear altogether.
  3. Home repair scam: A contractor will falsely claim that a home has damage in order to convince the homeowner to spend money on unnecessary repair services.
  4. Kickback scam: A contractor may receive kickbacks from suppliers or subcontractors in exchange for their building materials or services, while the homeowner is overcharged for materials or labor.
  5. Bait-and-switch scam: A contractor will initially quote a low price for a project. Once the work begins, however, the contractor will claim that additional work or materials are needed, resulting in the homeowner paying more than originally agreed upon.
  6. Contractor overbilling: The contractor charges the client for work or materials not actually provided.
  7. Shoddy workmanship: In this scam, the contractor performs the work but not to an acceptable standard.

Signs of contractor fraud

There are several warning signs to look out for that may indicate contractor fraud. One of the most common signs is when a contractor requests a large down payment upfront in cash before starting a project. This is a red flag because legitimate contractors typically request a small deposit to begin their work and will only ask for full payment once the job is completed.
Fraudulent contractors also don’t typically provide written contracts, which are intended to legally protect both the homeowner and the service provider. If a contractor tries to pressure you to hire them on the spot without providing any sort of legal documentation first, this could be a sign that they don’t have your best interest in mind.
Finally, a general contractor should have a physical business address and a telephone number that make them easy to contact. If the contractor asking you to hire them has neither of these — for example, if they operate their business out of a pickup truck or go door to door to offer their services — you may have trouble tracking them down if they suddenly disappear on a job or make mistakes in their construction work that need to be fixed.

SuperMoney may receive compensation from some or all of the companies featured, and the order of results are influenced by advertising bids. Learn more

Loading results ...

How to avoid contractor fraud

Finding an individual contractor who is both legitimate and reliable may seem like a daunting task. But by taking a few simple precautions and conducting some basic due diligence, you can minimize your risk of falling victim to contractor fraud.
Here are ten steps you can take to protect yourself from scams when hiring a new contractor:

How to prevent contractor fraud

  1. Research the contractor: Look up their business profile on review sites to find information on their accreditation status, customer reviews, and history of complaints.
  2. Ask for references: Ask the contractor for a list of local references you can contact to get an idea of the quality of their work and their customer service.
  3. Get multiple quotes: Determine the work you need done, then shop around and get at least three quotes from different contractors to get an idea of how much the work should cost.
  4. Sign a written contract: Always get quotes in writing and don’t allow any work to begin until you and the contractor have both signed a comprehensive written contract that includes details about the project, materials, payment arrangements, and warranty information.
  5. Verify licenses and insurance: Make sure the contractor has all the necessary licenses and insurance to work in your area. Check with their insurance carrier to confirm coverage for worker’s compensation, property damage, and personal liability.
  6. Confirm building permits: The contractor should obtain the necessary permits before starting the project. They should also include a clause in the contract stating that final inspections must be completed by local building inspectors before the final payment is made.
  7. Obtain a lien waiver: In the United States, a lien waiver is a statement from the contractor claiming that all suppliers and subcontractors have been paid for their work and therefore waive any lien rights to the homeowner’s property for the amount originally owed.
  8. Plan for future service issues: Be aware of your home warranty coverage and make sure you know how to handle any service issues that may arise in the future before the contractor begins their work.
  9. Arrange a payment schedule: Instead of making a full payment to the contractor upfront, set up multiple payments and make sure that the final installment is not paid until after the work is complete and has been fully inspected.
  10. Keep records: Once the job is completed, make sure to obtain a receipt from the contractor marked “Paid in Full” and keep the contract in a safe place in case of future questions or disputes.
By following all these steps, you can reduce your risk of falling victim to contractor fraud and ensure that your home repairs and renovations are completed to your satisfaction.

