The Real Deal New York

Interior construction keeps attracting corruption. But why?

Officials are reportedly looking into $100M worth of fraud, highlighting the industry’s checkered past
By Kathryn Brenzel | March 05, 2018 07:00AM

Corruption seems to be an enduring theme in interior construction: Every few years, a major contractor is forced to pay hefty fines for one form of fraud or another.

Most recently, state officials and investigators from the Manhattan District Attorney’s Office raided the offices of Bloomberg L.P. and Turner Construction in October, in relation to an alleged overbilling scheme, a New York Times report revealed last week. Bloomberg overpaid Turner $1 million as part of an agreement between company executives and subcontractors to inflate contracts, according to the publication. The raid was reportedly part of a broader investigation into $100 million worth of fraud involving other contractors and clients.

Representatives for the Manhattan District Attorney’s Office declined to comment on Friday. A representative for Turner said the employees involved in the alleged scheme no longer working for the company, though didn’t identify the individuals. The representative noted that Turner “had no participation in the alleged situation and did not profit from it.”

“We firmly believe our staff takes compliance very seriously and ‘does the right thing,’” It is a shame that a few rogue employees may have acted in a non-compliant and criminal manner and tarnished the image of the companies they worked for and the industry as a whole,” a representative for Turner said in an email. “Turner, as a company, had no participation in the alleged situation and did not profit from it.”

The investigation is reminiscent of a similar scheme at Structure Tone: The company agreed in 2014 to pay $55 million after admitting to overbilling various clients, including Bloomberg, for electrical, plumbing and other work. It wasn’t the company’s first conviction, either. In 1998, Structure Tone pleaded guilty to paying bribes to secure a multimillion-dollar contract to renovate Sony’s old headquarters.

Lendlease inked a deferred prosecution agreement in April 2012 to settle claims that it paid overtime to workers that never actually took place on various projects including the renovation of Grand Central. And Tishman Construction, before it was acquired by AECOM in 2010, paid more than $20 million in fines after officials claimed the company overcharged for work on One World Trade Center, the Jacob K. Javits Center and other projects.

Despite these blemishes, the companies emerged relatively unscathed and continue to dominate the market. Structure Tone, for instance, was the top general contractor in the city for renovation and alteration work between January 2012 and March 2017, according to an analysis by The Real Deal. Turner followed in second place. Meanwhile, Lendlease and Tishman are among the biggest general contractors for ground-up projects.

When it comes to interior work, there’s a relatively small pool of companies equipped to do high-end office renovations and build-outs, said Bruce Maffeo, an attorney with Cozen O’Connor and a former prosecutor with the U.S. Attorney’s Office. While a conviction may give a prospective client pause, it’s often not enough to convince them to take a chance on a lesser-known contractor.

“That’s a hard risk to sell,” Maffeo said. “They don’t want to see corruption, but they don’t want to have slipshod construction in their flagship space.”

At the same time, there are more trades — such as drywall, flooring and electrical — involved in interior work compared to shell and core construction, so competition at the subcontractor level is fierce. One construction source, who asked not to be named due to the ongoing nature of the Turner case, said the heightened competition causes some companies to turn to bribes and gifts to maintain an edge over others.

“Once these companies have a relationship with the general contractors, they want to keep it,” the source said.

It’s also a massive industry. Spending on renovation and alteration work reached $9.3 billion in 2016, according to the New York Building Congress.

While changes have resulted from officials cracking down on construction companies — as was seen after several scandals involving minority-and-women-owned businesses — the industry still remains vulnerable.

“There have been some significant jail terms, but it doesn’t really seem to operate as a break on people who are inclined to cut corners,” Maffeo said. “You can have all the policies and procedures in place, but you can’t eradicate the human impulse to line your own pocket.”