U.S. Commission on Civil Rights

Barriers Facing Minority- and Women-Owned Businesses in Pennsylvania

Chapter 3

Barriers Facing Minority- and Women-Owned Businesses

To obtain information on obstacles M/WBEs face in bidding for and completing state and municipal contracts, the Advisory Committee held a daylong forum on January 14, 1999. The forum consisted of five panel sessions where M/WBE owners, state and city of Philadelphia agency representatives, public officials, community advocates, industry analysts, and large prime contractors spoke.[1] At the end of the forum was an open public session where seven members of the audience spoke of impediments to businesses in Pennsylvania. There was a general sense that for years, disparity existed between M/WBEs and white-owned firms, largely due to discrimination in the contracting process. Many of the obstacles cited were reminiscent of those referenced in the Brimmer report (chapter 2). M/WBE owners described difficulty gaining access to necessary information and capital, limited job training opportunities, unfair labor practices such as non-payment for work and job interference, and problems associated with the completion of municipal contracts. This chapter summarizes barriers discussed by the panelists and, where appropriate, incorporates information from other studies.[2]

Negative Views

According to the panelists, majority contractors and vendors hold prejudicial views of M/WBEs ability to complete a job. They regard M/WBEs as unsophisticated, lacking necessary equipment and resources, and not having needed experience in or knowledge of contracting procedures.[3] M/WBEs must make extra effort to prove their ability and worthiness to prime contractors in order to receive a contract. M/WBE owners believe that they are qualified, yet encounter perceptions that they lack necessary experience to handle a particular job.[4] In the words of Floyd Alston, president of Beech Interplex Inc., a nonprofit community development corporation in north-central Philadelphia:

One of the obstacles that we run into most often is the assumption on the part of persons who we make our appeals, submit proposals, [or] make a pitch [to] . . . that because we are a minority, we don't have the capacity or the capability. I can almost see it when we walk in the room. We really have a difficult time overcoming that assumption. There is an assumption that because we are relatively small, we can't perform as well as large, sophisticated organizations. . . . Well, how do we overcome it? We overcome it by being very good at what we do and doing our homework. We are very professional in our presentations. We give quality documentation of what we can do and try to show them our sheer tenacity.[5]

Limited Access to Critical Information and Business Networks

M/WBE owners claimed that information regarding contracts is not disseminated effectively and that sometimes prime contractors fail to timely notify M/WBEs of bid opportunities.[6] As a result, M/WBEs cannot prepare bid documents to the level of expertise required to secure the contract. For example, Clinton Connor, chairman of the Economic Development Committee of the Philadelphia NAACP, described his experiences:

One of our negotiating sessions took place on a Friday [with prime contractors]. The subject came up . . . how many contracts have you let? How many do you have going out in the near future? Friday [morning] . . . they informed us that they had nine contracts that were to be bidded on at 8 o clock Monday morning, which gave the contractors that we were representing . . . almost no time. But those contractors . . . worked throughout the entire weekend to have those bids submitted. . . . Needless to say, none of them were chosen for any of the projects.[7]

According to Lynn Claytor, president of Contract Compliance Inc., a company that monitors M/WBE participation in public contracts, Pennsylvania indeed has no system in place to distribute information to M/WBEs effectively.[8] In its 1997 report summarizing disparities in government contracting in 58 states and localities, the Urban Institute stated that majority contractors reveal bids they received from M/WBEs to nonminority subcontractors, enabling them to underbid M/WBEs and secure the contract.[9] The Urban Institute report also identified instances where bid notices were publicized through majority-business networks that minorities have found difficult to penetrate.[10] Without knowledge of bid and contract opportunities (and without the same business contacts as majority-owned firms), M/WBEs find it difficult to enter the marketplace, limiting the opportunity for their economic growth.[11] Floyd Alston refers to this as dealing with the inner circle the old boy network that prevails. In most instances, the deal is done before we walk in and we are given a courtesy interview or a courtesy kind of consideration, he said.[12]

