Corruption in Public Construction

Corruption in Public Corruption in Public ConstructionConstruction

Things that happen in the Things that happen in the specification, buying, and specification, buying, and building process which waste building process which waste money.money.

What are the motives?What are the motives?

Simply put the prime motive for most Simply put the prime motive for most any type of corruption is to make more any type of corruption is to make more money. Sometimes there is a desire money. Sometimes there is a desire for power also, but usually laziness is a for power also, but usually laziness is a stronger secondary motive than power.stronger secondary motive than power.

It’s faster and easier to use corruption It’s faster and easier to use corruption to make more money vs. building a to make more money vs. building a better product, increasing operational better product, increasing operational efficiency, etc.efficiency, etc.

Basic corruption:Basic corruption:

Something obvious that is in Something obvious that is in defiance of the law, and more defiance of the law, and more importantly PROVABLE to be in importantly PROVABLE to be in defiance of the law with defiance of the law with reasonable effort.reasonable effort.

Basic examples:Basic examples:

• BriberyBribery• Bid RiggingBid Rigging• Deliberate conspiracy to prevent Deliberate conspiracy to prevent competitive biddingcompetitive bidding

• Corrective actions more widely known:Corrective actions more widely known:TransparencyTransparencyLaws and enforcementLaws and enforcementPolicies to motivate and protect Policies to motivate and protect

whistleblowerswhistleblowers

StealthStealth Corruption: Corruption:

This more complex type of corruption This more complex type of corruption is very common in the USA is very common in the USA construction market.construction market.

These strategies can involve 3, 4, 5 or These strategies can involve 3, 4, 5 or even more parties in a scheme for even more parties in a scheme for higher profits.higher profits.

StealthStealth Corruption: Corruption:

Multiple parties often involved.Multiple parties often involved. No one party may feel like they are being criminal.No one party may feel like they are being criminal. Zooming in with a microscope, things may look okay.Zooming in with a microscope, things may look okay. The ultimate test is to check costs and profits. If The ultimate test is to check costs and profits. If

prices are far above fair market value and several prices are far above fair market value and several parties have gained additional profit, there is parties have gained additional profit, there is corruption.corruption.

Financial damage to the public is often WORSE with Financial damage to the public is often WORSE with this more deviant type of corruption.this more deviant type of corruption.

Prosecution under the law is difficult to implement. Prosecution under the law is difficult to implement. Proactive reforms are more effective.Proactive reforms are more effective.

Klitgaard 1998Klitgaard 1998

C = M + D – AC = M + D – A C – CorruptionC – Corruption M – Monopoly, corporate influence. M – Monopoly, corporate influence.

Could also mean privatization.Could also mean privatization. D – Discretion, ability to bypass D – Discretion, ability to bypass

rules.rules. A – Accountability, watchdogs and A – Accountability, watchdogs and

whistleblowerswhistleblowers

Standardization Standardization (Monopoly/discretion)(Monopoly/discretion) The case to standardize is built upon a net The case to standardize is built upon a net

savings.savings. But typically the evidence is incomplete and But typically the evidence is incomplete and

biased.biased.

Standardization – Standardization – creates a hidden creates a hidden monopolymonopoly The argument to standardize is usually built with heavy The argument to standardize is usually built with heavy

influence from a vendor.influence from a vendor. Spare parts argument: Frequently used even if the owner Spare parts argument: Frequently used even if the owner

stocks no spare parts. Two times zero is still zero!stocks no spare parts. Two times zero is still zero! Inconvenience of multiple brands: Vendor builds up the fear Inconvenience of multiple brands: Vendor builds up the fear

in the owner for lost time and added cost from having multiple in the owner for lost time and added cost from having multiple brands. This cost is often greatly exaggerated.brands. This cost is often greatly exaggerated.

