Cracks in the System
Is the City's Minority Procurement Process Up to Par?
By Chris Walters, Fri., Sept. 19, 1997
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The mistake was eventually discovered and Kirkwood & Hunter was disqualified. On the face of it, here's an instance where the city's procedures seem to have worked, and thus barely qualifies as a donnybrook, much less a scandal. One could call it a near miss. But when the Kirkwood & Hunter documents are placed in the context of the city's history of minority subcontracting initiatives, a different story emerges. And it's not that pretty at all. The city's history is rife with instances of idealistic goals threatened by cynical manipulation of rules and procedure. It ends up with the branch of the city tasked with bringing fairness to the rough-and-tumble world of contracting being taken over by the most expedient city department, Financial and Administrative Services. And it raises the crucial question of whether that department, supposedly the municipal accounting arm, really runs the City of Austin in the first place.
Jumping Through Hoops
Within the small and enclosed world of the city's equal business opportunity bureaucracy and the people it directly affects, the Kirkwood & Hunter hoopla was a hot issue. The most dreaded noun in that community is "front," meaning a minority or woman-owned company either formed or solicited only to help a large, white-owned company increase its chances of getting into the public trough for lucrative contract action.
A classic front does little or no work aside from hanging around the job site for believability's sake, and collects a portion of the subcontracting dollars for doing so. When most of the monies that would have gone to a legitimate minority subcontractor slide across the ersatz sub's desk and into the coffers of the prime contractor, such an arrangement is known by the second most dreaded term, "pass-through." Aside from their illegality, fronts and pass-throughs are acknowledged by all concerned as very bad things because they trample the spirit of this particular type of affirmative action.
A good, clean certification process, the reasoning goes, acts as a barrier to abuses of the minority subcontracting preference system. Common sense suggests that a thoroughly checked company, one whose ownership vitals, financial statements, inventory, work history, and skilled workforce argue strongly for its actual existence, assures a certain level of integrity. Accordingly, the City of Austin's certification gauntlet has grown more rigorous over the years, and it now requires more information than some businesses are willing to divulge in documents technically accessible under the Open Records Act.
Judging from the Kirkwood & Hunter case, the system is far from perfect. In this instance, the city was caught with its pants down. Although the city had done nothing illegal it was put in the embarrassing position of having to take back the company's 900-series construction codes -- codes that never should have been awarded in the first place. What follows is an account of how the city department responsible for helping minority-owned firms get a piece of the contract pie almost handed a million-dollar serving to a local company with no hands-on experience.
Among the the papers included in the Certification Application file for Kirkwood & Hunter Electrical Supplies are 1996 certification documents that indicate that the Austin firm had only a scattered history in electrical supply work since ostensibly setting up shop in 1994, and no experience whatsoever in construction or excavation. Despite these limitations, SMBR awarded the company three numbered codes -- 280, 285, and 287 -- all referring to electrical supplies.
So how did Kirkwood & Hunter ever manage to receive the questionable "900 codes" that put it in line for the $1 million-plus of work for boring, sounding, and utility pole digging? And how was the mistake discovered?
Enter Susan Spencer, the driving force behind the Texas Center for Women's Business Enterprise (TCWBE) and by all indications a person with a flair for bureaucratic survival. Active for many years under contract to the Small Business Administration, she helped women get business loans from that agency and organized the Women's Construction Network, whose members compare notes on procurement strategy at monthly luncheons. After the flow of federal dollars dried up, Spencer arranged a contract with SMBR with the help of Councilmember Jackie Goodman. A proposal for a non-exclusive agreement between TCWBE and SMBR was submitted on May 8, 1996. The city's stake was $43,000, the contract runs from October 1, 1996 to September 30, 1997, and the expenditure was approved by the city council on December 5, 1996.
Had there been any discussion of the item, councilmembers might well have asked why such a partnering arrangement was needed when the SMBR was already staffed to provide consulting, technical assistance, certification training courses, and the like for Women's Business Enterprises (WBEs). In effect, Spencer moved her old federal consultancy -- helping WBEs get loans from the SBA and banks, normally not a SMBR task -- under the city umbrella. The deal included office space on the same floor as SMBR at the One Commodore building, which was moved to the Two Commodore building on East Ninth Street early this year. The in-kind value of the office and furniture, plus an SBA grant and private contributions, comprise the rest of TCWBE's $113,716 budget.
