Thomas Thacher is president and CEO of Thacher Associates, a construction fraud prevention consultant based in New York.

Rooting Out Corruption Starts with Prevention

Developers and contractors don't have to wait until problems arise
on a project to snuff out corrupt practices.

by Thomas D. Thacher II

It is not often that private industry can learn a valuable business practice from the public sector. But there is now a trend catching on in New York's builder and developer community that traces its roots to a highly successful anti-fraud program pioneered by the New York City School Construction Authority more than a decade ago.

In creating the SCA, the state's Legislature and Gov. Mario Cuomo called for new strategies to prevent corruption that had become endemic in our construction industry - and that threatened to infect plans for an unprecedented commitment of billions of dollars to school construction. State leaders pushed for a new anti-fraud program.

The plan called for a multi-prong strategy with interrelated initiatives that included:

• prequalification of all construction and design firms to weed out companies with histories of unethical practices or connections to organized crime
  
• incorporation of contractual obligations - and related sanctions - that prohibit specifically described unethical practices
  
• adoption of internal controls to assure transparency and auditability of all project transactions
  
• compliance audits to assure adherence to those internal controls
  
• and an integrity hotline to receive anonymous reports of unethical or illegal practices.
  

1. Contractor/Vendor Screening - It makes more sense to keep problem contractors off the project at the outset than to try to catch them or police them once on the site. Performing an integrity due diligence on firms prior to final bid evaluations is the key step. By including a business integrity questionnaire with distribution of bid solicitation packages, most information necessary for a comprehensive vetting of a contractor or vendor can be in the owner's or construction manager's hands before they even open bids. The project's integrity monitor can then review and verify that information and perform additional checks with law enforcement and regulatory agencies as necessary.

2. Use of IPSIGs - An owner may desire to use a contractor or vendor that has potential integrity problems, whether because of a low bid price or factors that make the contractor "uniquely qualified." In such cases, the owner can condition the award of the contract on a requirement that the contractor retain an independent private sector inspector general, who will monitor performance and report back to both the contractor and the owner.

3. Code of Ethics - Some owners request that all participants on a project commit in writing to adhere to a Code of Ethics that communicates in practical terms the ethical rules governing participation on the job. For instance, the rules can outline what gifts or benefits a subcontractor may give to or receive from the construction manager, employees of the owner, vendors, or suppliers.

4. Contract Integrity Provisions - The integrity monitor can assist in drafting unique, practical contract language that obligates adherence to specifically enumerated fair and ethical business practices, with sanctions. The language can also set forth numerous other integrity-enhancing provisions.

5. Integrity Hotline - Who knows better than workers on the site who is cheating whom and how they are doing it? But few workers want to risk being blackballed for reporting unethical or illegal practices. An integrity hotline, managed by the integrity monitor, can provide the means to receive anonymous calls about a problem that can be quickly fixed before growing into a scandal, operational disruption, or financial loss.

6. Controls Assessment - The Integrity Monitor can perform an assessment of the adequacy of controls on those processes that are most vulnerable to being manipulated unethically or illegally, e.g., bid and award, invoicing, change orders, minority- and women-owned business enterprise contract compliance, and labor relations.

7. Compliance Audits - Spot checks by forensic auditors of invoices, and by forensic engineers of site activities, can assure compliance with those internal controls and generate detection of wrongdoing. These audits, performed by professionals with fraud prevention and detection expertise, are very different than the comprehensive audits performed by project accountants or engineers.

Project Integrity Compliance Programs encourage adherence to the rules through their enforcement mechanisms. In the event that contractors and vendors have material misrepresentations in their answers to the questionnaire or fail to adhere to the construction contract integrity provisions, the enforcement tools can include disqualification from an award or withheld payments. These mechanisms can also provide for recovery of overpayments and can cover investigative and legal costs where a compliance audit establishes wrongdoing.

While these are only a few of the initiatives that can comprise a Project Integrity Compliance Program, they all constitute concrete, practical, and cost-effective steps a contractor or developer can take to infuse ethical behavior into all project activities. Perhaps more importantly, they also help project leaders make a strong statement that on this development, integrity really matters.