Written by Jim Adair
Since May 2012 when the Charbonneau Commission opened hearings into corruption and collusion in Quebec’s construction industry, Canadians have heard about how political parties, government bureaucrats, construction firms and organized crime worked together to push up the price of contracts and bilk the public out of millions of dollars.
“Laws and regulations are not enough to overcome collusion and corruption, so that’s why we must all do our bit,” said France Charbonneau, the judge who presided over the 30-month hearings. The final report of the commission is expected in November 2015, but in the meantime there’s been more focus on construction fraud in the country.
“From government projects to corporate developments to individual home builds, cases of fraudulent activity in the construction industry are rampant,” said a study by Grant Thornton LLP in 2013. “In many cases, rather than the stereotype of construction companies defrauding individuals or the public, it is the companies themselves losing money to fraud perpetrated by employees, contractors, subcontractors and venture partners.”
The report says that any business involved in residential or commercial construction, including construction firms, lawyers, real estate companies, property development companies and real estate investors, must be aware of the most common types of fraud schemes to avoid becoming a victim.
Because of Canada’s booming renovation industry, you also have to add condominium corporations and individual homeowners to that list.
With all the recent construction activity in Canada — especially in condo-happy Toronto and B.C.’s Lower Mainland — the average loss for all fraud cases in Canada was $628,500, according to a report from The Association of Certified Fraud Examiners in 2012. This was higher than the global average.
The Grant Thornton report says several factors can lead to a company being victimized by construction fraud, including economic pressure; lack of internal controls/monitoring/oversight of projects; vaguely worded contracts; the use of large amounts of undocumented cash in transactions; not ensuring the scope is defined before a price is set; and construction joint ventures in which one partner takes advantage of the other without his knowledge.
Common scams include non-payment of subcontractors and suppliers by delaying lien waivers or falsifying lien waivers, or using project cash receipts to pay bills for other projects. Billing for work that hasn’t been done by overstating the labour or equipment used is another one.
Some schemes involve substituting lower-grade building materials or stealing materials for use on other projects. Colluding with subcontractors, including bid rigging, bribes, kickbacks, false or inflated change orders and phantom subcontractors are other scams, says the report.
“Given current levels of construction activity and investment in Canada, the construction industry needs to implement proactive, preventative measures. Individuals and organizations need to acquire the tools and know-how to put a fraud prevention and detection plan in action,” says the report.
Homeowners also need to be aware of the scams that are prevalent in the home renovation industry.
Homebuilders’ associations blame the underground economy for many of the problems. They say you’re asking for trouble by agreeing to cash deals to avoid paying taxes.
But even having a contract can be trouble if you don’t understand it. The Waterloo Regional Police Service in Ontario recently released a warning about door-to-door renovation salespeople who offer a “senior’s discount” or “special price” for work that is only good for that day. The special price generally turns out to be more than normal market price and the repairs or renovations suggested may not even be needed.
It’s common sense that you should not be in a rush to sign a contract. Take a few days to think about it and check around to see if you really are getting a good price. You can also research the company’s credentials with the Ontario Ministry of Consumer and Business Services or the local Better Business Bureau, and there are other online review sites such as HomeStars.com that offer customer ratings.
The Ontario Ministry of Government and Consumer Services says you should never let a contractor talk you into making a large down payment for materials — it recommends a maximum of 10 per cent of the job estimate. Check that your contractor has all the necessary paperwork, including a professional licence, liability insurance and building permits.
The Canadian Home Builders’ Association says your renovation contract should include:
- start and completion dates
- description of the work to be done
- terms of payment
- standards of work
- the renovator’s warranty
- subcontractors scheduled to come to the job
- addendums, such as a precise list of the materials and products that will be used.