At some point during the last half of 1996, Spencer, RSI Inc., the prime contractor for the electric utility job, and Kirkwood & Hunter owner Dolores Hillyard Hunter seem to have made common cause, with Spencer recruiting Hunter's firm under a "mentorship" arrangement as a likely subcontractor to RSI for one of the most lucrative city contracts in the pipeline, the Electric Utility Department's Overhead and Underground contract. The mentorship arrangement included giving Philip Burke -- Kirkwood & Hunter's only employee listed in the firm's application with the city -- the opportunity to observe construction and excavation procedures (his resumé lists three years as an estimator and contract admininstrator for a local construction company as well as eight years of industrial security and investigative work).
"Susan Spencer made the request of Sam Harris that he add the codes for the drilling and pole installing work," recalls Reynaldo Cantu, who was director of the SMBR at the time. "He added the codes with the understanding that documentation supporting the contractor's eligibility was forthcoming."
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Some time in the middle of January, the Kirkwood & Hunter paperwork marched over to Jan Lawson, contract compliance manager at the Electric Utility Department (EUD-SMBR is a separate entity from SMBR). "The way the process works is, once a contract is awarded that relates to EUD, the MBE/WBE [minority business enterprise/women business enterprise] compliance plan is reviewed and verified by EUD-SMBR staff," Lawson explains. "In conducting... research through the SMBR office, there was no record of certification [for the 900 coded work], so at that point it was handed over to the SMBR office for review."
This is a subtle way of saying she flung it back with a big red flag on it. It also means that if Hunter and Spencer had worked the process harder, responded to those requests for information lickety-split, and received certification plus the extra codes a few months earlier, Kirkwood & Hunter would have secured a place on EUD's pre-bid availability list, meaning the subcontract would have sailed right through.
Instead, the file was pulled, and at that point, late January of this year -- the fan cranked up to full speed at SMBR and its city parent, Financial Services. Spencer swung into action on behalf of Kirkwood & Hunter, firing off letters and meeting with then-director Cantu and Financial Services director Betty Dunkerley. The company's 34 years in Houston was invoked several times, despite the fact that, according to the SMBR file, the Austin branch was in essence a stand-alone in need of a significant equipment loan from the prime contractor. Pushing the envelope, Spencer crowned her January 23 letter to Cantu with this logical gem:
"The mere fact that this is a new endeavor shows the diversity skills this business possesses. I understand that the role of this business in the activity of this work, is digging holes with hole digging equipment. Although it is a very important role in the nature of this type of project, digging a hole is not considered a highly technical area, requiring an extensive amount of expertise or special license."
While this passage shows a certain deadpan flair, in point of fact digging holes for an electric utility does require an elevated level of technical expertise. For obvious reasons, it is important that utility poles and the like do not fall down when subjected to heavy environmental stresses.
On February 18, Cantu sent a letter to Hunter informing her that certification for the 900-series codes was being withdrawn, meaning sayonara to the million-dollar subcontract. Cantu listed two overriding reasons for his decision: Kirkwood & Hunter was not a viable and/or independent business, and Kirkwood & Hunter was not operating within the city's marketplace for at least three months prior to the date of application for certification. Why the company should be certified at all, much less for the specialized construction codes, was not explained.
Although Hunter exceeded the 30-day limit for filing an appeal, Cantu says, she got a hearing anyway because "we wanted to give her due process." At issue was a failure of city process, not the motives of prime contractor RSI. (Nor are RSI's motives at issue in this article, although RSI's Jack Taylor did not return a Chronicle phone call.)
The audiotape of the hearing held by the city's MBE/WBE advisory committee on May 12 is a revelation. Marred by poor sound quality resulting in many unintelligible passages, it is still as candid a record of a rip-snorting City of Austin dustup as any outsider will ever hear. No reporters were present, and tempers threatened to boil over as the discussion simmered. (At one point there was confusion over incomplete documentation, echoing past complaints about missing files at SMBR.)
As the MBE/WBE advisory committee took testimony, two factions faced off for bureaucratic combat. On one side were Harris, attempting to explain his apparently cavalier awarding of the 900 codes to Kirkwood & Hunter, Cantu, trying to explain how the process got balled up, and Susan Spencer and Dolores Hunter, who fought a valiant but doomed defensive action behind the bulwark of "the mentor-mentee relationship."
