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Managing Fraudulent Clients A Contractor's Survival Guide

by Susan Edwards, Ph.D. 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

First, 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 there.

Warning Signs

I've talked 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 search. 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 clients. 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 disparaging way. Pathological envy. 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. Slave mentality. 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 agenda.
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 initial investment. The know-it-all. 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 consumer.
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 success. 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.