Limited Access to Capital

Small businesses, particularly M/WBEs, often lack sufficient funds to undertake medium- to large-scale projects. For M/WBEs, obtaining necessary funds to bid for and complete a job is a constant concern. In its 1998 survey of more than 650 women business owners, the National Foundation for Women Business Owners found that access to capital is a primary concern for women, particularly minority women business owners.[13]

Many owners begin their businesses with their own money, by using either personal savings or credit cards for part or all of their capital needs.[14] Because of this, any possibility of discrimination in the lending process poses additional hurdles for M/WBEs to receive sufficient capital. The National Foundation for Women Business Owners found that African American and Native American women business owners were more likely to have been turned down for loans by a bank when starting their business and were less likely to have bank credit than Asian, Hispanic, or white women business owners.[15] The 1997 Urban Institute study also identified factors that limit M/WBEs access to financial resources, including limited experience in borrowing, difficulty demonstrating creditworthiness, low income and home ownership, and poor capital resources.[16] Without these elements, it is difficult for M/WBEs to provide sufficient collateral to support a business loan. In addition, evidence points to possible discrimination in the loan process. For example, the Urban Institute references studies where African Americans with the same amount of capital as whites receive approximately half the loan dollars when seeking business loans.[17] Even with the same borrowing credentials, minorities are less likely to obtain business loans than white owners.[18]

Because they have difficulty obtaining necessary capital, panelists claimed M/WBEs are sometimes precluded from bidding on contracts requiring a set amount of cash reserves or specific equipment. In addition, because M/WBEs are viewed as lacking the ability to complete a job, the banking industry becomes weary of entering into business with all other M/WBEs in the area if an M/WBE does not succeed.[19] Floyd Alston believes such indiscriminate practices would not be adopted if the failed firms were majority-owned, because even when majority-owned firms file bankruptcy they are able to obtain financing.[20]

Unlike prime contractors, who can receive mobilization funds from municipal agencies to enable them to begin work, subcontractors and M/WBEs do not receive money upfront and must frequently finance on their own what is needed to complete the job.[21] Without sufficient funds, M/WBE owners said they are placed in the precarious position of pledging their own personal credit or obtaining additional mortgages on their homes or businesses.[22] These circumstances limit available cash flow and frequently cause businesses to default on their bonds and financial commitments.[23] Furthermore, without sufficient capital, M/WBEs cannot do volume buying to obtain the best prices from suppliers. This in turn makes them less competitive than majority-owned firms, and they might not win a future contract because of their higher price.[24]

Unclear Contract Terms

In general, M/WBEs are smaller, with fewer employees than majority firms. Problems associated with being a small business can add to the difficulties already experienced by M/WBEs. When confronted with confusing contract terms related to billing arrangements, payments, and termination, small businesses sometimes do not have staff expertise to clarify or do what is needed. Because of the lack of in-house expertise or the rush to secure and begin working on a contract, M/WBEs often fail to review carefully the contract provisions or negotiate revisions to their benefit. The experience of Grace Gibson, an owner of a sheet metal installation firm, illustrates this point. When her firm submits bids and proposals, she frequently is asked to begin work without a signed contract. In place of a signed contract, she is often given the prime contractor's contract. Given the size and complexity of the prime contractor's contract, it is difficult for her to comprehend the intricacies of the contract, let alone negotiate revisions.[25]

Difficulty Obtaining Bonding

In order to bid projects, most firms are required to obtain performance bonds, which guarantee that a contractor will fully perform the contract and offer protections against breach. Obtaining sufficient bonding (or bonding at all) is frequently cited as a major barrier to M/WBEs. Ambrose Chukwanenye, president of a minority-owned business, said only large contractors can afford bonding. Small businesses, he said, should not be asked to obtain bonding since they usually spend significant funds upfront just to perform the work in the contract (e.g., to obtain material and labor), and bonding requirements place additional heavy burdens on small-business owners. He told the Committee:

A lot of small contractors have their money held by the city or the [prime contractor on a previous job]. To me, it is enough that I am putting my money up first [to obtain] materials and labor [costs] up front. I don t know why I need [to pay] an insurance company 2 percent of the contract value for doing nothing. [It is a practice that assumes] because [you are] rich, [you] can afford it. [But] if you are poor . . . ultimately you can't compete.[26]

Minority firms often have difficulty obtaining bonding because they lack the experience bonding companies require. In addition, it is alleged that in some states bonding agencies are not bound by antidiscrimination laws and can arbitrarily choose whether or not to bond a firm.[27] No panelist at the forum was able to explain how bond requirements can be lowered or waived or identify a state or local office that could assist in obtaining bonds.

Difficulty Entering the Skilled Trades

In some industries, particularly construction-related crafts, membership in local unions has been a prerequisite for training and apprenticeships in specific trades. In the past, minorities were denied access to union membership, and consequently could not participate in their apprentice programs. According to Clinton Conner, chairman of the Economic Development Committee of the Philadelphia chapter of the NAACP, trade unions in the Philadelphia area have historically limited access to apprenticeships for African Americans.[28] This fact has been pointed out as far back as the late 1960s and was a primary impetus behind the original Philadelphia Plan, which was designed to remedy discrimination in the construction industry. Similar difficulty has also been reported in Pittsburgh, where community leaders have publicly voiced their concern that local construction trade unions have not actively recruited minorities for their training programs.[29] Union organizations have responded by citing their participation in job fairs, their pre-apprenticeship training programs, and involvement in community organizations that assist minority applicants.[30]

Prevailing Wage Laws

Prevailing wage laws, such as the Davis-Bacon Act and related state statutes, require private contractors working on public projects to pay wages and benefits to their workers that are prevailing for similar work in or near the locality in which the project is located.[31] Using standardized pay scales in union and non-union contracts, Pennsylvania sets a minimum wage rate for each craft or classification of work for a public works contract.[32] In the construction field, Pennsylvania uses union rates for state-funded projects when it determines that a majority of the workers in the area belong to the union.[33] Employers who are awarded public contracts must agree to pay the set wage.[34] For other projects, the state uses rates based on 1995 and 1996 employer surveys.[35] Frequently, M/WBEs do not have the financial resources to pay their workers the higher prevailing wages specified under the law. As a result, many M/WBEs choose to remain non-unionized, disqualifying them from competing in municipal projects, which call for prevailing wage rates among the project's labor force.[36]

M/WBEs also report that it is difficult to recruit employees because many belong to a union and many M/WBEs cannot afford to pay union wages.[37] Since unions provide a substantial portion of the training opportunities for skills in demand by employers in the state, most people entering a particular trade ultimately join a union, and it is difficult for M/WBEs to find workers who are willing to remain non-union.[38] At the same time, unions will pressure the firm into hiring their members.

Supporters of prevailing wage laws claim that without set wages, working-class and union members will receive lower pay, there will be a rise in the number of workers compensation claims as safety will be reduced on the job, the construction industry will be destabilized, and apprenticeship programs that produce well-trained employees will decline.[39] Proponents additionally claim that by having prevailing wage laws, contractors are prevented from basing their bids for public works on wages that are lower than those in the area, and prevented from using cheaper labor from outside the area.[40]

Project Labor Agreements in Philadelphia

Philadelphia Executive Order 5-95 (see appendix 4) encourages the use of project labor agreements between city agencies and labor organizations in public works projects over $250,000. The order specifies that the city, the project manager, and any contractor shall have the right to select qualified bidders for subcontracts regardless of a bidder's union status. Despite this protection, the Committee heard claims that project labor agreements effectively eliminate many M/WBEs from participating in these jobs because of the belief that only union firms are permitted to work on the job.[41] These allegations may be the result of such misperception. According to MBEC s director, James Roundtree, the city has entered into three project labor agreements, two with the Philadelphia International Airport and one with the One Parkway Building.[42] All three projects have non-union firms included.[43]