On the other side were two of the fiercest watchdogs to have emerged from the small group of people who have fought the minority procurement wars for a decade: James Harper and Carol Hadnot of the Black Contractors Association (BCA). Harper, a local contractor with 37 years of experience, and Hadnot, like Spencer a freelance minority procurement consultant, have voiced their hostility to cynical manipulation of the procurement rules at dozens of city council and MBE/WBE advisory committee meetings for as long as anyone can remember.
Following an inspired diversionary action by Spencer, based on the notion that Harris's awarding of the codes was done before "RSI actually came into play in terms of the bid," and other, equally dubious issues of timing, the hearing reached a climax of sorts after Burke, Kirkwood & Hunter's only listed employee, said under questioning that his experience in construction was restricted to observation. This prompted a vintage oration from James Harper.
"People don't do this. White people don't bring blacks in on nothing and tell them, `I'll give you the equipment.' It don't happen. If they're not setting you up as a front, they're not going to set you up in a business. Not in Austin, Texas. Maybe in Atlanta.
"I could take a toothpick, put it on my machine and pick your teeth, because I know what I'm doing! But he can't come out there and watch me doing it and get in your mouth with it! Because he don't know what he's doing... You have to know what you're doing. If you don't know what you're doing, you can't ride and run that machinery just because you've been out on the site. It don't work that easy!"
After more discussion, the committee voted unanimously to deny Kirkwood & Hunter's appeal.
The Exit Files
To understand how mistakes in the minority procurement process happen, one need only look at the unstable environment within the city's bureaucracy. Directors of the Department of Small & Minority Business Resources have the lifespan of a firefly. Since it began life 10 years ago at the sub-departmental level as the Office of Minority Business Affairs, founded by the city's first minority procurement ordinance, at least nine people have rotated through the top spot, and about twice that number have served as assistant directors. Consider the contrast with full-fledged departments. A few months ago, when John Moore and Jim Smith left their respective directors' posts at the Electric Utility and Planning in the city's latest round of musical chairs, it seemed like dynasties were ending. At SMBR, directors barely have time to get their pencils unpacked, and this fact alone says something about the tenor of the city's effort to instill fairness into its contracting process.
While a thorough history of that effort would quickly turn into a stale trek through political skirmishes and revolving doors, even a cursory glance is enough to establish several key facts about the city's handling of minority contractors in general and this department in particular. First, SMBR is a City of Austin stepchild that has enjoyed only a brief period of reporting directly to the city manager like a full-fledged department. Second, the MBE/WBE issue is the hot potato in what must be the longest running game of bureaucratic keepaway on record. Finally and most predictably, black people keep getting it in the neck -- and the city's own numbers bear this out.
Like any story about inertia and chicanery hiding behind a mask of good intentions, this one doesn't want to be told. Despite the lower stakes involved for bureaucrats, a version of omerta guarantees their silence just as it seals the lips of mob assassins. Or at least it does until they are assured they will be identified only as a "former city official" or "a person close to the process." Then they talk for hours. For many, service at the City of Austin fosters an irresistible urge to rat the place out.
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Echoing other SMBR veterans, people close to the process, and former city employees who had little to do with minority procurement, Fabela believes that Financial Services and Purchasing effectively function as one unit (F/P), which has more control over the day-to-day running of the city than any other entity -- including the city manager. Last year, SMBR stopped reporting directly to the city manager and was re-absorbed by Financial Services.
"Which is where it shouldn't be," says a former city official. "First of all, like the airport project where they get federal funds, a DBE (Disadvantaged Business Enterprise) is supposed to answer directly to an executive officer or someone high up enough so that the policies of the office cannot be influenced by the procurement process. You can't have the fox guarding the henhouse.
"SMBR is supposed to report to officials high enough that it circumvents control or influence by any other departments. So it's the third level down from where it should be. F/P controls the purse strings and indirectly controls the procurement process. Purchasing feels that because they're in charge of procurement and contracts, that responsibility should lie with them."
Disparity in Numbers
If true, all this means that the spirit of the strengthened 1995 procurement ordinance (amended in 1996) is now honored more in the breach than the observance, and is dependent on sharp-eyed outsiders in other departments, as demonstrated by the Kirkwood & Hunter affair.
