It should have been the happiest day in the lives of Assi and Keren Dror; the couple had just been married, and 600 guests were celebrating at Jerusalem's Versailles Hall. The tragic events which ensued were beamed around the world. As the bride's father was lifted in traditional style by the assembled throng, the floor beneath them disappeared in a dustcloud, and those on the periphery were left gazing, horrorstruck, at the gaping chasm. The revellers fell through three floors, and it is a wonder that not more than 23 people died.
Though it was Israel's worst ever civilian disaster, there have been many incidents worldwide where faults in construction have led to greater loss of life. For example, a bridge in the Chinese city of Qi Jiang collapsed in June 1999, causing 40 deaths. Investigations revealed local government collusion with an unqualified contractor, leading to fatal flaws both in construction and design. It was an all too familiar tale of bribery and kickbacks, for which the vice chairman of the city council paid the ultimate price when he was executed.
After the disaster in Jerusalem, an engineer, the building contractor and the contractor involved in a major renovation of the building, together with the inventor of the Pal-Kal floor/ceiling system used at Versailles Hall were arrested, as were the owners of the Versailles Hall. Terrorism was very quickly ruled out as a cause of the collapse. This was clearly a structural problem. And, although this may not apply in this particular case, all too often structural problems are synonymous with fraud.
One of the most common areas of fraud in construction is the substitution of inferior quality materials. Last year, there was great consternation in the UK media over the £97m renovation of the British Museum, especially in relation to the use of French limestone on the exterior of the 150 year old south portico, instead of the more expensive Portland stone which had been specified in contracts and which Camden Council had approved in planning permission. When the new façade appeared much lighter than had been intended, the Museum claimed to have been duped by Easton Masonry, the firm which had successfully bid for the £1.75m cladding contract. However, The Guardian reported a tip-off had been received before work commenced. English Heritage called the result: 'unfortunate, to say the least'.
Poor working practices are another area of concern to those commissioning building work - and an opportunity for the dishonest to exploit. Hong Kong boasts some of the world's tallest buildings, and constructors there are well aware of the engineering implications implicit in such structures. The foundations of high rise buildings require piling to sufficient depth to support the weight, and last year Hong Kong's Housing Authority was embroiled in a major corruption scandal when it was found that the piling in two 34 storey public housing developments had been short piled. Cracks soon appeared, and the blocks had to be demolished at an estimated cost of HK$500m. It was found that site supervisors had turned a blind eye to substandard work in return for bribes.
In the UK alone, there have been 17 major studies in the past seven years, which have aimed to address the problem of fraud in construction through the promotion of sound working practices. The most recent is the National Audit Office report Modernising Construction in January 2001. This painted a particularly bleak picture: "Many clients still do not understand that fiercely competitive tenders and accepting the lowest bid do not produce value for money in construction. 'Lowest price' tenders may well contain no margin of profit for the contractor, whose commercial response is to try to claw back the missing margin through variations, claims and 'dutch auctioning' of subcontractors and suppliers. Such adversarial approaches have disfigured the construction industry over many years. They have produced high levels of litigation and conflict, low investment, inadequate research and development, negligible margins and low level of esteem of the industry by the public."
Mitigating risks
So what can you do to mitigate the inherent risks involved with venturing upon construction projects? Before embarking on a scheme, you should establish the criteria by which its success or otherwise will be judged. These include, at the very least:
- on time and within budget - the building should be in commission on or before the scheduled date and within the target price
- absence of legal and other problems - absence of legal or regulatory breaches, arbitration or litigation; a good safety record, good industrial relations
- low level of defects - an acceptable level, discovered within 12 months of commissioning
- minimal changes to specifications - once agreed, these should not be altered without good reason; such changes are often indicative of fraud.
- confirmation of the integrity and independence of key members of the project team
- creation of common objectives and an ethical culture that applies to everyone involved in the project
- assignment of authority commensurate with responsibility through defined organisation charts, contracts, and job descriptions
- separation of responsibilities.
Invitations to Tender (ITTs) should use the same language as the proposed contracts, and should stipulate exactly what is required. The tax status of a project should be explicit, and a common format for financial proposals must be highlighted, for the seeds of deception are often sown through clients not comparing like with like. If vendors are given no room for manoeuvre through disingenuity with figures, one major avenue for fraud is blocked.
A pre-printed label should be provided with each bid, showing the name of the vendor, the package for which it is invited to tender and a sequential number, and a record should be kept by the Documents Co-ordinator as part of the audit process. As a further control measure, ITTs should contain a warning of the penalties for collusive bidding or other violations of the client's business principles, such as removal from the bidding process or cancellation of contracts, together with a clear message that bids will be final excepting limited negotiations to clarify ambiguities.
Sealed bid submissions should be on a specified date and within a specific timeframe on that date, and should require the delivery of simultaneous duplicate copies, one to be held by the client and another by an independent party such as a bank or a lawyer. This is crucial, as it greatly reduces the possibility of bids being switched at the last minute by collusive elements.
To prevent fraud, contracts should include:
- audit rights
- procedures for specification changes and reporting of incidents
- penalty clauses and guarantees
- warranty of truthful bids
- relationships with and payments to subcontractors (to ensure their good performance and that they are paid promptly; payments to prime contractors in respect of subcontractors should only be made where proof of expenditure exists)
- reiteration of warnings contained in ITTs.
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Geoff Covey is editor of Inside Fraud Bulletin, published by corporate fraud prevention and investigation consultants Maxima Group Plc.
www.insidefraud.com
www.maxima-group.com
PartneringThe UK Comptroller and Auditor General's January report Modernising Construction says that private sector clients are increasingly establishing long term collaborative relationships or partnering with construction firms for the benefit of both. But it warns that partnering should not lead to a cosy relationship with contractors - which would increase the risk of less value for money and possibly of fraud and impropriety.
