It was a confident Gov. Andrew Cuomo who, in his State of the State address in January, proclaimed that he would make a “$100 billion investment in transformative projects statewide.”

It was a big number, even by Empire State standards. “I propose the New York: Built to Lead program,” Cuomo said. “It is a development initiative that would make Governor Rockefeller jealous.”

On the impressive to-do list: $22.1 billion for roads and bridges to be built by the state Department of Transportation; $26.1 billion for Metropolitan Transportation Authority transit projects; $3 billion for an expanded Penn Station; and $5 billion for the Port Authority of New York and New Jersey’s Gateway rail tunnel under the Hudson River.

Yet, industry experts warn, the reality is that historically these kinds of big projects fall prey to multibillion-dollar cost overruns, blown deadlines and even what prosecutors describe as criminal behavior by the very construction companies that are building them.

Consider the Port Authority’s World Trade Center,which came in years behind schedule at a cost of $14.8 billion, well above the original $11 billion estimate. There is also the MTA’s East Side Access, designed to link Grand Central Terminal with the Long Island Rail Road, which was supposed to cost $4.3 billion and be completed in 2009. In 2014, the MTA said the project would come in at $10.8 billion and would not be finished until 2023. New York City’s Croton Water Filtration Plant was supposed to cost $800 million and came in at $3.2 billion.

The stakes are high. Even as our critical infrastructure has continued to deteriorate, the federal government has scaled back its role in supporting big-ticket projects. When projects blow their budget and timeline, that boosts costs. That, in turn, means a higher debt service to cover the additional borrowing that’s required.

To this day, the inability of agencies like the New York City Department of Environmental Protection and the MTA to bring in big projects on time and on budget has forced residents to pay higher water rates and subway fares.

Brian Aryai, a former U.S. Treasury special agent and former senior executive of a major construction company who became an industry whistleblower, warns that the way New York’s industry is currently wired, the governor’s ambitious plan will fall short of its goals. The reason, said Aryai, who now runs Icon Compliance Services, is because of “long-standing layers of fraudulent padding of construction costs,” which has roots in the era when organized crime dominated the business.

“We must first cure the endemic disease that plagues the construction industry and trade unions before incurring more capital expenditures,” Aryai told City & State. For him, the remedy is having truly independent compliance and integrity monitoring at every step of these massive public works projects.

Aryai says holding the construction industry accountable is a more formidable challenge than keeping the banking sector honest. “With the Wall Street banks, it seems like every politician is a beneficiary of the campaign cash largesse of Wall Street, and the same thing is true when it comes to these multinational contractors,” he said. “But in the case of the builders, they are even more formidable because of the political clout of the trade unions who depend on the big builders.”

Ronald Goldstock, former director of the New York State Organized Crime Task Force, which investigated the infiltration of the construction trades by the Mafia, says law enforcement has been successful in rolling back the mob's dominance in construction. However, he says that the organized-crime legacy still makes the industry vulnerable to corruption, like padding the bills they send to their public and private sector clients.

“Over time, customs and practices are internalized within the industry,” Goldstock told City & State. “Industry participants live with what they see as an accommodation – union leaders are able to reward their friends, and the companies that pay expect that the union will not cause major financial harm by having their members unduly delay projects. But the system, at its core, is corrupt and needs to be ended.”

 

Accused and on the job

For years, the U.S. attorney’s office in the Eastern District of New York has been pursuing what prosecutors allege is an industrywide practice in which contractors fraudulently bill both public- and private-sector clients tens of millions of dollars for phantom overtime hours. The practice is known as “eight and two,” referring to the bonus of paying two hours of overtime without the worker having to be on the job to earn it.

Industry insiders defend the practice as a way contractors can retain their skilled workforce. Aryai says the practice is just the tip of the iceberg. Prosecutors did not charge any unions or individual members in connection with the alleged scam.

So far, three companies have paid $83 million and accepted non-prosecution or deferred prosecution agreements to settle these federal fraud charges, which go back years and involve signature projects like World Trade Center Towers One, Three, Four and Seven; the World Trade Center PATH Transportation Hub; the Plaza Hotel renovation; the Javits Convention Center Expansion and Renovation Project; the Aqueduct Casino in Queens; and scores of other jobs.

In April 2012, prosecutors required Lend Lease, formerly Bovis Lend Lease, to pay out $56 million for construction fraud.In May of last year another contractor, Hunter Roberts Construction Group, settled for $7 million, and in December Tishman Constructiona subsidiary of Aecom, settled for $20 million. As part of their settlement agreements with the Department of Justice, all three pledged to make significant internal reforms and to put in place rigorous compliance programs in order to avoid prosecution.

“Through a systemic practice, Tishman Construction bilked its clients by charging them for unworked time and at rates higher than those bargained for by their clients,” U.S. Attorney Robert Capers said in a statement in December. “By doing so, Tishman defrauded its clients and abused the trust placed in it to provide construction services on some of New York’s most storied buildings.”

