Pittsburgh mayor cracks down on construction fraud

Dive Brief:

• In light of recent incidents involving unreported cash payments by subcontractors on construction projects, Pittsburgh Mayor William Peduto has signed an executive order to combat construction fraud, promote worker safety and protect city tax revenue.
• The Construction Fraud Executive Order cracks down on fraudulent construction companies that commit tax, insurance and workers’ compensation fraud. It also aims to stop the practice of paying workers in cash to avoid taxes.
• Such moves allow corrupt firms to outbid honest ones and fuel a cycle of lost wages, decreased tax revenue and unsafe and hazardous work sites, according to a news release from Peduto’s office.

Dive Insight:

The order stems from the findings of the city’s Joint Task Force on Construction Industry Fraud, which was founded in December 2018 and forwarded its final recommendations last month. Documented cases of fraud and labor violations were gathered by trained construction industry professionals after visiting multiple jobsites and conducting on-site worker interviews.

According to the task force findings, four drywall subcontractors were paying in cash or check without deductions on several multi-million dollar job sites, including the Riverfront Landing mixed use development in the Strip District and the former the Macy’s redevelopment project downtown.

The order directs the city’s department of Permits, Licenses and Inspections, as well as its Finance Department, to form a committee with several local building trade groups to examine city code and craft language to define the term “construction contractor” and to create more accountable and transparent construction development processes. It also orders that contractors or developers receiving a City of Pittsburgh public subsidy must report all workers on the project site.

In addition, PLI will list the names of all construction contractors on the city’s BuildingEye website, to enhance transparency and accountability, discourage the dishonest use of subcontractors to avoid paying taxes and commit fraud and shine a light on companies that are involved in construction projects throughout Pittsburgh, according to the release.

Not unusual

The issues uncovered in Pittsburgh are not rare, said Thomas A. McShane, president of investigations and monitoring for New York City-based Guidepost Solutions, a compliance, investigations and security firm. Many construction fraud cases involve illegal payments to workers, such as failure to pay prevailing wages or the minimum wage. “And it’s not entirely uncommon that cash payments are made to workers,” he added.

Instances of this type of fraud grow in times of greater competition within the industry, added Brian Sanvidge, principal and leader of the regulatory compliance and investigations group at New York City-based Anchin Accountants & Advisors, which has more than 25 years of experience working with businesses on labor and fraud investigations.

Such fraud hurts reputable construction companies playing by the rules, he added.

“They’re covering their employees on workers’ compensation, they’re doing the withholding from pay, that all flows to their overhead,” Sanvidge said. “A disreputable competitor not doing those things can underbid them on projects. They don’t have the same level of cost.”

Increased oversight

Creation of a task force providing oversight and leading to active enforcement, as occurred in Pittsburgh, represents an effective way of tackling construction fraud, but remedies must start at the project level, McShane and Sanvidge said.

There must be tight supervision by the general contractors and building owners, as well as internal controls, to ensure fraud doesn’t occur, Sanvidge said. When contractors do seek to circumvent rules, government must establish task forces to conduct audits and launch investigations, and bring civil and criminal cases where appropriate.

For instance, in New York City, the Port Authority of New York and New Jersey, the Metropolitan Transportation Authority and the Empire State Development Corp. assign integrity monitors to oversee major capital projects and prevent fraud and abuse.

“The intent is to oversee project records and project activity to make sure records accurately reflect numbers of workers on site, change orders, subcontractors on site and that regulations are followed with respect to safety plans to protect project integrity,” McShane said.