Designer: Benefits by extending a system with existing Designer: Benefits by extending a system with existing brand. Simplifies design, submittal review, etc. More profit $brand. Simplifies design, submittal review, etc. More profit $$$$$

Prime contractors: Act as a “smoke screen” to hide the fact Prime contractors: Act as a “smoke screen” to hide the fact that only one vendor is bidding on an expensive item/trade.that only one vendor is bidding on an expensive item/trade.

Review boards: Often told of a manufacturer to imply there Review boards: Often told of a manufacturer to imply there will still be competition, but specification lists the exclusive will still be competition, but specification lists the exclusive vendor for the manufacturer. This is deliberately deceptive.vendor for the manufacturer. This is deliberately deceptive.

Standardizing to save Standardizing to save money, a lie when money, a lie when monopolizingmonopolizing No matter what “evidence” can be No matter what “evidence” can be

cooked up by the owner, engineer, cooked up by the owner, engineer, vendor to show a cost savings, once vendor to show a cost savings, once monopolization is enabled the future monopolization is enabled the future greed and highly inflated pricing from greed and highly inflated pricing from the vendor will likely far exceed initial the vendor will likely far exceed initial projected savings.projected savings.

Give the fox keys, he will take Give the fox keys, he will take chickens. How many? Who knows.chickens. How many? Who knows.

Government Contract Government Contract purchasing abuse (M and purchasing abuse (M and D)D) Many government entities provide a means Many government entities provide a means

for purchase of certain products/services for purchase of certain products/services through pre-established pricing.through pre-established pricing.

The process biases tenders towards the The process biases tenders towards the larger vendors. Price lists can be thousands larger vendors. Price lists can be thousands of pages.of pages.

Government contracts:Government contracts:

This creates a difficult environment for smaller, This creates a difficult environment for smaller, locally owned and operated businesses as they do locally owned and operated businesses as they do not have the resources to manage the complex not have the resources to manage the complex government price lists.government price lists.

Beware of “loss leader” tricks whereby a fraction of Beware of “loss leader” tricks whereby a fraction of the work is at the pre-established price, but the lion’s the work is at the pre-established price, but the lion’s share of work is done at vendor set prices.share of work is done at vendor set prices.

Coordinating this “special” arrangement with a Coordinating this “special” arrangement with a vendor is not even legal in some regions for a vendor is not even legal in some regions for a construction project. How do you handle scheduling, construction project. How do you handle scheduling, insurance, progress payments, supervision, etc. insurance, progress payments, supervision, etc. when a vendor is bypassing a normal prime when a vendor is bypassing a normal prime contractor for a construction project?contractor for a construction project?

Sidebar- losing Sidebar- losing resources from resources from bypassesbypasses Both standardization and contract buying Both standardization and contract buying

arrangements tend to direct purchases arrangements tend to direct purchases towards large, multi-national corporations.towards large, multi-national corporations.

How many profits leave your region and/or How many profits leave your region and/or country?country?

Are goods more likely to be made offshore Are goods more likely to be made offshore vs. when supporting a local business?vs. when supporting a local business?

This is off the topic of corruption but This is off the topic of corruption but demonstrates further damage that is likely demonstrates further damage that is likely to occur from over-use of this discretion.to occur from over-use of this discretion.

Money affects reason Money affects reason and beliefand belief Gifts create a bias towards believing a Gifts create a bias towards believing a

message.message.

Bias from gift receiptBias from gift receipt

Preference towards certain products, technologies, Preference towards certain products, technologies, and vendors is often a matter of opinion and such and vendors is often a matter of opinion and such opinion can be persuaded via gift giving.opinion can be persuaded via gift giving.

The vendors who do the most gift giving are often The vendors who do the most gift giving are often trying to bridge a wide credibility gap, and gifts trying to bridge a wide credibility gap, and gifts help to bridge that gap.help to bridge that gap.

Vendors are not charities. When they give gifts, Vendors are not charities. When they give gifts, they expect to get than money back, AND MUCH they expect to get than money back, AND MUCH MORE, by having limited or no competition for MORE, by having limited or no competition for future sales.future sales.

