Casino contracts under fire

OLG stops payment and launches audit of $2 million 'surcharges' on construction deals

Kevin Donovan, Staff Reporter, Sep 03, 2009 04:30 AM

The troubled Ontario Lottery and Gaming Corp. has stopped payment on two casino building projects worth about $30 million while internal auditors investigate the "bidding practices" of the winning general contracting company.

At issue are a series of "surcharges" levied by general contractor Govan Brown on the many subcontractors it has hired to expand casino and slot machine properties in Brantford and Ajax. The five individual surcharges total 7.5 per cent of each subcontractor's contract, and could add up to about $2 million.

Bid documents obtained by the Star show Govan Brown instructs subcontractors to include surcharge amounts in their bids for such things as site cleanup. One subcontractor contacted by the Star said he dutifully included the surcharges in his successful bids. Although his company does the site cleanup or other work, he said they do not receive the surcharge money.

The OLG said it never approved these surcharges. OLG spokesperson Allison Sparkes said yesterday that resolving the matter with Govan Brown is a priority for the Crown agency.

She said allegations "regarding (Govan Brown's) bidding practices" were first received on July 22. A review began immediately and then on Aug. 21 the OLG met with Govan Brown officials and told them payment was being stopped pending outcome of the probes.

Though payment has been stopped, the projects are ongoing.

Govan Brown's chief financial officer emailed the Star yesterday saying he welcomes the audit. "Previous audits, which are routine and which we welcome on any project, have always demonstrated and confirmed our unparalleled transparency and high ethical standards," Eric Wegler wrote.

In a second email last night, Wegler said adding "charges for specific services is a common industry practice."

Wegler said his company met with OLG in July and "explained the services that were provided for by the surcharges, and why we felt they were appropriate." Wegler said that the OLG asked for the surcharges to be removed. "In order to maintain our strong working relationship with them as a client, we agreed," said Wegler, adding that the surcharge amounts will be submitted to OLG later "through another formal process."

The OLG has recently been rocked by allegations of misspending by senior executives. CEO Kelly McDougald has resigned and the board of directors stepped down earlier this week.

OLG owns and manages numerous gaming properties. The two involved in this story are Casino Brantford and the slot machine complex at the Ajax Downs racetrack.

Both are being expanded by the OLG. Tenders went out in the last year from the OLG seeking a general contractor to oversee the projects and hire, through tenders, all the subcontractors to build the expansions, furnish them and build such things as "Noodle Bars," "Winners Circles," a "Grab 'n' Go Bar Lounge," along with new restaurants and gaming spaces.

Brantford is a $22 million contract according to the OLG's tender documents. Ajax is valued at $8 million to $10 million.

Numerous bidders came forward. Govan Brown, a Toronto company, won both jobs. The amount of its successful bid is not known.

Once Govan Brown was awarded the contract, it then issued a tender call for builders, electricians, cabinetmakers and numerous other subcontractors who do the building and supply interior finishes.

The Star obtained Govan Brown's "instructions to bidders" for both projects. Each asks bidders to raise their bid by a total of five separate surcharges totalling 7.5 per cent. The surcharges are:

In the case of the weekly cleanup and the green building documents, the tender specifically states that the subcontractor is required to do the work.

"The daily cleanup of debris and garbage generated by the (subcontractor) is still the responsibility of the (subcontractor)."

The Star contacted one subcontractor, Provincial Store Fixtures, which successfully bid on both projects and included the surcharges. A company official, who asked that his name not be used, said while his company raised their price through the surcharges, "we don't get the money."

A general contractor's profit on a project, after all trades are paid, is usually about 3 per cent, industry experts say.

Wegler, the CFO for Govan Brown, told the Star in an email that the OLG was well aware of their instructions to subcontract bidders. He said it was an "oversight" on OLG's part that the Crown agency was unaware of his company's surcharges.

"In reference to both OLG projects in Ajax and Brantford, the instructions to bidders were issued with strict adherence to such requirements and with full disclosure and transparency to the client," Wegler said.

The Star asked the OLG if it knew where the 7.5 per cent of the construction cost is going.

Spokesperson Sparkes said "the audit and business review will be addressing this question and others. What I can tell you is that the resolution of this matter is a priority for OLG and the corporation is withholding payment to Govan Brown until that time."

Govan Brown, which calls itself "an established leader in the construction management industry," does work for both private and public projects.