Corruption in New York Public Construction

A complex and flawed municipal law structure, and poor private sector behaviors, enable crony capitalism and price gouging of the NY taxpayer.

What are the motives?

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

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

Basic corruption:

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

Basic examples:

• Bribery• Bid Rigging• Deliberate conspiracy to prevent competitive bidding• Corrective actions more widely known:

TransparencyLaws and enforcementPolicies to motivate and protect

whistleblowers

Stealth Corruption:

This more complex type of corruption is very common in New York state.

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

Stealth Corruption:

Multiple parties often involved. No one party may feel like they are being

criminal. Zooming in with a microscope, things may

look okay. The ultimate test is to check costs and

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

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

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

Klitgaard 1998

C = M + D – A C – Corruption M – Monopoly, corporate

influence. Could also mean privatization.

D – Discretion, ability to bypass rules.

A – Accountability, watchdogs and whistleblowers

GML 103-5 Standardization (Monopoly/discretion) “Standardizing” means to justify the use of a

single product or service. The case to standardize is built upon a net

savings. But typically the evidence is incomplete and

biased.

The original NYS GML 103-5 as recorded:

Upon the adoption of a resolution by a vote of at least three-fifths of all the members of the governing body of a political subdivision or district therein stating that, for reasons of efficiency or economy, there is need for standardization, purchase contracts for a particular type or kind of equipment, material or supplies of more than ten thousand dollars may be awarded by the appropriate officer, board or agency of such political subdivision or any such district therein, to the lowest responsible bidder furnishing the required security after advertisement for sealed bids therefor in the manner provided in this section. Such resolution shall contain a full explanation of the reasons for its adoption. - See more at: http://codes.lp.findlaw.com/nycode/GMU/5-A/103#sthash.YbMb89sh.dpuf

Comptroller’s office – Extrapolates use of GMU As shown on the previous slide,

103-5 was meant for owner direct purchasing, NOT construction projects.

Yet today 103-5 is used VERY frequently for construction projects.

Thus much of the abuse of 103-5 is the fault of the executive branch.

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

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

owner stocks no spare parts. Two times zero is still zero!

Inconvenience of multiple brands: Vendor builds up the fear in the owner for lost time and added cost from having multiple brands. This cost is often greatly exaggerated.

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

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

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

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

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

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

State contract purchasing – more extrapolation New York state provide a means for purchase

of certain products/services through pre-established pricing.

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

Government contracts:

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

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

As with GML 103-5 standardization, most language in laws adopted by the legislature refer to “eyes on” owner direct buying, not passing off the mandate to buy from a single source to a contractor.

Sidebar- losing resources from bypasses Both standardization and contract

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

How many profits leave New York and/or the USA?

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

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

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

message.

Bias from gift receipt

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

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

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

New York state has very weak policies concerning gift receipt by public sector employees. Example: A school facility manager who might be involved in a construction renovation project that will receive a great deal of state aid, should be held to strict standards concerning gift receipts. So should engineering firms that design projects.

Hyper-bundling. (M)

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

Hyper - Bundling

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

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

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

Beware the influenced expert (M) Specifying engineers attend trade

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

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

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

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

Deviant Specs:

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

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

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

Separate pocket syndrome A dollar from the state is not

treated with as much value as a dollar from local government.

A local municipality may spend $10 of state money to save $1 of local funds. This particularly comes true when money is spent for added “convenience” for a local authority.

Executive branch discretion: As mentioned earlier, GML 103-5

standardization has been greatly expanded upon by the NYS Comptroller’s office.

Large DOT projects have been short-listed to certain contractors by the executive branch. This is another over-use of discretion and executive authority.

Best Value discretion, GML 103-16, a new problem perhaps? Be careful of “mixed metaphors”. Detailed

plans and specifications, AKA “plan and spec”, bidding processes lend themselves to a lowest responsible bidder selection criteria.

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

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

Scaffold Law Reform:

Over the years the original intent of the scaffold law has been re-interpreted by the courts in NY to be an absolute liability standard.

Contributory negligence by employees has no bearing on awards.

See this group: http://

www.unshackleupstate.com/

Wicks Law:

New York State has required the use of separate prime contractors for larger projects, i.e. school renovations.

Many feel that this results in higher costs, more finger pointing, and possibly more corruption.

Prevailing Wage Law:

Wage standards are set for construction projects.

Some projects go a step further and require a PLA, project labor agreement, which further forces the need for organized labor.

Scaffold, Wicks, and Prevailing Wage Laws- Blue Collar detractors for white collar corruption: School boards, the public, media,

etc. are all very much galvanized around Wicks and Prevailing wage laws.

Such focus is on these factors, that the design firms, facility managers, etc. are not properly scrutinized for their substantial role in price gouging and corruption for public projects.

Prescription: More Procurement oversight (A) New York’s government overseeing

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

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

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

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

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

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

Above all - simplicity limits corruption

Thank you

Prepared by:Rich PurtellClimate Control TechnologiesCell 607-425-9730email rpurtell2@stny.rr.com