The Losses Keep Mounting

More than $8.4 billion a year is lost to Construction Industry Tax Fraud! Watch the losses climb, from Jan. 1, 2017 to now. 

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Through Layers of Subcontractors, An Inside Look at Greed and Exploitation

In addition to Ricardo’s story, information for this blog post was provided by a representative of the North Atlantic States Regional Council of Carpenters.

After six years working in the Boston-area nonunion construction industry, Ricardo has seen up close the damage done by greed and dishonesty.  

Ricardo worked in retail sales before moving into construction as a laborer, cleaning up jobsites—and learning. He watched how timelines and ordering worked, and what it takes to get a project done from start to finish. He tried and failed to run his own small company but stayed in the industry working as a project manager and estimator.

Describing one of the region’s largest drywall contractors (“Company A”), Ricardo said, “It’s disgusting. Part of running a business is making a profit, but they have built a complicated system with a dark side that is hurting a lot of people.  

“There are so many layers of subcontractors. The general contractor (GC) will have 15 or 20 large or medium subcontractors from various trades on a job. Most of the carpentry subs, like Company A, will have multiple small subcontractors under them,” Ricardo said.

Many small subcontractors are “companies” in name only; they are simply individuals who can pull a crew together. They are handed a contract showing how much they will be paid for the particular scope of work that a first-tier subcontractor like Company A wants them to do.

The estimates are done only by Company A, as most lower-tier subs don’t have the capacity to do their own estimating to verify if the numbers will work. The numbers on these contracts are enticing, and they do whatever they can to make it work.

Workers end up getting squeezed the hardest, working 60-hour weeks without overtime pay; often getting paid in cash or by personal check, with no benefits and no deductions for income taxes or Social Security and Medicare taxes.

Often, when projects are at least halfway done, lower tier subcontractors run out of money and stop paying their crews. Sometimes they are forced to abandon the job. Payroll documentation is nonexistent for the most part, but when these subcontractors must supply evidence of payroll under pressure, it typically is half-true or outright fabricated.

In the system described by Ricardo, Company A keeps their lower tier subs in the dark to perpetuate the scheme.

“They do not have their own job superintendents or estimators, and Company A never allows them to have access to the blueprints or specs,” Ricardo said.

That makes it impossible to calculate true costs and collect overcharges for any additional work. When change-orders come in—a common occurrence on all projects—the foreman for Company A withholds that information from the lower-tier subs.

The foreman simply instructs the subcontractor to do the new work, as if it had been required all along, but the subcontractor is not paid extra. Upper-tier contractors like Company A are then able to pocket the profit.

Ricardo got a hard look at Company A’s system when a frustrated subcontractor hired him to evaluate his situation on a jobsite.

“Through a contact I had with the general contractor, I was able to see the job’s blueprints and I figured out that several change orders, worth about $50,000 each, had never been disclosed to the subcontractor,” Ricardo said.

When the subcontractor tried to get answers, Company A called Ricardo in to dispute his numbers and deny wrongdoing.

“But I had looked at the blueprints and used the same system they did to figure it out. I told Company A they were either lying or stealing, and they threw me out of the office. I went back to the jobsite, and they had a security guard escort me off the property.

“That subcontractor is now in the red on three different projects that he is doing for Company A, and these are the only projects he currently has his crew of 60 drywallers, framers and tapers working on,” Ricardo said.

 “He has two options now: avoid paying payroll taxes and required insurance, pay his crew in cash and hope that he can make it work—or pay his crew appropriately with payroll deductions and run out of money in a few weeks.

“He has decided to walk away from all those jobs.”