Irregularities in Payment for Work Performed

M/WBE owners stated contractors intentionally delay payment for work they have completed, often waiting 60 days or more before compensating M/WBEs. When delays occur, M/WBEs are placed at financial risk, as they must now find other funds to pay their subcontractors while at the same time maintain resources to complete the original contract and other ongoing projects.[44] Faced with delayed payments, M/WBEs may request different pay schedules or ask to be paid earlier than specified under the contract. When this occurs, however, contractors are likely to assume that M/WBEs cannot handle the job.[45] Darcel McGee, a minority business owner, noted that such misattribution would not happen if it were a major corporation requesting a different payment schedule.[46]

It is also claimed that prime contractors back charge M/WBEs (i.e., withhold a portion of the agreed upon payment) based on false allegations that M/WBEs delay the work schedule, leave the job site unsupervised, or create a safety hazard. Grace Gibson, president of a minority/women-owned sheet metal firm, explained how delays in payment and back charges can damage a firm s ability to compete in the marketplace:

Certified minority- and women-owned companies work very hard to bid a job, negotiate with general contractors, and begin to prepare to do the job. We work for 60 days supplying all our materials and labor before our first payment from the general contractor is made to us. We do not receive the full amount billed because 10 percent is held for retainage. That 10 percent is held every month on every invoice until the job is completed, and most times, long after the project is turned over to the owners. It can be as long as a year after the owner takes possession that that 10 percent is released. Dishonest general contractors or builders back charge us for false or unlawful charges. We can do nothing to convince these general contractors to release our 10 percent because they are holding our money. . . .

Some of the back charges are: we are delaying the work schedule, we don't lock gates, or we don't clean up. This happened to me and the general contractor not only held my 10 percent, but my regular contract money as well to the tune of $165,000. I was held hostage. When this particular general contractor did not pay me $165,000, I couldn't pay my suppliers. My credit was ruined. My credit is still ruined. I am still trying to come back from that. [In addition to holding 10 percent of the contract money,] general contractors also reduce my invoices without informing [me]. I knew nothing about it. There was no documentation that he was reducing it. And the reason he reduced it is because he didn't feel that I did that percentage of work. So, now you have an additional $20,000 on top of the 10 percent that he controls.[47]

According to Marcellus Blair, president of a minority-owned business, municipal agencies pay the prime contractor project start-up funds on a regular basis, but do not monitor whether M/WBEs (as subcontractors) are paid timely by the contractor. To make matters worse, further delays in paying M/WBEs occur when municipal agencies are late in paying the prime contractor.[48]

In Philadelphia, it was alleged that city officials do not track whether M/WBEs are paid for completed work.[49] The experience of Marcellus Blair is illustrative. His company, MBA Enterprises Inc., was selected by a city agency to perform work on a housing project. As part of the agreement between the agency, prime contractor, and MBA, supplies and materials MBA required were to be paid by the prime contractor. During the course of the project, however, the prime contractor was consistently late in paying MBA for these charges, causing it to delay paying its employees for work performed, which in turn led them to stop work on the project.[50] Blair complained to the city agency but received no relief.[51]

Interference from Labor Unions

Concern was raised that unions interfere with valid contracts between prime contractors and M/WBEs. It was alleged that once union organizations discover that a non-union firm was selected for a particular job, the firm may be subjected to a variety of hostile acts: trespassing at its job site, picketing, and vandalism, or having untrue complaints filed against it with the National Labor Relations Board.[52] It was also claimed that unions threaten prime contractors with violence or tell them to shut down unless they replace non-union subcontractors with unionized ones.[53] Projects can easily be shut down, because workers usually refuse to cross a picket line. Grace Gibson elaborated:

I and another owner were recommended by the owners to work on a very large residential job. But, because of union interference, we were not awarded the job. The unions trespass on the job site, inspect our work, [or] disrupt our men from working. This kind of interference by the union interrupts our relationship with our customers. We lose work and cannot earn a living. Non-union companies, when awarded a job, find vandalism to our work and our materials stolen. Everyone knows that we are sabotaged and these acts are done to cost us money. Unions put a tremendous amount of pressure to either sign up the non-union company, or the union organizers try to strip us of our men and try to convince them to join the union, leaving us stranded. If that does not work, they file an untrue complaint with the National Labor Relations Board, costing us time and money to respond.[54]

