2019-01-28

Recommendation report concerning the expansion and renovation of the Pierrefonds library (call for tenders 5887), filed on January 28, 2019

Summary

Construction Lavacon Inc. concluded an agreement with its subcontractors to give the company a discount on the value of their work for every change order. These agreements created upward pressure on prices. The city was denied a fair price. The contractor did not act in the best interests of the city. This scheme justified the recommendation of a five-year declaration of ineligibility.

SUMMARY

The Office of Inspector General conducted an investigation after receiving a denunciation that Les Constructions Lavacon Inc. demanded a discount from its subcontractors for change orders regarding the expansion and renovation of the Pierrefonds Library. The work was part of a program set up several years ago to increase and improve library services in Montréal.

Following the call for tenders issued on January 11, 2017, Les Constructions Lavacon Inc. was declared the lowest compliant bidder with an amount of $20,350,614.02. Work began in spring 2017 and ended in fall 2018 during which thirty (30) subcontractors worked on the project under the responsibility of Les Constructions Lavacon Inc.

As part of its investigation, the Office of Inspector General interviewed ten (10) subcontractors who worked on the Pierrefonds Library project. The investigation revealed that Les Constructions Lavacon Inc. concluded an agreement with each subcontractor under which they undertook to give the company a discount (a “cut”) of 5 to 15% on the value of their work for each change order.

The investigation showed that the procedure for paying the discount was the same for all the subcontractors. When a change order was issued, the subcontractors would send their estimate to Les Constructions Lavacon Inc., which would then submit it to the City’s project managers. Once the estimate was accepted, Lavacon would send the purchase order to the subcontractors less an amount equal to the discount included in the agreement. On completion of the work, the subcontractors would send their invoices for the same amount as listed in the purchase order.

At no time were the City’s project managers aware of such an agreement and it would have been impossible for them to know about it since the subcontractors were under the responsibility of the general contractor. What’s more, when change orders were received, Les Constructions Lavacon Inc. was required to enter the amount submitted by the subcontractor for the change order on the form provided for this purpose in the contract. The contract thus provided a mechanism for Ville de Montréal to see the amount that the subcontractor would be paid. The method of payment for the discounts received by Les Constructions Levacon Inc. allowed the company to avoid paying the full value of the work performed by the subcontractors while collecting full payment from Ville de Montréal.

The investigation also showed that each subcontractor interviewed concluded such an agreement shortly after the contract was awarded to Les Constructions Lavacon Inc. by Ville de Montréal and that these agreements remained in effect for the duration of the work on the library.

Testimony gathered from the subcontractors during the investigation showed that Les Constructions Lavacon Inc. had incorporated the agreement in its contract with subcontractors. Four (4) subcontractors confirmed that this agreement was imposed on them, even though two (2) did not sign the agreement in their contract. For example, a subcontractor explained that an employee of Les Constructions Lavacon Inc. told him that

the discount would be applied to the purchase orders even if he refused to sign the agreement. This scheme is unacceptable and should be publicly denounced.

Four (4) subcontractors confirmed that they raised the prices of their estimates for change orders to offset the discount they had to give Les Constructions Lavacon Inc. They specified that they increased the price of their estimate by the same amount as the discount they had to give Les Constructions Lavacon Inc.

From a contractual standpoint, the Inspector General concluded that because of the agreements, Ville de Montréal did not pay a fair price for subcontracting work arising from change orders. The contractor’s actions increased Ville de Montréal’s costs for change orders. As one subcontractor explained, almost all his profit was wiped out because of the discount he had to give the general contractor. These losses were impossible for his business to absorb, forcing him to raise the price of his estimates.

Two (2) of the four (4) subcontractors mentioned above indicated that it was an employee of Les Constructions Lavacon Inc. who told them to increase the amount of the estimates to offset the discount. A subcontractor confirmed to the Office of Inspector General that he produced two estimates for change orders: a higher estimate including the discount and another excluding the discount, which he kept for his files.

Lastly, by having these agreements with its subcontractors, Les Constructions Lavacon Inc. did not fulfill its duty to act in its client’s best interests. These agreements placed the company in a conflict of interest between its own interests and those of Ville de Montréal since it stood to gain financially by having the change orders carried out at the highest possible price due to the proportional discount.

In conclusion, the Inspector General is of the opinion that such a situation cannot be tolerated at Ville de Montréal and that the actions of Les Constructions Lavacon Inc. during management of the contract constitute a fraudulent practice under the City’s bylaw on contract management and recommends that the company be listed in the Register of Ineligible Persons for a period of five (5) years pursuant to such bylaw.

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Recommendation report concerning the expansion and renovation of the Pierrefonds library (call for tenders 5887), filed on January 28, 2019