Nailing fraudulent contractors

Home improvement and construction fraud

By Richard Brody, Ph.D., CFE, CPA; Stephen Moscove, Ph.D., and Sherrie Slom

In many countries, new home construction and remodeling is booming. But so is home improvement and construction fraud. Fraud examiners can help stanch the flow of money into the pockets of fraudulent contractors by learning the latest tricks that plague unsuspecting homeowners. 

Mark was the owner of Iko Construction and Design. He told homeowners that he was a licensed contractor but he wasn't qualified by the state to perform work. Actually, he no longer had a contractor's license because it was revoked three years before in another state. But Mark was less expensive than others and had more business than he could handle. He received hefty deposits, knocked down walls, and stripped rooms, and either walked away with hefty deposits or did substandard work. All his customers had one thing in common: they were victims of home improvement and construction fraud.(1)

Fraud examiners can learn from the mistakes of unfortunate homeowners who trusted but didn't verify. A typical home repair construction fraud begins when a self-styled, unlicensed contractor makes an unsolicited call on a homeowner and offers to do some repair work such as building a deck or repairing a roof. He may claim to have leftover materials from a prior construction job or that he's repairing other homes in the neighborhood and can offer a special deal. He requests a monetary advance for the repair work and says he'll return soon to begin work. That could be the last the homeowner ever sees of him. Or he may do some of the job but use substandard materials and/or shoddy workmanship.(2)

So, these frauds involve:

  • unlicensed contractors;
  • non-payment to a subcontractor and/or material supplier;
  • stolen advance payment; and/or
  • materials and equipment switches.

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