Minority Contract System Critics Blame Government : Transit: Small firms say they are vulnerable to abuses. Contractors say the laws are poorly administered.

The goal was noble. After decades of being shut out, small construction companies owned by minorities and women finally would be given their fair share of work on multimillion-dollar public works projects.

But instead of channeling billions of dollars in subcontracts to these disadvantaged firms, a showcase federal program has become a morass of missed opportunities, avarice and abuses, its critics say.

The critics include minority subcontractors and big prime contractors alike. Both groups contend that government agencies which control the purse strings and regulate the process are failing to ensure that legitimate--and qualified--minority firms are the ones who are benefiting.

“Those agencies should either enforce the (equal opportunity) rules or get rid of the program,” said one black contractor, who spoke on condition of anonymity.

By federal law, at least 10% of the country’s $100 billion in public works projects each year should go to “disadvantaged business enterprises.” No one knows exactly how much money is reaching such firms, but a Times investigation of the largest Los Angeles transit contracts found that at least $50 million has gone to companies with questionable minority status or companies serving as “fronts” for non-minority contractors.

Minority-owned companies complain that they receive unfair treatment when they seek work on transit projects such as the $3.9-billion Metro Rail subway, and that they risk financial ruin when they try to buck the white, male-dominated construction industry.

Transit agencies, minority contractors say, do little to protect their small and financially vulnerable companies from exploitation and bullying by major contractors.

Much of the work earmarked for minorities goes to companies fronting for powerful non-minority contractors, said Oscar Streeter and several other minority contractors. And when legitimate minority firms win subcontracts, they said, the big, prime contractors attempt to wrest control of the work from them and cut into their profits.

“It isn’t difficult to get certified (as a minority firm), that’s the easy part,” said Streeter, the black owner of a small South Bay construction company. “What you have to realize is that the system you operate in is very hostile (to minorities.)”

On the other hand, the 32,500-member Associated General Contractors argues that the minority contracting laws are poorly administered and force them to hire under-financed, unqualified minority firms that often cannot finish a job.

The contractors favor an open, competitive bidding system without mandatory quotas or goals, said Mike Kennedy, a special counsel for the group. There is no effort to exclude minority or female-owned firms, he said.

“It’s a terrible program . . . filled with corruption,” said association member Mike Shank, managing partner of Shank-Obayashi, a Denver-based firm that finished two Metro Rail tunnel contracts worth $34 million. “The idea that you can parcel out work to people who simply aren’t qualified . . . is a recipe for disaster.”

The minority contracting requirements, he said, put prime contractors in a Catch-22: If they do not hire disadvantaged firms, they cannot win public works contracts. But “disadvantaged” firms tend to be under-funded and inexperienced subcontractors who will need help to do the job. If a prime contractor hires such a firm and provides too much help, he risks being accused of setting up an illegal front.

Transit authorities alleged that Shank did just that on his two Metro Rail contracts. Shank vigorously denied the charges.

Officials at the Southern California Rapid Transit District--builders of Metro Rail--acknowledge that the prime contractors sometimes have tried to force out minority firms and take over their work.

“We recognize there is a problem because the prime contractors are so much more powerful than the subs,” said RTD spokesperson Andrea Greene. The problem, she said, is “inherent in the industry.”

Green said there is nothing that the RTD can do because it does not mediate disputes between prime contractors and subcontractors--and usually does not hear about them.

Abuses within the minority contracting program are not confined to Los Angeles. Problems with fronting have been uncovered in Seattle, Houston, Baltimore, Philadelphia, Pittsburgh, Pa., New York and a number of other major cities.

Part of the problem is that local public works officials are quick to certify disadvantaged firms but then ignore reports of fronting or other abuses because of the pressure to meet minority contracting goals, according to federal officials. If agencies do not meet the goals, they risk loss of federal funding.

“There is a lot of abuse going on in the (disadvantaged business enterprise) program,” said Rich Ugolow, spokesman for the U.S. Justice Department in Washington. “There is a lot of pressure on agencies to participate, so they turn the other cheek” to apparent abuses.

When Congress passed the first minority contracting law in 1977, the goal was to ensure that at least 10% of the public works projects funded with federal money would be subcontracted to disadvantaged companies.

Implementation of the program is left up to state and local agencies, which use federal guidelines in deciding whether companies are eligible for minority subcontracts.

The requirements for certification as a minority business sound simple enough. A firm must gross less than $14.7 million and be 51% owned by a minority person or a woman who controls the business and manages the work.