What to do if you encounter a fraudulent contractor

If you suspect a contractor of committing fraud, you should file a report with your state’s consumer protection office or licensing board. You can also file criminal charges against the contractor with your local police department or state attorney general.
If you’ve already been defrauded by a contractor, your best option is to consult with an attorney who can walk you through all your legal options. You can start by sending a registered letter (with your lawyer’s help) requesting that the contractor complete the work as agreed and threatening to take legal action if they don’t. Also consider contacting agencies that can help you take action against a fraudulent contractor, such as the Better Business Bureau, the Department of Consumer Affairs, and the National Association of Home Builders.
If the contractor still will not respond, however, you may need to file a civil lawsuit against them to recover your stolen money. It may also be a good idea to seek an injunction to stop the fraudulent contractor from scamming other unsuspecting clients. And if possible, make sure to leave a bad review online to warn other homeowners!

Pro Tip

Some states have a recovery fund for homeowners who have been scammed by fraudulent contractors. Check with your state to see if you may be eligible for compensation after falling victim to contractor fraud.

FAQ

What is contractor fraud?

Contractor fraud typically refers to a variety of shady practices in which contractors will intentionally misrepresent their qualifications or services in order to secure work or pay from a homeowner or business. However, some contractors may not intend to commit fraud but do so inadvertently due to their lack of knowledge or skills. Inadvertent fraud can be just as damaging to the client, regardless of the motivation.

What are some common types of contractor fraud?

Some common examples of contractor fraud include performing work without being properly licensed, overcharging for services, or using substandard building materials that will put a homeowner at risk.

How can I prevent contractor fraud when hiring a contractor?

To avoid becoming a victim of contractor fraud, make sure to first research the contractor’s qualifications, check their references, and verify their licensing and insurance. Also, be wary of contractors who solicit work by going door to door, who offer their services for much less than other contractors, or who demand a large cash advance for services or materials upfront.

What should I do if I get scammed by a contractor?

If you fall victim to contractor fraud, you should hire a lawyer to help you take legal action. An attorney can help you send a registered letter to the contractor demanding they complete their work or file a suit in small claims court to get your money back. You can also contact agencies like the Better Business Bureau for help, file criminal charges against the contractor, or request compensation for the stolen money from your state’s recovery fund.

Key Takeaways

  • Contractor fraud refers to when a contractor or service provider intentionally misrepresents their qualifications or services in order to secure work or payment from a consumer or business, which can result in homeowners and business owners suffering financial loss, property damage, and even physical harm.
  • Common types of contractor fraud include unlicensed contractor scams, home improvement scams, home repair scams, kickback scams, shoddy workmanship, contractor overbilling, and bait-and-switch scams.
  • There are multiple signs of contractor fraud to watch out for, including a low initial offer, a request for a large cash advance upfront, and a refusal to provide a written contract before beginning a project.
  • The best ways to protect yourself against contractor fraud are to conduct a background check on the contractor, verify their licenses and insurance, ensure they have all the proper permits in place, request and sign a written contract before the project begins, and keep records of all payments made to the contractor.
  • If you fall victim to contractor fraud, you should file a complaint against the contractor with your state’s consumer protection agency and hire an attorney to help you take legal action, such as filing a civil lawsuit to reclaim your stolen money. You may also be able to request compensation from your state’s homeowners recovery fund.
While you may not be able to prevent every type of fraud, you can take steps to protect yourself (and your money) from scams and poor-quality work. Before you hire a general contractor to do construction work on your house, you’ll want to make sure any damage they may cause will be covered by your homeowner’s insurance.
Are you in the market for a better insurance policy? SuperMoney can help! Read our guide on how to find homeowner’s insurance that covers everything you need, then use our comparison tool to find the best home insurance policies for you!

Andrew Latham

Andrew is the Content Director for SuperMoney, a Certified Financial Planner®, and a Certified Personal Finance Counselor. He loves to geek out on financial data and translate it into actionable insights everyone can understand. His work is often cited by major publications and institutions, such as Forbes, U.S. News, Fox Business, SFGate, Realtor, Deloitte, and Business Insider.

Share this post:

You might also like