Home East Side Access Project Examining a faulty contracting system

Examining a faulty contracting system

by Benjamin Kabak

The East Side Access project, not often in the news, made a headline for all the wrong reasons this morning. As William K. Rashbaum of The Times reports, New York Dirt Contracting, one of the project’s subcontractors that has earned over $2 million hauling away dirt, has been barred from doing business by the city’s Business Integrity Commission in because of the company’s close ties to organized crime.

In the short run, this development, says the MTA, won’t impact the timeline for the East Side Access tunnel. Another company will take its place in June. But for the MTA, this embarrassing development, in the words of Rashbaum, “underscores what some critics say is the authority’s persistent failure, despite its budget problems, to aggressively vet subcontractors in an industry where corruption, fraud and abuse are widespread.”

Referencing a February MTA inspector general report, Rushbaum writes:

In recent years, a steady stream of troubled companies have done work for the authority, which oversees the city subways; the commuter rail lines to Long Island, the counties north of the city and Connecticut; and many of the city’s bridges and tunnels.

The authority’s inspector general, Barry L. Kluger, has been lobbying to standardize the vetting process for contractors and subcontractors since 2008, when a moving company rejected by one of the authority’s constituent agencies because its owner had been convicted of racketeering was hired by another.

That case, Mr. Kluger said in a report last year, “brought to light certain systemic inconsistencies among M.T.A. agencies involving the depth of their due diligence reviews.” And, noting that well over 50 percent of the construction work for the authority was done by subcontractors, he said in an interview on Wednesday, “More attention must be given to the vetting of subcontractors in terms of both integrity and their performance on prior jobs.”

For its part, the MTA defended its business practices. It asks companies to respond to a questionnaire and cross-checks responses accordingly. However, as The Times notes, these companies are not asked to respond under oath, and in this instance, MTA Capital Construction had to make company determinations based on what amounts to an honor system. In this instance, the process failed.

Although this development concerns a subcontractor, I’ve often wondered about the MTA’s relationships with its contractors and the legislative mandate that the authority accept the lowest bids on all projects open to competitive bidding. Over the last few years, we’ve seen numerous instances of construction projects. We’ve seen the Second Ave. Subway fall four years behind its initial schedule. We’ve seen engineering errors at South Ferry delay the opening and later lead to leaky walls. We’ve seen costs raise across nearly every Capital Construction project, and we’ve seen other big-ticket items — the camera surveillance system and a plan to wire six stations for cell service — falter.

From a cost perspective, the MTA runs into more problems choosing the lowest bids than it would if it were able to select the most reliable company. We would probably see fewer missed deadlines, better quality of work and more efficient spending. Currently, MTA CEO and Chair Jay Walder is overhauling how the MTA does business, but in this instance, he would need legislative approval to do so. It probably won’t be forthcoming, but the MTA should explore how better to work with its contractors and how better to vet its subcontractors. If anything, the public would have more faith in the work.

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19 comments

Larry Littlefield May 20, 2010 - 9:27 am

I’ve seen the capital bidding process up close.

One aspect of it is that the MTA has to release its estimates of a job’s cost for budget purposes, and that becomes the low point for bidding. Another is that government agencies cannot allow variations in both pricing and quality, because that would require judgement that opens the door to corruption. One or the other must be kept constant. “Lowest bidder” contracting tries to vary price while trying to keep quality constant with six page bid books that become a lawyer’s paradise for those seeking to rip off the authority later with change orders.

Costs have escalated far beyond inflation. The MTA should drastically drop its estimates, and turn them into actual prices — holding price constant. It should set the price, and pick the contractor with the best plan, capacity and quality. And it should hold out for that price as long as necessary — years if that is required — before making an adjustment.

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Boris May 24, 2010 - 11:29 am

That’s quite a conflict of interest. Any business unit anywhere wants to always inflate estimates, because then it gets more money for its budget so it can hire more people and grow in importance. But this is typically the budget for internal work, where the management sets how employees are compensated. This so totally doesn’t work with contractor bidding, I imagine this system must’ve been invented in Albany. But how do other transit agencies do it? DOT? The federal government?