Public agencies should set policies to severely Public agencies should set policies to severely limit the receipt of gifts.limit the receipt of gifts.

Hyper-bundling. (M)Hyper-bundling. (M)

A specifying engineer may work with a A specifying engineer may work with a particular vendor on the project and the particular vendor on the project and the vendor will be listed as “basis of design”.vendor will be listed as “basis of design”.

Hyper - BundlingHyper - Bundling

• A vendor will put together a unique mix of A vendor will put together a unique mix of products, and if even just one product is products, and if even just one product is exclusive, the vendor can have a lock.exclusive, the vendor can have a lock.

• The vendor will put out a large scope of work, The vendor will put out a large scope of work, including the special product(s), and will including the special product(s), and will refuse to itemize the pricing.refuse to itemize the pricing.

• Contractors often don’t make much of any Contractors often don’t make much of any effort to fight this because they don’t want to effort to fight this because they don’t want to be blacklisted by the vendor, and it’s more be blacklisted by the vendor, and it’s more convenient to get one equipment price in the convenient to get one equipment price in the mad scramble to meet bid deadlines. It’s not mad scramble to meet bid deadlines. It’s not the contractor’s money that is wasted. The the contractor’s money that is wasted. The contractors actually profit slightly from “cost-contractors actually profit slightly from “cost-plus” arithmetic when input costs are higher.plus” arithmetic when input costs are higher.

Beware the influenced Beware the influenced expert (M)expert (M) Specifying engineers attend trade Specifying engineers attend trade

shows/educational conferences and shows/educational conferences and hear “expert” testimony about new hear “expert” testimony about new technologies.technologies.

Very often the “expert” is financially Very often the “expert” is financially connected to a manufacturer.connected to a manufacturer.

Self serving Self serving specifications (D)specifications (D) Specifications require the use of a Specifications require the use of a

certain entity by the contractor. certain entity by the contractor. Entity is connected to the Entity is connected to the specifying agency.specifying agency.

Deviant Specs:Deviant Specs:

Specifying engineer requires what seems to Specifying engineer requires what seems to be an unusually large amount of testing be an unusually large amount of testing procedures for a project.procedures for a project.

The engineer is affiliated with the company The engineer is affiliated with the company that will do the testing. In this way the that will do the testing. In this way the engineer will increase their financial reward engineer will increase their financial reward from the project.from the project.

Financial connections between design Financial connections between design firms, construction firms, and suppliers firms, construction firms, and suppliers create opportunities for conflicts of interest create opportunities for conflicts of interest and abuse of the public trust.and abuse of the public trust.

More Auditing? (A)More Auditing? (A)

Drive your car and ignore all Drive your car and ignore all maintenance schedules.maintenance schedules.

Engine fails.Engine fails. Change the oil after the blown Change the oil after the blown

engine.engine. How helpful is that going to be?How helpful is that going to be? This is an analogy of how helpful This is an analogy of how helpful

post construction auditing is for post construction auditing is for corruption issues.corruption issues.

Prescription: More Prescription: More Procurement oversight Procurement oversight (A)(A) Many government overseeing bodies Many government overseeing bodies

for construction are loaded with for construction are loaded with architects and engineers, the same job architects and engineers, the same job classification as who they oversee.classification as who they oversee.

Close the revolving Close the revolving door:door:• The revolving door whereby employees within The revolving door whereby employees within

government level design & construction groups regularly government level design & construction groups regularly change positions with architects & engineers in the change positions with architects & engineers in the private sector is a conflict of interest. Bad habits will private sector is a conflict of interest. Bad habits will sneak into the system. Propaganda can spread and sneak into the system. Propaganda can spread and poison the truth.poison the truth.

