Managing Fraudulent Clients
A Contractor's Survival Guideby Susan Edwards,
Imagine pulling up to a gas station, pumping $20 worth of
gas, and after the tank is filled, telling the attendant you'll
pay only $10 because that's all you thought it was worth. "Tell
it to the judge," the attendant would say as he took your
license number and called the police.
If this was a construction job, however, the contractor
would probably take the $10. Often, the contractor will even
believe that there must have been something wrong with the
work, otherwise the client would pay the whole amount.
I've spent years studying fraud against builders, and have
found that in many cases where contractors are cheated out of
all or part of their final payment, their clients are
pathological - people who planned from the beginning to get
something for nothing. I call them "serial litigators," because
they use lawsuits almost compulsively to get their way. They
may complain about the quality of the work, but that's just a
smokescreen. The issue is and always was money.
How much money? Fraudulent people cost the construction
industry millions of dollars every year; in fact, I believe the
statistics are underestimated because consumer fraud often
masquerades as customer dissatisfaction. During a recent
training session, I asked a group of Midwest builders and
remodelers to complete a survey on the financial loss
associated with customers who defrauded them. After reviewing
their own personal histories, this group of about 125 honest
builders came up with a total loss of some $5 million - an
average of $40,000 each. Given their current margins, they
estimated they would need an additional $50 million in sales -
$400,000 each on average - to absorb the losses.
Unfortunately, there is no foolproof way to avoid being
taken advantage of. To protect yourself, you need to reduce the
chances that you can be fooled. You can learn to rescue
yourself when you find that you're swimming with sharks, but
it's easier to just stay out of the water. The problem is that
fraudulent clients hide their true nature. The ominous
appearance of a dorsal fin alerts everyone to a shark, but
fraudulent people are more like piranhas dressed in goldfish
suits. In this article, I'll give you some pointers to help you
see these people coming.
They're Out There
however, I have to convince many of you that these people are
real. If you're a builder, you've probably had clients like
this, although you may not have guessed that they had set out
deliberately to defraud you. Most builders are honest and they
expect others to be honest in return. If a client complains
about the quality of the work or claims not to understand that
a change order costs extra, most builders take those statements
at face value. They search for defects in their techniques, and
discount their work to make amends for not explaining
themselves more clearly. But this just plays into the hands of
the pathological client.
A pathological person makes for a great movie villain, but
it's not so entertaining to find one sitting across your desk.
Just one customer intent on fraud can cause financial ruin.
Take this character type seriously. My research has shown that
pathological customers are responsible for everything from
failures of small businesses to losses of more than $l million
on a single job for one East Coast builder. They're out
with hundreds of builders who have been defrauded. While none
of them has discovered anything akin to a stud sensor for
locating fraudulent people, their experiences show that
pathological clients behave in predictable ways, not only
during the construction process, but in the many contacts that
take place before work even begins. There's usually plenty of
time to extricate yourself, but the earlier you recognize
potential trouble, the better off you'll be.
Early screening. Too many builders do business
on the basis of a handshake and as a result, they don't always
know who they're really dealing with. One way to find out is to
see if a search of a computerized legal database like LEXIS
turns up a trail of lawsuits. It worked for a builder who
recently called to tell me he had just turned down a client who
had previously sued 69 builders. The red flag will rarely be
this obvious, but lawsuits are so costly and time consuming
that anyone who's gone to the trouble to sue more than one
builder is suspect. Computer searches aren't cheap, but for
expensive jobs where the stakes are high enough, it's worth
asking your attorney about the cost of doing a litigation
Similarly, a credit report may show a history of problems.
In many states, a credit report is required prior to many
common business transactions, including renting a $400-a-month
apartment. It certainly makes sense to take the same
precautions before accepting a job that will serve as your main
or only source of income for the next three months or so.
Telltale behaviors. Most builders who've had
bad experiences with clients have told me that they knew
something was wrong, but they couldn't put their finger on it.
This kind of intuition is another form of information, one we
have difficulty measuring objectively, but that often picks up
on subtle cues that the logical mind discovers later. Look for
indirect signs. When the client calls your office or your home,
does your spouse or office manager cringe? Pay attention - they
may intuitively understand something that you have missed.
Another sign is a person who appears "slick." Such people
are often skilled performers and appear believable while really
pretending. Often your intuition is triggered and you get a
sense that something is missing in this picture. It usually is.
What you are seeing is not the person, but a facade.
If you pay close attention to what a potential client says
during the first phone call or in the first meeting at his or
her home, you may be able to detect people who intend to
defraud you. These conversations are not idle chit-chat - they
are reconnaissance missions. By listening carefully to what
people say and how they say it, you can gain valuable
information, not just about the job but about their character.
If you know what to look for, you may be able to identify a
dishonest client before it's too late.
Here are some common types of fraudulent construction
Put-down artist. Beware of a client who
describes everyone as lazy or incompetent, or describes others
as idiots or imbeciles - everyone except you, of course. Rest
assured that it will only be a short while until you're lumped
into that group with everyone else.
This is particularly true if the people being put down are
contractors or subcontractors with whom the prospective client
has worked before. But you should also be alert for someone who
characterizes his or her neighbors and even relatives in a
Asking prospective clients
why they want to remodel their home can elicit some revealing
information. Many clients initiate remodeling projects to "keep
up with the Joneses." This kind of envy toward neighbors or
even toward you and your staff - is a normal part of the human
condition. But some people exhibit pathological envy, which has
a ruthless quality that may express itself as wishing harm to
others or as a desire to take away the happiness others feel
about their possessions. This type of envy makes it impossible
to accept anything as good enough. Not being satisfied with
themselves, this type of client is not pleased by anyone else's
work, even when it is of high quality.
Having a service business
means you try to please your customer, and healthy people
recognize that business involves competence. They will not ask
you to perform tasks that do not square with your expertise.
Fraudulent people, however, see you as some sort of special
servant or as personal property instead of as a professional
conducting your trade. They may ask you to do some seemingly
innocent task, like clean their belongings out of the garage
before work starts. This is a reasonable request if made by an
elderly person, but in someone who is physically capable of
doing the work themselves, it could be a sign of a secret
The slave mentality may also reveal itself in someone who
acts as if everyone has a price. For example, when you go to
the house to look over the job, a fraudulent client may try to
impress you by offering to put down cash - say $2,500 on a
$25,000 job. The cash is a small worm used to catch a big fish,
so don't take the bait. In the end, they are planning to pay
much less than the job is worth, so what may seem like a large
amount of money to you is peanuts to them. If they withhold
$10,000 after the work is done, they've quadrupled their
If a potential client acts as
if he or she knows more than you do about the project, you may
be dealing with something other than a knowledgeable
Problem clients often have a know-it-all attitude that shows
in their unwillingness to accept evidence that they're wrong.
As a result, they can't work on a team to make the job a
These types of people often ask to alter contract terms
before they've seen the quality of your work. They may even ask
you to fax your contract to them before they've met you.
Beware: You could be dealing with serial litigators looking for
a loophole they may have used successfully before.