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Nathanael May 25, 2010 - 8:18 pm

In the rest of the world, they use “lowest *competent* bidder”, allowing for disqualifications as a matter of judgment.

They also do not release detailed budget estimates before bidding — only ‘order of magnitude’ ballpark figures.

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Al D May 20, 2010 - 9:36 am

Releasing a ‘budget’ belies the concept behind competitive bidding because it gives bidders a target rather than aiming for the lowest cost, the purpose of a competitive bid. One way to combat this is to have as thorough and clearly defined specification as possible. This will additionally decrease the chance of change orders later on. However, discovering a wall that nobody knew about (South Ferry station) is an example of where a change order is the best solution.

City subcontractors are required to complete VENDEX Questionnaire(s) and are subject to a NYC Inspector General review and VENDEX database query, including past performance as part of their vetting process. I would suggest the MTA (i) adopt the same or similar, (ii) have a consistent vetting process across all agencies.

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Marc Shepherd May 20, 2010 - 10:41 am

I am shocked—shocked—to hear that there are construction companies with ties to organized crime.

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Larry Littlefield May 20, 2010 - 10:41 am

“One way to combat this is to have as thorough and clearly defined specification as possible.”

MTA contracts for modest projects go on for several volumes. The cost of producing them has escalated as well. Compare that with the “Dual Contracts” that built 2/3 of the subway system.

Every time a contractor finds a loophole, the bid books get bigger and more complex. Pretty soon, there are fewer and fewer companies that can navagate the whole mess.

Fix the price at a much lower level. Make the contractors produce the detailed specifications for what they will provide.

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Marc Shepherd May 20, 2010 - 11:24 am

That sounds like a very smart way of doing it. Are there any transit agencies that operate this way?

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Al D May 20, 2010 - 11:56 am

Talk about the fox guarding the henhouse!

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Christine September 21, 2010 - 10:01 pm

Exactly!

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Josh K May 20, 2010 - 4:39 pm

As an engineer with experience as both an outside consultant and an in-house consultant for state and local government projects, I can say that lowest bidder doesn’t work. In the private sector, contractors qualify to bid. In the public sector they bid to qualify.

While the lowest bidder system attempts to hold quality constant while seeking the lowest cost, the contractors have every incentive to try to use the cheapest/ lowest quality materials possible. I really do think the agencies should just estimate a price and list the materials they want used. Then shop the project around and have the contractors compete on qualifications. This wouldn’t go over well with the powerful contractors lobby. It would also get slammed by the small contractors and the Minority/ Women owned Business Enterprises (M/WBE’s), who would complain that the system would be rigged in favor of the major (largely male and white owned) contractors.

To limit the quality and loophole issues, I’ve written specifications that were as loop hole proof as humanly possible, hundreds of pages long, based on the cumulative experiences of state engineering staffs for 200+ years in NY. For every trick that the contractors come up with, we worked to find counter-measures. We wrote long, incredibly detailed quality assurance and submittal requirements. We wrote performance specs entirely based around our preferred equipment. Contractors would still challenge us. Even when we did have an iron clad spec and the contractor still tried to gives us cheap crap, the legal department would roll over on it, because the litigation costs exceeded the cost savings.

In the end, either the contractors get sneakier, they’d just bid higher and the good ones get frustrated and stop bidding. Many of the better contractors don’t want to deal with the hassles of public construction projects. If you’re not a mega contractor like ECCOIII or Skanska, you’re not going to have the resources to even try to comply with all the requirements that the state includes in the documents.

The firms I’d like to do business with, the ones who’s quality I like, who’s employees do high quality work and who’s prices I think are fair, aren’t interested in government work. They get more money, quicker, with less hassle on the private sector projects. During the construction boom in NYC, any really decent contractor had more private sector work than they could actually do. So the ones you were left with are largely the mega contractors who know the loopholes inside and out or they’re the scumbags who no one else will hire, so they come looking for government work.

All government procurement needs a major overall. Infrastructure and Defense most of all.

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Nathanael May 25, 2010 - 8:19 pm

Qualify-to-bid sounds right. I’ve read of smaller government agencies elsewhere doing exactly that, so I wonder why the MTA can’t?

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Christine September 21, 2010 - 9:55 pm

Conflict of Interest…..