• There needs to be an outside SUPERVISORY influence to There needs to be an outside SUPERVISORY influence to help reign in the problems in this process:help reign in the problems in this process:

•Risk assessment.Risk assessment.•Monitoring of the design development process.Monitoring of the design development process.•Monitoring of the bidding process.Monitoring of the bidding process.•Post bid protest procedures.Post bid protest procedures.•Data analysis, surveys to see that the market is fair Data analysis, surveys to see that the market is fair

and competitive at all levels.and competitive at all levels.•Post construction cost metrics and evaluation.Post construction cost metrics and evaluation.

Oversight metric to Oversight metric to use?use? Analogy: For the outsourced Analogy: For the outsourced

federal government military federal government military contractors there are in house, full contractors there are in house, full time auditors who are employees of time auditors who are employees of the federal government, not the the federal government, not the contractor, to help to monitor costs.contractor, to help to monitor costs.

These monitors help to see that These monitors help to see that money is spent more frugally.money is spent more frugally.

Monitoring A/E firms:Monitoring A/E firms: A/E firms design projects for the public.A/E firms design projects for the public. Contractors build the projects, but the Contractors build the projects, but the

costs are clearly more defined by the costs are clearly more defined by the A/E firms’ choices in materials and A/E firms’ choices in materials and methods.methods.

There is a strong parallel to the military There is a strong parallel to the military contractor model. On site supervision contractor model. On site supervision offers strong accountability. Allow for offers strong accountability. Allow for on site oversight in proportion to design on site oversight in proportion to design hours. The on site supervisor watch-dog hours. The on site supervisor watch-dog puts pressure on the A/E firm to ensure puts pressure on the A/E firm to ensure fair competition to get the best pricing.fair competition to get the best pricing.

Best Value discretion:Best Value discretion:

Be careful of “mixed metaphors”. Detailed plans Be careful of “mixed metaphors”. Detailed plans and specifications, AKA “plan and spec”, bidding and specifications, AKA “plan and spec”, bidding processes lend themselves to a lowest responsible processes lend themselves to a lowest responsible bidder selection criteria.bidder selection criteria.

Using a best value selection process in an RFQ is Using a best value selection process in an RFQ is inappropriate. Best value logic belongs in an RFP, inappropriate. Best value logic belongs in an RFP, where inherently more than just price is to be where inherently more than just price is to be evaluated.evaluated.

New York State has a new law which could New York State has a new law which could potentially confuse a best value process with a plan potentially confuse a best value process with a plan and spec process: and spec process: https://www.osc.state.ny.us/localgov/pubs/piggybackingla://www.osc.state.ny.us/localgov/pubs/piggybackinglaw.pdfw.pdf

Design Build, Design Build, legitimate best value legitimate best value usageusage Some parts of the US and other nations have Some parts of the US and other nations have

found that negotiating processes such as found that negotiating processes such as design/build offer higher transparency and design/build offer higher transparency and lower costs.lower costs.

The core issue of having one party (A/E firms) The core issue of having one party (A/E firms) specifying products/services while another specifying products/services while another party (contractor) is mandated to buy the party (contractor) is mandated to buy the products/services is eliminated.products/services is eliminated.

It would seem to be common sense that It would seem to be common sense that greater purchasing leverage reduces costs and greater purchasing leverage reduces costs and corruptioncorruption..

Above all - simplicity Above all - simplicity limits corruptionlimits corruption

Global progressGlobal progress

CIPSCIPS NIGPNIGP Transparency InternationalTransparency International The World BankThe World Bank FCPA complianceFCPA compliance An ISO “Procurement Fraud” standard is An ISO “Procurement Fraud” standard is

in developmentin development Construction is one aspect, a major Construction is one aspect, a major

aspect, of global fraud and wasteaspect, of global fraud and waste

Thank youThank you

Prepared by:Prepared by:

Rich PurtellRich Purtell

Climate Control TechnologiesClimate Control Technologies

Cell 607-425-9730Cell 607-425-9730

email [email protected] [email protected]