Contractors used sham minority subcontractor on 19 city contracts
Most of the prime contractors have signed compliance agreements with the City
A Philadelphia Office of the Inspector General investigation of 19 Philadelphia Housing Development Corporation contracts has found that 11 prime contractors used JHS and Sons Supply Company to circumvent the City’s antidiscrimination requirements by paying JHS only for its name and its minority-owned business certification. So far, the City has signed a no-fault settlement agreement with one prime contractor and has hammered out compliance agreements with eight other prime contractors.
“It was clear from the beginning that this problem was widespread,” said Inspector General Amy L. Kurland. “These settlements meet our goal of ensuring that companies comply with our antidiscrimination requirements. Our mission is to bring companies into compliance, not to put them out of business.”
Investigators first discovered that prime contractors were using JHS to circumvent the City’s antidiscrimination requirements in PHDC’s weatherization contract with UGI HVAC Inc. In that case, the OIG established that William Betz Jr. Inc. had colluded with JHS and UGI to make it appear that JHS had provided equipment and supplies when Betz was in fact the supplier.
In January 2012, the City signed a no-fault settlement agreement with UGI, which agreed to pay the City $100,000, increase minority-business participation in future contracts and adopt new policies and procedures to comply with the City’s antidiscrimination requirements. The City also removed JHS from the Office of Economic Opportunity’s registry of certified minority-owned businesses.
In October 2012, the City signed a no-fault settlement agreement with Betz, which agreed to pay the City $128,000, comply with the provisions of an Equal Opportunity Procedures Policy and voluntarily declare itself ineligible to participate in City contracts for two years.
The case led to the adoption of Executive Order 03-12, which strengthened the City’s previous antidiscrimination policies and made it more difficult for companies to hire sham minority-, woman- and disabled-owned businesses (M/W/DSBEs) as subcontractors. All of the contracts in which JHS posed as a working minority subcontractor were signed before JHS was removed from the OEO registry.
After concluding the UGI case, the OIG continued investigating contracts involving JHS and Betz, and found that JHS provided no services to the 10 other prime contractors that had identified it as a subcontractor for 18 PHDC contracts. Those contractors are Burke Plumbing & Heating, Inc.; Clements Brothers and Sister, Inc.; DMC Environmental Group, Inc.; Buzz Duzz Plumbing, Heating, & Air Conditioning, Inc.; Edward Hughes and Sons, Inc.; Martin Johnson Plumbing and Heating, Inc.; Paragon Contracting; J.J. Magnatta, Inc.; John Stevenson, Inc.; and S. Murawski & Sons. The contracts ranged in value from $100,000 to $350,000.
In most cases, Betz facilitated the arrangement between JHS and the prime contractor, providing JHS’ minority business certification and the supplies necessary to complete the job. As a result, Betz received more than $640,000 worth of business that was intended for legitimate minority-owned companies. JHS received at least $70,000 for acting as a pass-through.
Most of the prime contractors that used JHS as a minority pass-through were small businesses that did not fully understand the City’s antidiscrimination requirements. The companies reached out to other contractors or suppliers for advice on how to comply with the requirements when they should have sought help from the Office of Economic Opportunity.
While the settlement agreement with UGI references a specific instance in which the City believed UGI had violated the City’s antidiscrimination policies, the compliance agreement with the remaining prime contractors is general in scope and does not include a payment to the City.
The purpose of the compliance agreement is to clarify the contractors’ legal obligation to provide meaningful opportunities for M/W/DSBEs and to educate the contractors about the assistance that the Office of Economic Opportunity can provide when searching for a qualified M/W/DSBE. Moving forward, these prime contractors now understand what is required under Executive Order 03-12 and are expected to follow the City’s policies on M/W/DSBE participation.
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