Dive Brief:
- Corruption has become commonplace in the $45.3 billion New York City construction market, according to a report from The Real Deal. The rise of fraudulence, the report found, stems from a lack of oversight that has left third parties — like property managers, suppliers and subcontractors — to a construction project virtually unchecked.
- The large size of many New York City construction projects reportedly allows some suppliers and subs to inflate line items or overbill because there is a slim chance that anyone will catch it. These incidents can be compounded when two third parties collaborate and attempt to defraud the project and owner. The Real Deal reports that small contractors and property management companies often don't have the financial resources to implement strict monitoring and compliance programs, while large contractors may often be able to write off costs associated with corruption charges as a business expense, emerging virtually unscathed.
- Risk management experts told The Real Deal that the construction industry is largely unregulated when it comes to project management and tends to resist self-policing.
Dive Insight:
Corruption and fraud are believed to be major drivers behind high construction costs in New York City. In February, the focus turned to the city's $9 billion interiors sector when New York State Police and the Manhattan District Attorney's Office announced that they were investigating $100 million in potential pay-to-play schemes. Former executives at Turner Construction and Bloomberg were pulled into the probe regarding work performed at the Bloomberg headquarters. Authorities claimed that some Turner and Bloomberg executives took bribes and kickbacks from interior subcontractors in return for awarding contracts.
Fraud cases play out under the oversight of owners, who are often not familiar with construction material and labor costs. Some organizations are working to change that by offering guides, like one released by JLL last month, that aim to offer better insight into cost benchmarks. Armed with the average costs of buildouts in several U.S. markets, owners could better understand the difference between contractor invoices and what construction labor and materials should cost.
Union labor has also come under fire amid claims that some workers are being billed exorbitant or sometimes unnecessary amounts. Manhattan's Hudson Yards developer Related Cos. is suing the Building and Construction Trades Council of Greater New York claiming that the council is trying to force them to include corrupt unions in a project labor agreement for the second phase of the $25 billion Manhattan development. These are the same unions that, Related says, pilfered $100 million during the project's first phase by padding worker hours and letting high-paid, senior workers waste expensive time performing menial tasks and providing an unsafe working environment.
