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I incorporated my first cold start optometry practice in 2016. I locked in a Main Street location in a booming rich suburb. It was perfect. Six months later I was facing bankruptcy and my practice hadn’t even opened yet.
This can happen to you during ANY office construction — first office, second office, location change, or a remodel. After showing you how I became a victim, I will give you the four rules to prevent optometry office construction fraud.
Building a team . . .
I wanted to do everything right, so I hired:
- Optometry business consultant
- Contract lawyer
- Commercial real estate agent
They all did a great job. I got a fantastic lease, great attention from my lawyer and accountant, and full funding from my banker.
I got multiple general contractor quotes for my buildout. I went with the contractor who not only had the best price, but also had done work for many years with my architect, and never had a problem. The contractor had also recently built out one of my neighbor tenants in the same building.
. . . and discovering a fraud
I’ll simplify and round numbers so it’s easy to see what happened next.
The general contractor needed 20% down to start the job. Part of him keeping the cost down was him not funding it. I paid it.
Within days, he had workers cutting concrete for plumbing, and putting up wall framing.
He needed 20% when he started wall framing. I paid it.
He started running electrical wires, and filling the concrete back in.
He needed 20% to order the HVAC units and supplies. I paid it.
He started nailing up drywall to the frame, and got most walls covered on one side. He began sealing and painting the drywall.
He needed 20% to begin sealing and painting the drywall. I paid it.
He put up more sheets of drywall to close some of the walls.
He needed 20% to order my cabinetry, so it would be finished on time. I paid it.
He now had 100% of my money. He immediately abandoned the construction site, and no workers ever returned. He embezzled all my money from his company to a second company he secretly owned. Then he declared the first one bankrupt (the one contracted to build my office).
What happened next
I later found out that:
- He never paid any of my subcontractor workers — concrete, plumbing, drywall, paint.
- He never ordered the HVAC unit.
- He never ordered the cabinets.
- He was simultaneously defrauding about 10 doctors doing construction.
- He personally kept 100% of my money. None of it went to my office construction.
Construction fraud is rampant across the US; especially in states that don’t regulate or license general contractors.
I was left with no loan money. My office was some drywall and a pile of rubble. The workers who had been building my office all began to put liens on my property. This meant that to get my office built, I would have to spend almost THREE TIMES my original budget:
- 100% to the general contractor who defrauded me.
- 50% to the workers who put liens on me.
- 100% to a new general contractor to finish the job.
I didn’t have that money, and the bank wouldn’t loan me that money. I had no cash left to take the contractor to court. I couldn’t support my enormous business loan by simply working another job. My insurance policies only covered damage, not fraud. I had guaranteed all my loans personally. My only option was to file both business and personal bankruptcy.
What should I have done differently? How can you prevent this from happening to you?
I have four simple rules that will keep you safe from office construction fraud.
1. Get a BOND.
If your construction will cost more money than you can afford to lose, get a construction bond. This is different than insurance. Insurance covers damage from fires, floods, etc. A bond will cover completion of your project if your general contractor doesn’t finish it for any reason. Some companies are already bonded. Verify this by asking for copies of their bond and calling the bond company.
2. Pay AFTER construction is complete.
A good construction company might quote you 10-20% higher, but they will be able to fund your job in phases. You only pay for a phase after they have completed it to your satisfaction. Then you can verify that work is done, and materials are on site.
3. Make sure your subcontractors are PAID.
Many construction companies want you to only contact them, because they don’t want you to cause drama or know the markup of services. But who is auditing your general contractor? YOU. Go to your site regularly and talk with anyone working on your project. Get their business cards. Call their offices and verify when they have gotten paid by your general contractor. If they haven’t been paid, don’t give the general contractor any more money.
4. Include in the contract a penalty for finishing LATE.
Your general contractor will propose an itemized cost for your project, and a timeline. But if he delays completion by 3 months, you will take a huge hit in lost revenue, staff wages, and overhead. My architect suggests looking at the proposed timeline, giving them one extra week for wiggle room, and then charging $400 per business day that the job is not complete. This needs to be in the initial contract. If your general contractor balks, do not give up. Ask him how much extra time he needs. Ask him what daily penalty he thinks is fair. This conversation can be very revealing.
If you follow these four rules, you can completely avoid being defrauded by general contractors, and even subcontractors for small remodel jobs.
An ounce of prevention — a bond, an awkward conversation, a few phone calls — can be worth much more than a pound of cure.