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Scott E May 20, 2010 - 10:53 am

Honestly, I wouldn’t worry about it. Contractors will always hire subcontractors, subcontractors will always hire sub-subcontractors. The actual laborers only get hired after the contract is awarded, so regardless is Contractor A or Contractor B wins, they will choose from the same pool of applicants, and the same guys will likely end up doing the work.

The General Contractor is responsible for the people and the subs he hires. If he doesn’t do the job well, he doesn’t get paid. One might say that MTA Capital Construction should be the GC (essentially a project manager) and have closer ties to the subcontractors (now direct contractors) on the big projects – after all, that’s what MTACC is here for, but I’d question their ability to do it well.

Let the legal system worry about investigating ties to organized crime, and let them take care of it accordingly.

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Anon256 May 20, 2010 - 12:33 pm

The MTA already pays far more for its capital projects than they would cost anywhere else in the world. You’re suggesting that it should pay even more?

Also, if you want to determine bids based on “quality” and “reliability”, you will need some numerical formula to measure these, and any formula you come up with will have loopholes and ways for contractors to game the system.

The MTA should give contracts to the lowest bidder, without any predetermined minimum price, but bidders should be required to show that they have enough assets or insurance to cover their liability if problems arise. Issues like the South Ferry leaking should come directly out of the contractor’s pocket, as should most cost overruns. Hopefully this will limit bidding to the same international companies that run construction projects everywhere else in the world.

Though maybe banning any company based in New York or New Jersey from bidding would be a simpler solution…

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Scott E May 20, 2010 - 2:15 pm

It’s not that simple. You might be able to attribute leaks to workmanship. But the discovery of previously unknown obstacles (an underground wall, for instance, or perhaps an undetected sewer pipe) can’t. A wider-than-acceptable gap might be a design fault, not a construction fault.

A contractor has to have a limit on the work he is willing to do for the price he is being paid. If he is responsible for unexpected tasks, he will inflate his initial bid accordingly.

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Anon256 May 20, 2010 - 3:27 pm

Regarding design faults vs construction faults, many of these contracts should be design+build.

Yes, asking contractors to accept liability for unexpected tasks will increase their initial bids. The point is to ensure that this happens at the bid stage, when they are still competing with each other and so have some incentive to keep their bids low, rather than later on during construction, when the MTA has no choice but to keep paying the same contractor even as they find more and more excuses to charge extra.

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Josh K May 20, 2010 - 4:52 pm

Government entities are forbidden by law from using Design+Build contracts in NY state. Federal can use them but they don’t pay for the level of in-house staffing you really need to ensure quality results.

The powerful contractors lobby in Albany will never allow Design+Build to pass. They make have too much invested in the current system and they’re making huge profits off of it.

There is another option that never gets discussed: government construction forces. If the private sector can’t seem to handle the job in a responsible manner, than maybe the state needs to do it itself. Have a centralized “State Construction Authority” that is the central design and construction force for all state and municipal projects. The state could then leverage it’s scale to get cost reductions. Project costs could be fixed. As taxpayers we’re already paying the overhead of the government staff to oversee the private contractors, who in turn have their own profit and overhead. Instead of every individual school district, state agency or authority running it’s own projects, why not have one agency with experienced, streamlined staff?

Granted this would be a monumental philosophical shift in Albany. You’d get push back from nearly everyone with a stake in the current system: contractors, outsourced E/A and CM firms, the individual agency fiefdoms that currently exist and the politicians who need the lobbyist contributions to get re-elected. But if the current system is so fundamentally broken, it stands to reason that it can’t be patched over; you need to start from scratch. Without voter/ taxpayer pushback against all the entrenched interests, you’ll never see any change.

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SEAN May 20, 2010 - 4:24 pm

And yet the MTA is no longer going to employ Goldman Sacks? Well at least the MTA fired the largest part of the finantial mafia. Now do something about your contracting.

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Alon Levy May 20, 2010 - 10:33 pm

It’s really nothing that can’t be fixed by listing the baseline budget to be in line with European costs, and then inviting contractors from Madrid or Paris to bid. The cost saving is so enormous it might not be a violation of Buy American, and even if it is, it saves more money than the MTA would have to return to the feds.

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