Whether it’s overzealous subcontractors trying to take advantage of the strengthening construction market or malicious intent through kickbacks, bid rigging, and bribery, it is crucial to protect your project through ongoing scrutiny and due diligence. This quarter’s articles remind Owners of the importance of reviewing CURRENT prequalification materials and the disastrous results of lack of oversight.
Subcontractor Defaults - Get to the Finish Line
By Kenneth Rubinstein and Eric Penley
December 10, 2018
Earlier this month, a subcontractor-default insurance company filed suit against an electrical subcontractor in New York state court. The claim: a $12.8-million loss caused by the sub’s admitted failure to complete electrical work under a subcontract at the Whitney Museum of American Art in Manhattan.
While contractors used to worry about finding work, in today’s strengthening market, the bigger concern is finding qualified subcontractor resources to perform new and ongoing projects. As that struggle intensifies, many firms overlook the growing risk of subcontractor default—forgetting that a single such event can cause a crippling loss.
Surprisingly, defaults have actually increased as the industry financial picture has improved. More subs have stretched to take on added work, pushed through project backlogs and overextended capital and manpower, resulting in cash-flow problems.
Subcontractor default has bitten an ever-growing number of contractors who now regret not doing more beforehand to mitigate risks.
Although many firms look to subcontractor default insurance or surety bonds to mitigate this risk, these tools are not appropriate for all contractors or all projects. These options also are often expensive and are not always justified from a risk-benefit perspective.
Instead, subcontractor prequalification remains a key tool to guard against default. As the industry has gained sophistication, and default insurers have developed specific financial metrics to evaluate risks, certain best practices have emerged to help contractors identify and avoid the risks linked to subcontractor default.
The first step is to gain a clear picture of a prospective sub’s financial stability. There is no one-size-fits-all method, but contractors should generally require a current set of financial statements and the past three years of gross earnings. These can be used to evaluate the sub’s stability, track record and asset levels. The contractor needs to determine if he or she is comfortable with the sub’s debt level compared to those assets.
Complete Picture Needed
Asking a subcontractor for detailed financial information can be a sticky subject. If a prospect balks at providing financial statements or other detail, a contractor should ask for a document that lists several recent years of revenue and values of current-year committed projects to determine if it is overextended. Another good strategy is to seek the current employee level, including the number hired in the past six months. The sub also should be required to provide project data such as injury rates and OSHA citations over the past five years, and the level of going-forward risk, with references provided to confirm any issue in safety or performance.
Following through on these contacts often uncovers revealing patterns about a subcontractor’s reliability, adaptability and success in completing work on time. It is likewise a good practice to solicit and contact references for a sub’s critical suppliers to identify potential downstream issues if there is a history of slow payments.
Prequalification data is only valuable to the extent that it is reasonably current. For this reason, contractors should require all subs to periodically update some or all prequalification materials before they bid new work.
In particular, we recommend that subs must provide updated financial and project information annually, or biannually for trusted subs that have successfully completed multiple projects. Subcontractor prequalification is not a one-time exercise; financial circumstances and project commitments can, and do, change from when information is first submitted to when a sub bids on its second, third or fourth project with a contractor.
Contractors with strong prequalification programs typically enjoy greater stability from their subcontractors and have stronger relationships because those subs have built more trust that they will perform as needed.
Ultimately, the risk of subcontractor default, even if not obvious, never goes away. A bit of extra diligence might just be enough to avoid a painful loss.
By Matthew Chayes
Bryan Thomas for The New York Times
Bloomberg LP Execs, NYC Building Contractors Charged in Alleged Kickback Scheme
December 12, 2018
Rogue executives from Bloomberg LP conspired with building contractors on Manhattan projects to steal $15 million by inflating bids, generating phony work orders and misappropriating other cash, the Manhattan district attorney's office said Tuesday.
The alleged conspiracy, lasting from May 2011 to October 2017, involved at least 14 people - including three from Long Island -- and three companies doing work on 120 Park Ave. and 919 Third Ave., according to the district attorney's office. The companies named are Hugh O'Kane Electric and Litespeed Electric, both of Manhattan, and Cooling Guard Mechanical of Middle Village, Queens.
"New York's sky-high construction costs are driven not only by market demand, but by pay-to-play industry corruption that makes it impossible for honest companies to compete," the district attorney, Cy Vance, said in a press release.
The projects involved interior office space for Bloomberg LP, the media company owned by former New York City Mayor Michael Bloomberg, who is reportedly considering running in 2020 for president of the United States.
The Long Island defendants are Ronald Olson, 51, of Massapequa, a construction executive; Louis Squillante, 68, of East Meadow, an operations director for Litespeed; and Hugh R. O'Kane, 41, of Oyster Bay, according to the district attorney's office.
At successive arraignments lasting nearly two hours Tuesday at Manhattan Criminal Court, each defendant pleaded not guilty and was unhandcuffed and freed on bond as high as $1 million.
One of the indictments, spanning 47 pages, details a years-long scheme involving kickbacks, a cash-filled envelope, fictitious invoices, no-show jobs, a custom glass tabletop for one of the defendants, bid-rigging, leaking Bloomberg LP's proprietary information in order to give a co-conspirator a competitive edge, and a false application to qualify set-asides for businesses owned by women or minorities.
According to the indictment, conspirators would sometimes use culinary euphemisms to describe kickbacks.
"When do u think u will be coming with sandwiches," defendant Vito Nigro, 57, of Holmdel, New Jersey, texted an unnamed co-conspirator in 2016. "The crew is hungry and want to eat."
Various charges include grand larceny, money laundering, contract in restraint of trade/monopoly, conspiracy and falsifying business records, all felonies, according to the district attorney's office.
Prosecutor Christopher J. Beard alleged at court that Anthony Guzzone, Bloomberg LP's now-former head of global construction, "orchestrated ... almost this entire scheme to steal from his employer at every and any opportunity that presented itself." Beard said Guzzone, 49, of Middletown, New Jersey, "received millions of dollars in kickbacks," directed underlings to commit crimes, and "basically, quite frankly, built himself a palace out there in Jersey."
Guzzone's attorney, Alex Spiro of Manhattan, called the informants who helped build the case against the alleged conspiracy "alcoholics" and "proven liars."
Ty Trippet, a spokesman for Bloomberg LP, said in an email that the district attorney's office uncovered "this scheme."
"This sends a strong message to contractors in New York who engage in fraud: You will be caught," Trippet said.
The indictments don't itemize the total amount the conspiracy is alleged to have netted, but the district attorney's office said it's $15 million.
"A lot of money," said Judge Roger S. Hayes of Manhattan, who presided over the arraignments. "These are very serious charges."