Navigating Construction Season: Protecting Yourself Against Fraud

Intro

Spring is finally here and as many Canadians know, this means it is the beginning of construction season. Cities start fixing up roads, and property owners start fixing up their buildings. But with construction scams being one of the most common scams perpetrated in Canada, it is important to keep a level head and not let the excitement of the something new and shiny overshadow protecting yourself against potential harms.

After all, a person’s property is likely to be the biggest individual investment that they will make in their lifetime, so you will want to make sure you get exactly what you pay for.

 

What is Construction Fraud?

Construction fraud involves intentionally deceiving another party about some aspect of the construction process — whether that is the cost of a project, the timeline for completion, or the qualifications of the builder, among other notable examples.

Construction fraud can lead to serious consequences for a property owner. Increased project costs, delays, projects left incomplete, potential exposure to legal liability for mistakes made by the builder,  property owners filing for bankruptcy because they can no longer afford to fund the construction — the consequences of construction fraud are varied and severe. If you are thinking of doing some renovations this summer, make sure to take the time to properly inform and protect yourself. You’re reading this article, so you have already taken the first step.

Common Types of Fraud

How can property owners identify whether they are being scammed? There are a few telltale signs to look for.

Vague Contractual Terms

Vagueness is a major red flag in any transaction, and especially in the construction industry. Contractors and property owners need to be on the exact same page when it comes to three major components of a project — 1) The scope of the project, 2) the project’s total budget, and 3) the project timelines, not only completion of the project but the timing of payments as well.

Vagueness leaves the door open for a contractor to change the terms on a whim, at any stage on the project, which directly leads to increased costs and delays.

Excessive Upfront Payments

Builders often require some form of payment upfront — not only for the initial deposit, but throughout the project at various milestones in the timeline. While it is common practice for a builder to obtain some of the funds ahead of time to pay for materials and labour, the amount requested needs to be proportionate to the specific work being done and to the overall cost of the project as a whole.

Unfortunately, builders asking for a large deposit and then never doing any work, or barely starting the work and then failing to complete the project, happens more often than we like to think. Property owners need to be wary of the amount of funds being requested and make sure it is proportionate and reasonable. If a project is going to cost $100,000, it would be suspect for the builder to request a $50,000 deposit before any work begins– that is an excessive amount and should be met with skepticism from the property owner.

Lack of Proper Licensing and Insurance

All contractors require some type of licensing and insurance in order to operators.

For insurance in particular, contractors will typically need not only general liability insurance / general commercial insurance, but they will also have to provide WSIB clearance certificates for each project. Builders are required to make payments to the WSIB as part of their operations — the clearance certificate relieves the property owner from being responsible to cover those payments should the builder fail to do so themselves. Obtaining a valid clearance certificate from the contractor is an absolute must for property owners.

Unexpected Changes in Price or Scope

A sudden jump in the cost of materials without clear justification is very telling. This can often happen when builders intentionally undervalue a project when competing with other builders, and then when they are selected over other builders, they will claim that the project is actually more expensive than they initially thought.

Same goes for changes in scope. An idea for the kitchen that was feasible and had numbers attached to it is suddenly no longer possible or will be too expensive and the builder suggests lowering the quality of materials or change the idea altogether. Be wary of any sudden and unjustified changes.

How does the law protect people from construction fraud?

There are a number of different legal routes property owners can take when addressing the consequences of construction fraud. A few of the options are set out below (this is not an exhaustive list by any means).

Consumer Protection Act

The Consumer Protection Act (CPA) is a piece of legislation that protects all Ontario individuals who enter into a contractual transaction with a business for services to be provided in Ontario (Note that the CPA does not apply to transactions between businesses or transactions between individuals). Businesses that fail to follow the rules and regulations set out by the CPA are subject to fines and penalties, and might even see the contract cancelled out by the courts.

The following are some sections of the CPA that are particularly helpful in construction situations:

Section 9 — this section creates a deemed warranty that the supply of services will be of reasonably acceptable quality, which gives property owners a minimum standard of behavior to expect when it comes to how the builder can act. Note that this section does not apply to the quality of the materials, only the labour.

Section 10 — builders cannot charge more than 10% above an original estimate provided to a property owner. So if renovating a kitchen is estimated to cost $100,000, the property owner cannot be charged more than $110,000 at the end of the project, assuming no changes have been made.

Section 22 — this section requires that all future performance agreements be in writing. Any work to be done at a later date, like construction, qualifies as future performance, and under this section, the agreement must also include an itemized list of the prices for the materials and labour expected to be incurred.

Section 23 — grants the right to cancel a future performance agreement within one year of entering into the contract.

The CPA is mandatory legislation — it applies to all consumer transactions and contractors cannot force property owners to exclude the application of the Act from the project.

Construction Act

The Construction Act grants property owners the power to order builders to produce their financial records and statements, in order to show how the funds for construction were actually used. Parties will need to obtain a court order for these financial documents, so it is best to consult with a lawyer on

The Construction Act allows provides parties with a fast-tracked dispute resolution process when a property owner disagrees with an invoice provided by the builder — we previously discussed this process here. It is an expedited process, which can result in a quicker and relatively cost-effective resolution as compared to filing a lawsuit with the courts. This process also helps to balance out the powers of the two parties, making it harder for contractors to use their specialized knowledge of construction to pull a fast one on property owners.

Criminal Code of Canada

Contractors that engage in fraudulent behavior even risk exposing themselves to criminal charges. Property owners who were defrauded out of their funds have the option to file a complaint with the police.

Now, it should be noted that the criminal route does not provide any sort of recovery for a property owner who lost money or had increased costs due to delays. Only filing a lawsuit with a civil court can provide a way to get those funds back — however, sometimes recovery is unrealistic and impractical, and criminal charges can at least provide some sort of justice for those who have been wronged.

Practical tips to protect yourself against construction fraud

Put absolutely everything in writing

It goes without saying, having a written contract, with written invoices, and a documented way to track expenses and project completion rate, is the most effective way of minimizing the risk of being scammed. Written documents help eliminate any vagueness about the major terms of the project.

Text messages are fine

On that note, some people think that the requirement that transactions be in writing requires some sort of formality, but all it really requires is for something to be in writing which is exchanged between the parties. A written contract is nothing more than a piece of paper that both parties have reviewed and exchanged. Emails are electronic communications exchanged between parties, and the same goes for text messages. Text messages are a great way to track a project. If you are the type of person who is more likely to respond to a text than an email, then make sure you instill that communication method with the builder right at the outset.

Stay the Course

Be consistent in your communications with the builder. If getting an itemized invoice before sending payment is important to you, make sure that you insist on that every time funds are requested. If you only want to communicate via email, then don’t send any text messages. Do your best to keep your communications confined to one or two methods, phone call + email or text, with every phone call followed up with a quick text message or email setting out what was discussed and agreed to in bullet point form.

If the wife is the one who mainly instructs the builder, then have all communications be between the builder and the wife. The husband of course can be involved, but switching back and forth between both presents an opportunity for miscommunication and vagueness to enter into the picture.

Whatever you decide, just stick to it.

When in doubt, talk to a lawyer

I know, I know. I can hear you grumbling. ” Get a lawyer, that’s what they always say.”

Yes, we do. We will always recommend getting advice from a legal professional when someone is involved in a legal dispute. Always, always, always.

Each situation is unique.  so if you are unsure about what next steps you should take when you and the builder have hit an impasse, speaking with a lawyer can give you the necessary clarity on what to do next.