“Horror at the Harmon” How the Lack of Proper Systems Puts a Contractor at Risk And Created “The Nightmare on Las Vegas Boulevard” for MGM

Any construction project can result in a loss if the company does not have the proper methods, systems, controls and procedures to ensure the quality of its work. Construction companies are at much greater risk than many other small businesses because of the large financial impact that a failure in having the right systems in place can have on their liability if their failure to adhere to best practices causes a large financial loss.

We all saw how the failure to have the proper system in place at the 2017 Oscars caused Warren Beaty and Faye Dunaway to incorrectly announce “La La Land” as the winner of Best Picture when “Moonlight” actually had been selected by the Oscar voters as the winner, when an executive from the accounting firm of PricewatershouseCoopers gave the presenters the wrong envelope for the night’s most prestigious award.  While this failure to have a foolproof system in place proved to be an unprecedented embarrassment for many of the people involved, the failure in having a foolproof system in place caused no financial harm.

However, for a contractor or subcontractor which does not have best practices in place to ensure the quality of its work, the company may expose itself to financial liability for tens of thousands, hundreds of thousands, or even millions of dollars.

What follows is a story of how a construction company which did not take the time to develop best practices for the work performed by its employees caused a half a billion dollar mistake in Las Vegas requiring a hotel on the Las Vegas Strip to be torn down before it ever opened—all because the company failed to develop the necessary methods, systems, controls and procedures to ensure the quality of its work.

The Harmon Hotel and Residences, whose incomplete construction cost had already reached $279 million, and was to be part of MGM’s $8.5 billion City Center project, which is the largest privately financed development in the United States.  After the outer shell (before interior finishing) of this 47 story hotel and condominium unit was completed, it was discovered that there were serious flaws in the installation of the rebar on the first 15 floors.  The reinforcing steel, or what is commonly called “rebar”, is installed directly in the concrete during construction and is necessary for the engineering integrity of the building to withstand the tremendous weight of the completed building.

According to an article in the Las Vegas Sun, “Some of the steel, known as rebar, was so badly positioned that it stuck out of the concrete floor and was sawed off to conceal the mistake.” In addition, “Harmon workers reportedly moved rebar without first getting an OK from the structural engineer . . . .which is a major no-no in the construction chain of command.  Rebar placement is carefully configured to maximize structural building strength. ‘Congestion, or too much rebar matted together, prevented proper coverage and distribution of concrete,’ said a project official who requested anonymity.”

The investigation also revealed that the contractor failed to properly coordinate the rebar installation and concrete placement with its different crews during the day and night shifts working on the project.

An engineering firm was brought in to evaluate the structural problems caused by the incorrectly installed rebar and concrete.  The consultants concluded: “On July 11, 2011 a report was released by Weidlinger Associates, an engineering firm hired by MGM Resorts International. This report indicated that the building was likely to collapse in a major earthquake and that a determination of possible repairs would take at least a year.”   (Wikipedia)

After the report was issued, MGM decided to tear down the hotel before it ever opened.

The Clark County Development Services Department issued five notices concerning the contractor against the ironworker subcontractor over the problems alleging the contractor “failed to provide workmanship.”

The failure by the contractor to have the proper methods, systems, controls and procedures to do the work correctly was compounded by the incompetent work of the inspection firm hired by the contractor.  In other words, the contractor had hired a third-party inspection firm to inspect its work.  That was the only system it had to ensure the job was done correctly.  Instead of developing the proper internal systems, it relied on the fact that it hired an outside firm to inspect its work as being compliant with the engineering specs.

However, here is what the Las Vegas Review Journal reported about the third-party inspection firm:

“They found that the Harmon’s third-party inspection firm . . . falsified 62 daily reports between March and July 2008 stating that things were OK when they weren’t.  County inspectors missed the problems, too. It seems rebar was misplaced inside link beams that transfer horizontal loading to the building’s shear walls.  A shear wall is a braced panel wall that counters lateral loads on a structure.  In other words, it supports the building and keeps it from falling over.

“Stirrup hooks, ties that hold rebar together, also were spaced incorrectly, county inspectors found; some even poked past the floor slab, prompting workers to cut them off with a blowtorch so they wouldn’t show.

“‘We do not see this very often,’ county building official Ron Lynn said.  ‘They installed it wrong.  That’s the bottom line.’”

The attorney for the third-party inspection firm “sought to attribute the Harmon errors to bad communication.  ‘There were numerous representatives on site during the entire process of construction, evaluation and implementation. . .  It is safe to say there was a shortfall in communication.’”

A hearing into the Harmon horrors of construction found that the inspector from the third-party inspection firm was inexperienced.  The transcript of the inspector’s meeting with the county about the problem revealed his inexperience.  The inspector said that on previous jobs he always had help from other inspectors in reading the plans.  However, the Harmon project was his first job for the inspection company where he read the plans without any help from other inspectors.

Over two months this inexperienced inspector and another company inspector issued 62 notices stating the rebar was in compliance.  In the meeting with the country, the inexperienced inspector admitted that he had personally inspected floors 17-20 and “made an error signing items that were in noncompliance with the approved construction documents.”

The report concluded that the third-party inspection firm’s “inspectors did not identify the non-conforming reinforcing steel work.”

The Las Vegas Sun reported the results of the hearing on the ‘Horror at the Harmon’:

“… inspectors did not identify the nonconforming reinforcing steel work … This may have been the result of a variety of different causes, including misinterpretation, incompetence, a mistake or something more nefarious.

“Other things, such as reinforcing steel and concrete placement during different shifts, night work, moving reinforcing steel to facilitate concrete vibration, or accidental or intentional concealment of the problem by others may also have been contributing factors.”

The county hearing officer found the contractor at fault for its lack of systems to ensure that the engineering specs were followed, saying,

“By these individuals most knowledgeable of this issue not communicating this problem with the inspector, the engineer, the owner or the construction manager, the ability of all concerned to mitigate these issues early on was dismissed, and the chain of problem discovery, supervision and problem resolution was broken.”

This was a failure which the construction company’s management could have avoided with proper systems had they brought in business experts to identify the lack of management systems and implement a consulting services project to install the proper methods, systems, controls and procedures to ensure that the workers were installing the rebar and concrete according to the engineering specifications, and just as importantly, that there was the proper communication between the day, evening and night shifts to ensure that both supervisors and company workers were working in concert and according to plan.

On August 27, 2013, District Court Judge Elizabeth Gonzalez ruled that the hotel could be torn down and acknowledged the public safety risk if there was an earthquake, resulting in catastrophic damage. And, a $500 million construction defect lawsuit, which has already been filed, is expected to be heard in the Nevada courts over who’s responsible for the loss. The litigation alone is going to be a nightmare for the construction company, all of which could be avoided with the right systems in place.

While the MGM “Nightmare on Las Vegas Boulevard” or the “Horror at the Harmon” blockbuster may represent an extreme result—tearing down this project and its total loss to investors—it vividly demonstrates the real financial risks contractors take when they operate their businesses without the proper methods, systems, controls and procedures to ensure that the building project conforms with the engineering design.

Whether it is a million dollars or thousands of dollars, there is no excuse for putting one’s company at significant financial risk by not having the right methods, systems, controls and procedures in place.

A third-party business analysis for construction companies is like having an insurance policy against improper management planning. A construction company or contractor will always benefit from having an independent, third-party point of view. It’s a small price to pay to ensure peace of mind for a business owner that he has the right systems in place to insure that the “Horror of the Harmon” will never be visited on one of his projects. As of May 2016, only the concrete slab for the foundation and the exterior walls at street level are left of the Harmon Hotel.