Professionals in corporate real estate, construction, and project management know that one of the biggest financial risks on an interior construction project is fraud within the complex and multi-tiered bidding process. It happens too often - on a small and large scale. A skilled client (or advisor) can setup the right process and controls to prevent it. But when the client's principals and agents are involved in the fraud directly, the problem could go unchecked for years.
This seems to be what happened at Bloomberg LP, the NYC-based global financial media firm. The New York Times, the Real Deal, and other sources are reporting on a criminal investigation by the New York State Police and Manhattan District Attorney, regarding possible bid-rigging that may have cost Bloomberg more than $1 million on recent office buildout projects.
Following one of the most basic and classic bid-rigging approaches, subcontractors who were involved in the scheme padded their bids for work, while the main contractor and internal executive (who analyze the bids) allegedly adjusted the numbers to make the honest bidders appear higher. The main contractor and internal executive would then receive a kickback to share in the padded profits.
In the case of Bloomberg, the alleged fraud involves subcontractors for drywall and interior glass walls; the main contractor (Turner Construction), and Bloomberg's internal head of global construction (Anthony J Guzzone). Turner is one of the world's largest construction managers, with branches in 20 countries handling an annual volume of over 1,500 projects worth $10 billion.
Although neither Turner nor Guzzone have admitted guilt, Turner recently fired several employees who worked on the Bloomberg projects, and Guzzone has been fired by Bloomberg. Guzzone appears to have worked for Bloomberg for over 16 years - a tenure spanning across several of the company's previous heads of corporate real estate.
Fraud in construction projects - particularly on "end user" office interior fit-outs where the client is not a sophisticated developer or property investor - is extremely common, worldwide. The NYT article mentions a few others from recent NYC history, including the 2015 conviction of John Cassisi (head of global construction for Citi), and over $92 million in restitution and penalties recently paid by Plaza Construction, Tishman Construction, Granite Construction, Hunter Roberts Construction, and others.
There are a few best practices worth noting for those who are considering an corporate office construction project:
(1) Appoint a truly independent advisor. Project managers and construction firms often pitch their "deep market expertise" and "relationships" as reasons to be selected. While those are valuable and you can also get hurt without them, they can also make things too cozy. For a relatively small additional fee (typically less than 1% of total construction value), consider engaging a truly independent advisor who has a high volume of broad experience - in construction across multiple markets. Construction prices have some variability by geography, but that factor can be identified and isolated. Someone with expertise and relationships that are broad rather than deep will serve a very important governance and control function - in addition to bringing fresh ideas and approaches beyond just the finances. Often this type of advisor is called an "owner's rep"; they free from any conflict or relationship with the parties performing the work, and in the project team org, they sit atop the construction or project manager(s) - truly representing the interests of the client only.
(2) Don't rely exclusively on internal staff.
(3) Invite wide participation in bids, competitively bid (at every level), and insist on receiving client copies of all bid correspondence and submissions.