When a project is shut down, firms whose own work is dependent on the completion of a portion of the project by another subcontractor are forced to suspend their work on the job.[55] In addition, even if prime contractors elect to keep M/WBEs on the job, M/WBE owners stated they would most likely not be hired in the future regardless of the quality of work performed.[56] M/WBEs believe that prime contractors would fear another picket and thus choose a subcontractor that is unionized.

It has also been reported that unions threaten prime contractors when they choose non-union firms as subcontractors, often leading to the cancellation of signed or promised contracts.[57] One M/WBE owner reported that although a prime contractor verbally promised him that he was to receive a project contract, threats from the local union caused the prime contractor not to select him because his firm was non-union.[58] He later learned that the contract had been given to a union firm at a higher price than the one he quoted.[59] The following account illustrates the experience of a non-union subcontractor:[60]

In April 1999, North American Roofing & Sheet Metal Company (North American) and ANVI & Associates sued five union organizations, a general contractor, and the Philadelphia Housing Authority. North American and ANVI alleged that because they employed minority workers, the unions walked off the job to force the general contractor to terminate their contract.[61] A representative from North American alleged that he was told by a representative of the general contractor that contracts were not awarded to other M/WBE subcontractors (despite their low bids) because union officials persuaded the property owner not to use non-union employees.[62] North American and ANVI believe that the contractor knew of their non-union status prior to the contract being signed but decided to use them anyway. In preparing to work on the project, North American purchased new equipment and was required to subcontract 25 percent of its work to ANVI, a minority- and female-owned business.

North American successfully worked this project for four months; however upon arrival of its minority (Asian) subcontractor ANVI, union leaders immediately visited the site and inquired as to ANVI's union status. Soon after, all of the unionized workers (approximately 296 of 300 who reported that day) left the job site, an action North American and ANVI believed was a protest to keeping non-union workers at the site.[63] Later, the general contractor suspended North American's contract and ordered it to leave the property. After terminating the contract, the general contractor contracted with a union roofing company for a higher price than the original contract with North American.[64]

Contractors False Claims of M/WBE Solicitation and Utilization

At the U.S. Commission on Civil Rights September 1997 briefing on obstacles confronting minority entrepreneurs, M/WBE representatives alleged that during the bid solicitation process for government contracts, some large contractors falsely claim they solicited M/WBEs as subcontractors and then include their names in the bid package to the municipal agency. It was claimed that the contractors report to the agency that they were unable to find M/WBEs. The problem is exacerbated when contractors apply for and receive good faith waivers from contracting agencies, which in essence permit their bid to proceed without M/WBEs being specified. It is alleged that agencies do not question the validity of a contractor's statements made to obtain the waiver.[65]

Most organizations that participated in the Advisory Committee's January 1999 forum were from the Philadelphia area and had similar stories. In regard to city contracts, it was alleged that prime contractors list minority- and women-owned firms as subcontractors in their bid proposals to the city. However, once the contractor obtains the contract, they elect not to use the M/WBE or perform that portion of the contract themselves. Contractors fail to advise the agencies that M/WBEs were not used, and city officials do not monitor whether M/WBEs have worked on the job.[66] According to one panelist, the city awards contracts to prime contractors even though no subcontractors are named and prime contractors may wait until the project is near completion before naming subcontractors.[67] On this topic, the Urban Institute noted that these practices are common where there is little oversight by municipal agencies.[68] It noted, however, that little information is available concerning the level of state and local government monitoring of subcontracting agreements.[69]

Additional Barriers

Two additional barriers M/WBEs face difficulty obtaining business experience and burdensome regulatory requirements were referenced at the forum but not explored in depth. These are presented in a footnote for the reader.[70]