The city's own numbers support this argument, at least where the mighty flow of construction dollars is concerned (the city spent over $230 million on construction in the fiscal year that ended last fall). According to current city purchasing records, the MBE percentage for Fiscal Year 1995-96 was 13.72%, 10 points below the goal of 23.8%. The Fiscal Year To Date figure for 1996-97 is 12.09%. The WBE numbers for construction reflect some improvement, from 3.67% for FY 95-6 to 7.93% for FYTD 96-97, against the goal of 8.40%. According to the Black Contractors Association, however, it is unlikely that the city is even meeting its goal of 2.6% African-American participation in construction contracts, a number they consider outrageously low. FYTD figures show a 2.48% participation level for blacks obtaining construction contracts. That's down from 2.11% in 1996 and 5.78% in 1995.
Therein lies another tale of city intrigue: A disparity study of the Austin market, commissioned by the city and delivered by the Atlanta consulting firm of D.J. Miller in 1993, one of the leading firms in the country for doing such studies. Miller had set the African-American construction goal much higher, close to 5%. The number was arrived at by measuring the local availability of services and plugging those figures into an involved formula that accounted for the size and scope of city work and many other variables. When the new MBE/WBE ordinance was being written in 1995, city management brought in a new consultant, Collette Holt of Chicago, who said the Miller study was not recent enough. At Holt's behest, the city commissioned a new study by researchers at UT's LBJ School of Public Affairs, who had already performed a disparity study for the State of Texas. According to former SMBR officials, it was reasoned that statewide numbers should be used since the city often employs contractors from out of town, a nice piece of sophistry. So the new study by the LBJ School rolled the numbers they'd gathered for the entire state into the mix, and the African-American goals dropped to toenail level.
"African-Americans would have been better off under the old study because the new one used statewide numbers," says Hector Fabela. "Basically the African-American construction companies are in the major cities, and if you go statewide and include areas where they are negligible" -- say, all of West Texas, the Panhandle, and the Valley -- "it's going to affect your figures." Hence additional African-American goals of 0.3% (commodities), 2.5% (nonprofessional services), and 1.1% (professional services).
When the new, lower goals passed into the ordinance without a protest from then-councilmember Eric Mitchell, his inaction stunned Hadnot and Harper. They withdrew their support of Mitchell and waited to fight another day, until after the voters tossed him out of office.
"Ever since they did that disparity study on us and reduced us to 2.6%, we have not been a happy bunch, the African-American construction businesses," Hadnot says now. "We know we got screwed. That means all they have to do is meet a goal of 2.6 and they have achieved goals for getting African-Americans into construction. At the time, we were at 4.5% by my understanding, and they reduced us. All the other ethnic groups doubled or tripled. It's still stinging us; [there is] distrust and animosity because of that. Because the whole disparity study came about because of us complaining."
When she spoke to the Chronicle in early July, Hadnot gave passionate vent to her years of frustration. When contacted again in August, Hadnot would not comment, but her remarks back in July were telling. She remembered one case "where I was on a contract to do a survey for a Water & Wastewater Project, the contract was postponed by the council. At some point in time they approved that contract, but I was never notified, and the company went ahead and did the work, giving my part of the work to somebody else. The auditing department called me from the city and asked me if I had performed the work and I said no, and they said the contract would be completed in two weeks. How the company wanted to resolve it was, they said that Water/Wastewater was short on secretarial staff and my people could go over there and help out for a couple of weeks. We went to the city manager's office and [former City Manager] Camille [Barnett] got it rectified. So I did get to do a small piece of the work. If they think you're not gonna do anything about it they'll just blow smoke, but if they think you'll take it to a higher level they'll try to resolve it.
"What we are always told," Hadnot continues, "is that big contractors are going to file a lawsuit if the city follows through on the minority participation. They have more economic power than we do, that's just a fact of life, reality. Lots of times you don't even bill them for things you do -- only non-minority businesses get to play the change-order game. We have to perform beyond the call of duty because you don't want anybody to raise a question. You put in extra hours and you only bill the hours in your contract because you can't get away with only doing a good job, it has to be excellent for it to be considered as good. It's that crazy," she said. "You can do great and wonderful, and you miss one little thing and it's like the world has come to an end. It's a crazy way to work. People are human, they make mistakes all the time. It's not about blame, it's about reality. This is what goes on out here. If anybody says this is not what goes on out here, they are lying or they are in denial."
When Hadnot refers to "the change-order game," she is talking about a method of running up the bill on a public sector contract that probably goes back to ancient Babylonia. A recent story in the Austin American-Statesman about a city building renovation which quadrupled in cost shows what can happen when the process is carried to extremes. Which is not to say that additional expenses called for in change-orders are never legitimate, or that Hadnot's complaint is petty.