In practice, the federal, state and local regulations governing these programs are complex, confusing and often contradictory, critics say. In Los Angeles, for example, there are at least a dozen agencies certifying minority companies, and records show that sometimes firms found to be bogus or unqualified by one agency have been certified by others.

The Southern California Rapid Transit District has certified 371 firms since 1986. The Los Angeles Transportation Commission, which built the Blue Line, has certified 234, including some that are on the RTD lists. Disadvantaged enterprises from these lists have been awarded 300 subcontracts worth $471 million.

There is no way to determine how much of the money has actually gone to bona fide companies, partly because the monitoring by transit agencies is deficient in a number of ways, The Times found.

First, the RTD--unlike the transportation commission--does not routinely review subcontracts for evidence of abuses.

Second, the agencies do not routinely inspect job sites to determine whether a minority subcontractor actually is performing the work. Instead, they rely on written reports from the non-minority prime contractor.

Because enforcement is weak in Los Angeles, prime contractors have learned to skirt equal opportunity regulations, according to an expert on minority businesses.

Arlene Williams, a vice president of Business Development Center of Southern California, a federally funded project to assist minority firms, said the system is partly to blame:

When a transit project comes up for bidding, several prime contractors usually compete for the work. Each bid lists the minority subcontractors that the prime contractor intends to use and the work they will do. The contractor that lists the most minorities often wins, even if his bid is higher.

To meet minority contracting goals, some prime contractors set up “fronts” to make it appear that they are hiring minority subcontractors to do part of the work.

“The bottom line is that (legitimate minority contractors) are being effectively shut out,” Williams said.

If legitimate minority firms are listed as subcontractors, the prime contractors often try to renegotiate the prices and the amount of work to be done by subcontractors. Some minority firms may be dropped from the project. Others may be forced to surrender a portion of the work listed for them.

At least one minority contractor says he is reluctant to even bid again on big rail transit jobs because prime contractors are manipulating the system.

“We just can’t compete . . . against these fronts,” said Otis J. Clopton, president of OJB Engineering., a Whittier concrete construction company. OJB successfully completed one $2-million rail transit subcontract, but now bids for work elsewhere.

Minority contractors are particularly handicapped by the lack of financing and an inability to obtain the performance bonds required by most prime contractors, according to Ralph Thomas, executive director of the 3,500-member National Assn. of Minority Contractors.

Discrimination in the construction and banking industries has historically frozen minority firms out of large public works projects, Thomas said. Yet the public agencies that certify these disadvantaged firms offer them no help in obtaining financing or bonding.

Once a disadvantaged minority firm wins a contract, it must finance the start-up of the project, including hiring crews, buying supplies and renting equipment.

These small struggling firms are vulnerable to unscrupulous contractors who want to force them out and take over the work, Thomas said. All the prime contractor needs to do is delay payments for work completed, which deprives the minority firm of money to continue the job.

An estimated one-third of the minority contractors bidding on public works jobs across the country go broke, Thomas said.

An industry spokesman agreed that there is an “ongoing problem” of minority subcontractors going broke in Southern California.

Gary Butler of the Associated General Contractors said prime contractors are adversely affected by this because they must find substitute minority subcontractors or risk losing minority credits.

The blame, he said, rests with public agencies who fail to test the financial resources or abilities of the small companies they certify.

“The result is there are not enough qualified minority firms in Los Angeles,” Butler said. To remedy this, he proposed training programs and new regulations that would allow prime contractors to assist minority subcontractors by renting them office space and equipment and by handling their payrolls, for a fee.

“In other words, be helpful,” Butler said. “Isn’t that what the whole thing is about, trying to help?”

Federal guidelines do allow for a mentor relationship between the prime and minority subcontractors. However, local transit officials said these regulations do not spell out how such an arrangement is to be made.

“The federal regulations are vague and often conflicting . . . and a nightmare to administer,” said the RTD’s Andrea Greene. As a result the line between setting up an illegal front and extending a helping hand is fuzzy, she said. Neither transit agency has any kind of mentor program.

As for determining which minority firms are qualified to do the work, transit officials argue that this is none of their business. They say it is up to the prime contractor to determine if a certified minority firm is able to do the subcontracted work.

“You certify someone as a (disadvantaged business enterprise), that is all we are doing,” said Walter Norwood, the head of the RTD’s equal opportunity program. “That certification doesn’t say they are an astute businessman.”