Seeking $3.9 million, New York contractor King Contracting Group NY, Inc. is suing its subcontractor Hi Rise E.I.F.S., alleging the group abandoned two projects and committed various acts of fraud.
King Contracting, based in New York, specializes in exterior insulation finishing systems (EIFS), masonry, and roofing work. In June of 2020, King Contracting hired Hi Rise to perform EIFS installation work on the $2.83 million “River Crossing” project at the 1st Avenue tunnel in Manhattan, as well as the $340,000 “Third Avenue” project in the Bronx.
King Contracting was evidently happy with how the work was proceeding. According to court documents, King Contracting entered into a Services Agreement with Hi Rise on August 31, 2021.
The agreement provided that Hi Rise would work exclusively with King Contracting, handling all of its EIFS work for various projects. On top of its typical monthly billing, Hi Rise was entitled to a share of project profits as well as cash advances on these earnings.
Due to the benefits Hi Rise was receiving under this arrangement, the contract contained a clause that prevented Hi Rise from working with any of King’s competitors.
Hi Rise allegedly used a shell-company to skirt contractual restrictions
Problems began soon after the two companies entered into the agreement. On October 20, 2021, Hi Rise purportedly abandoned both the River Crossing and Third Avenue projects without any notice to King Contracting.
According to court documents, Hi Rise had been pre-paid for work on these projects as established in their agreement. Nonetheless, work remained unfinished, and King Contracting claims to have had to repair and finish the project on their own for additional cost.
King Contracting then discovered that a third company, North Stucco, was owned and operated by the same owners as Hi Rise. North Stucco was also an EIFS specialist, and a direct competitor to King Contracting.
Allegedly, the owners of these two companies were using Hi Rise as a “shell company” to engage with King Contracting on various projects. The owners would then funnel payments to North Stucco, which could then compete with King Contracting for work, skirting the non-compete clause in the agreement.
According to court documents, through this scheme, Hi Rise was able to obtain access to King Contracting’s “highly valuable and proprietary” customer and pricing lists.
On top of this, the two parties are currently in a payment dispute. Hi Rise claims to be owed more than $783,000 for the projects, while King Contracting asserts that they are in fact ahead of payments by $680,000.
In two Westchester Supreme Court suits, King Contracting is ultimately seeking $3.9 million from the owners of Hi Rise and North Stucco.
The recently appointed attorney for the defendants has yet to comment on the case.
Whether factually accurate or not, King Contracting’s experience with Hi Rise highlights the challenges fraud can inflict on construction firms. Unfortunately, fraud is more common than it should be in the construction industry.
According to a report by accountants Brown Edwards, the construction industry has the second-highest fraud rate of all industries, behind only retail.
“That’s not to say that the industry is full of bad people,” says construction attorney and Levelset reporter Alex Benarroche. “Rather, it’s just an industry where the few bad apples that are determined to commit fraud might have an easier time getting away with it.”
An overwhelming majority (83%) of construction firms reported experiencing fraud of some kind. Over a third of reported losses of at least 7% are reportedly due to fraud. In an industry with well-documented payment and cash-flow problems, this can pose a significant challenge to many professionals.
Luckily, there are a number of controls your business can put in place to reduce the risk of fraud — both internal and external.
“The average construction project is a study of controlled chaos,” says Benarroche, referring to the many participants and moving parts involved in a project. As such, “there are an unlimited number of ways fraud can occur at any point during a construction project.”
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