Minority procurement lore is rife with stories of prime contractors trying to get rid of minority subcontractors by citing shoddy work, claims that are sometimes true and sometimes not. Hector Fabela tells a priceless anecdote about a prime contractor renovating city facilities who tried to replace a Hispanic plumber, a white female cabinetmaker, and the aforementioned James Harper, the latter for not saying "Yes, sir" and never smiling.
A printer named Frances Cornejo remembers getting certified as a minority subcontractor back in 1992 and landing a plum job in the low five figures. Her name stayed on the contract, but the work and the money somehow passed her by. After several months of sporadic meetings with city officials and the prime contractor, "I just got tired and kind of went away," she says. Next she landed a three-year subcontract to print all the letterhead and envelopes for one of the airport prime contractors. "In the past two years I've done maybe $800 worth of work on that contract." And even that might not have materialized had then-councilmember Eric Mitchell not phoned the prime on her behalf.
There are so many ways the chain can be jerked without crossing legal lines, that Fabela's allegations of illegality in his lawsuit are all the more surprising. A more recent incident shows how the process sometimes combines capriciousness with low insult. Andy Howard's Pest Control is a 100% African-American owned firm that has been active in Austin for almost three decades. At one time they had the big City of Austin pest control contract for four years before losing it to low bidders. This June the firm bid for a job with the City Housing Authority, a contract somewhere in the middle five-figure range, according to Dennis Howard, company vice president and a nephew of its founder. Howard's submitted the low bid. Then the company waited for confirmation, and waited some more. They were told that proper procurement procedures regarding notification of potential bidders had not been followed, and the bid could not be forwarded to the Housing Authority board for a stamp of approval. Apparently the snag had to do with the Austin Apartment Association not being notified, and a lot of potential contractors known to the AAA not hearing about the job. Howard was told he would have to rebid.
"There were 12 companies that bid on it, and it was a real competitive bid," Howard says. "Good mixture of small and large companies. If you rebid, your numbers are out on the street, it's gonna make [the value of the contract] go down." Meaning goodbye profit margin. Feeling yanked around and played for a fool, Howard did the right thing. Howard said he appealed to a savvy player from outside the bureaucracy who knew where to apply pressure, and in August the contract dropped back in his lap.
Given these realities, the arguments that swirl around SMBR policy, over firewalls between certification and compliance, and over the definition of "good faith effort" in the procurement ordinance as amended a year ago, seem not to matter as much as good old-fashioned gamesmanship. Reynaldo Cantu, who was happy to return to Water & Wastewater in an engineering capacity after his stint as SMBR director, argues vigorously that the agency does a good job, as vigorously as James Harper argues that it does not much at all.
Cantu points out that the annual recertification process has been simplified, and that sensitive information in the main documentation is not released under Open Records if the state Attorney General rules that it is proprietary. He also points out that, after dipping below a thousand in the wake of the ordinance changes, the number of firms certified by the city has started to climb again. He points to the Kirkwood & Hunter squawk as proof the system works, not as evidence of its being within centimeters of veering off course at any time.
Council's Role
One thing everybody agrees on is the importance of council oversight. One former city official says that former city manager Camille Barnett put a stop to one standard manipulation, amending a contract for more money without further minority participation due to "unavailability," because "she didn't want any more arguing in front of the council." Critics of the process agree that the goal of fairness in awarding city contracts has never had strong, unanimous council support. If the city manager tells the council he has to sign a waiver on the procurement goals because the job in question is an emergency, the council tends to believe him. Yet without the possibility of council intervention, say veterans of the process, the minority goals would stand no chance once the windfall of the new airport -- a boon for Hispanic contractors if not local African-Americans -- is over and done with.
Under current policy the council must approve every contract over $38,000. That may not always be the case. Reporting on an interview with acting electric utility director Milton Lee in the July 9 issue of In Fact, Ken Martin wrote the following: "Lee says he wants voters to approve an amendment recommended by the consultant Metzler and Associates to authorize the general manager to approve purchases of $1 million or less and the city manager to approve purchases of $2 million or less. Lee says this would shorten the procurement cycle and increase efficiency."
As the one man in recent years who has had the nerve to go to the mat with the city in a public arena, Hector Fabela deserves the last word. "The irony is," he says, that SMBR "is supposed to keep out fronts, when the whole department is a front for city management to make it look like they're doing something."
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