Janice Fedarcyk, then the head of the FBI’s New York office, was equally tough on Bovis in 2012. “The overbilling fraud affected city, state and federal public building projects,” she said. “If you are a New York City resident, Bovis indirectly swindled you on three different levels.” Loretta Lynch, then the U.S. attorney for the Eastern District of New York, added: “The defense of ‘everyone does it’ will not be a shield against law enforcement.”

When the Justice Department started publicly rolling on these cases in 2012, it was reported that prosecutors were also investigating Skanska, Turner Construction and Plaza Construction for similar practices. Turner Construction and Plaza Construction did not return a request for comment. An attorney close to the case, but not authorized to speak about it by his client, confirmed that behind-the-scenes negotiations were ongoing.

A representative for Skanska confirmed the company was contacted, along with other New York-area contractors, by the Eastern District of New York as part of its industrywide investigation into certain labor billing practices and minority- and women-owned business enterprises, or MWBEs. “We continue to cooperate with the Eastern District and its investigation,” the Skanska representative confirmed.

A subsidiary of Skanska, Bayshore Concrete, is supplying materials for the multibillion-dollar state Thruway Authority’s new Tappan Zee Bridge and is the primary contractor on the Port Authority’s Bayonne Bridge project.

Skanska also entered into a non-prosecution agreement with Preet Bharara, the U.S. attorney for the Southern District of New York, in March of 2011 to settle criminal charges that the firm fraudulently tried to exploit federally established programs to help disadvantaged MWBEs from getting government work. Skanska had to pay $19.6 million.

On other projects, higher costs have not led to criminal charges or settlements but have raised questions all the same. Bronx Assemblyman Jeffrey Dinowitz says there just is no accountability when it comes to public works projects like the New York City Department of Environmental Protection’s Croton Filtration Plant, which had a final price four times its original estimate. “When the total cost of a project is multiples of the original estimate, there needs to be a real investigation,” he said.

And Dinowitz said he’s not impressed when prosecutors get multimillion-dollar payouts from construction companies as part of deferred prosecution deals. “A lot of companies will take a hefty fine and look at it as just a cost of doing business,” he said. “Now, perhaps it is time to hold individual executives liable.”

 

Lowest bid, high risk

Barry LePatner, an attorney and one of the nation’s leading experts on the construction industry, says that the standard public-sector practice of awarding a contract to the lowest bidder sets the stage for fraud down the line.

“The contractors routinely know they have to bid at or below their actual costs to get the job and count on making their profit with change orders later on,” said LePatner, the author of “Broken Buildings, Busted Budgets: How to Fix America’s Trillion-Dollar Construction Industry.” “If you go with the lowest bidder, you get what you deserve.”

LePatner, who says cost overruns in the United States total $120 billion each year, suggests both public- and private-sector construction service consumers shift from a lowest-bidder strategy to criteria for picking a contractor that incorporates their overall performance and track record. “We don’t reward competence or success otherwise,” he said.

Maria Doulis, vice president with the Citizens Budget Commission, says part of the problem is that officials pushing for a project will low-ball the cost to get public consensus. “And then, in the public sector, there are these deep chasms between the scoping and design phase effort of a project and its actual construction,” she said.

Doulis credits the Cuomo administration for shifting to a “design-build” strategy, where those discrete phases are bid as a single contract. “A single firm or consortium of firms bids on the contract, and the contract is awarded based on the lowest bid, or more commonly, the ‘best value,’” Doulis explained.

Doulis says the results of design-build, first put on the books in 2011, have been encouraging, with several state Department of Transportation projects coming below budget and ahead of schedule.

For Cuomo, the biggest test to date for design-build is the ongoing replacement of the Tappan Zee Bridge. The nearly $4 billion project is supposed to be completed by 2018. So far, officials say they are on budget and on schedule.

 

Back to basics

Mark Peters, the commissioner of the New York city Department of Investigations, says it should come as no surprise that the construction industry is vulnerable to criminal activity. “There’s billions of dollars at stake,” Peters told City & State.

But Peters, who served as the chief public corruption attorney for the New York state attorney general, remains confident that the way to stop it is by holding individuals responsible for their actions, including construction contractors.

Last summer, Peters and Manhattan District Attorney Cyrus Vance charged two managers of a lower Manhattan excavation site with manslaughter because they allegedly failed to take proper safety precautions on the site, which lead to the death of a 22-year-old laborer. Last month Vance and Peters teamed up again to bring criminal charges against contractors and property owners who allegedly were responsible for the gas explosion in the Lower East Side last year that left two people dead.

But Peters notes that keeping corruption in check is not just the job of officials. “One person can absolutely make a difference,” Peters said, referring to citizens that call into the DOI with tips about corruption.

“Just last year, we arrested 50 building inspectors, related contractors and property owners in a massive bribery scheme,” Peters said, “and it all started with a single tip from a single person who told us about a single bribe attempt.”