Common Contractor Fraud Scams To Watch Out For

By a Biometrica staffer

In a previous piece, we gave you a quick look at contractor fraud. We examined what it is, looked at common signs, and gave you a few tips to protect yourself from falling prey to such scams. In this piece, we will delve into the modi operandi of contractor fraudsters by examining common schemes that they use on unsuspecting people to get away with their illegal activities.

Some of the schemes we will go over, based mainly on information from the National Insurance Crime Bureau (NICB) and the U.S. Department of Transportation, include bid rigging, conflict of interest scams, kickbacks, and materials overcharging. Given the number of common scams to explore, this piece will be the first of a two-part series on contractor scam types.

First, here’s a run-through of what exactly contractor fraud is. Contractor fraud happens when an individual contractor or a company offers services that knowingly mislead the other party. It could include performing unsatisfactory repairs or charging more than a job is worth. It usually ends up becoming a costly affair for a homeowner, with racked up bills, unnecessary additional repairs, and insurance complications.

How do you avoid falling prey to such scams? Always be wary of unsolicited approaches by contractors, and never pay the full amount upfront. Always make sure you get everything in writing and get your contractor also to sign off on it. This should include prices for labor and materials, clean-up procedures, and estimated start and finish dates.

Ideally, try to make a list of contractors that you feel will be good to hire if the need arises. Look up reviews on these contractors, check on their licenses, and seek out their Better Business Bureau information. If possible, shop around for a contractor by getting recommendations from friends and neighbors. It’s better to try and do this background check beforehand, whenever possible.

Here are some common kinds of scams that contractor fraudsters tend to employ, per the U.S. DoT Office of Inspector General (OIG):

Bid Rigging

In bid rigging and collusion, contractors misrepresent that they are competing against each other when, in fact, they agree to cooperate on the winning bid to increase job profit. Some red flags to watch out for when it comes to this, the DoT OIG website says, are —

• Unusual bid patterns: too close, too high, round numbers, or identical winning margins or percentages
• Different contractors making identical errors in contract bids
• Bid prices dropping when a new bidder enters the competition
• Rotation of winning bidders by job, type of work, or geographical area
• Losing bidders hired as subcontractors
• Apparent connections between bidders: common addresses, personnel, or telephone numbers
• Losing bidders submitting identical line-item bid amounts on nonstandard items
• Persistent high prices by all bidders
• Joint venture bids by firms that usually bid alone
• Losing bids do not comply with bid specifications or only one bid is complete and other bids are poorly prepared

Conflict Of Interest

In fraud involving conflict of interest, a contracting or oversight official misrepresents that he or she is impartial in business decisions when he or she has an undisclosed financial interest in a contractor or consultant who inflates the job cost to the government. The red flags here, according to the DoT OIG, include:

• Unexplained or unusual favoritism shown to a particular contractor or consultant
• Government official disclosing confidential bid information to a contractor, or assisting the contractor in preparing the bid
• Employee discussing about employment with a current or prospective contractor or consultant
• Close socialization with and acceptance of inappropriate gifts, travel, or entertainment from a contractor
• Incomplete vendor or consultant address, or an address that matches employee’s address
• Government official leasing or renting equipment to a contractor for performing contract work
• Contracting employee fails to file Conflict of Interest or Financial Disclosure forms

Kickbacks

In kickback schemes, a contractor or subcontractor misrepresents the cost of performing work by secretly paying a fee for being awarded the contract and, therefore, inflating the job cost to the government. Some red flags of this kind of scheme include:

• Unexplained or unreasonable limitations on the number of potential subcontractors contracted for bid or offer
• Continuing awards to subcontractors with poor performance records
• Not awarding the subcontract to the lowest bidder
• “No-value-added” technical specifications that dictate contract awards to particular companies
• Non-qualified and/or unlicensed subcontractors working on prime contracts
• Poor or no established contractor procedures for awarding of subcontracts through competition

Materials Overcharging

Under this fraud scheme, a contractor misrepresents how much construction material was actually used on the job and then is paid for excess material to increase job profit. Here are some warning signs to watch out for when it comes to this kind of contractor scam:

• Discrepancies between contractor-provided quantity documentation and observed data, including yield calculations
• Refusal or inability to provide supporting documentation
• Contractor consistently loading job materials into equipment away from inspector oversight
• Truck weight tickets or plant production records with altered or missing information
• Photocopies of quantity documentation where originals are expected
• Irregularities in color or content of weight slips or other contractor documents used to calculate pay quantities
• Not receiving report for invoiced goods
• Unusually high volume of purchases from one vendor
• Invoiced goods cannot be located in inventory or accounted for