Owners and developers put a lot of faith in the contractors they hire. They also sink a great deal of money into their construction projects, so when contractors, subcontractors or suppliers commit some act of fraud or negligence, it could put the entire project — and investment — at risk.
The apprehension on the part of owners has likely only increased as unscrupulous acts involving construction projects continue to make the news.
Earlier this month, for instance, the U.S. Department of Justice indicted a New Jersey contractor for allegedly defrauding the New York City School Construction Authority by submitting false certified payroll reports incorrectly stating that it had paid the required prevailing wage. In February, Lancaster, New York-based contractor Nichter Construction Inc. pleaded guilty to using non-minority companies to meet its minority participation requirements on a New York state project.
And it’s not just public works contractors being implicated in acts of malfeasance. At the end of last year, some former Turner Construction Co. and Bloomberg executives were indicted for bribery and bid-rigging in connection to a renovation of a Bloomberg property in Manhattan. Working outside of each companies’ established controls, project managers, subcontractors and vendors allegedly conspired to inflate bids, overbill for services and then share the proceeds.
It is because of cases like these that more owners are hiring an extra set of eyes to make sure that contractors and subcontractors generally do the right thing — adhere to the terms of their contracts, keep jobsites as safe as they can be and check the books so that unscrupulous players don’t raid the project coffers with fake bills.
Keep a watchdog, stay out of the doghouse
There are two basic types of monitoring, said Paul Ryan, managing director at K2 Intelligence, which provides these oversight services not only for the public and private construction industries but for other business sectors as well. One type is project monitorship, and the second is the company-focused variety that comes after a contractor has breached the terms of a current or prior contract. The latter is known as “integrity monitoring."
Although assuring the integrity of the construction process is actually a part of all monitoring, Ryan said, whole project monitorships are more proactive in nature.
As part of a standard project monitoring engagement, Ryan said, K2 conducts a risk assessment and makes sure that there are proper controls in place to address those risks. K2, for example, determines whether the general contractor has a robust subcontractor vetting and prequalification process and, if not, helps develop one.
Other monitor activities might include putting systems in place for all holes or gaps in the company's existing controls. Examples include:
- Ensuring that subcontractors’ certificates of insurance are valid.
- Verifying workers' safety credentials
- Looking at who is permitted to approve change orders and material purchases and how they’re processed.
- Checking for any charges against the contingency fund.
- Correlating how the budget aligns with the money actually spent on the project.
- Evaluating what goes into the preparation of certified payroll and other government-mandated forms.
Then, during the course of the project, monitors like K2 conduct regular reviews to make sure that the contractor is in compliance with the approved systems and with any other regulatory or contractual requirements.
