As contractors bend the rules, Public Building Commission stands pat
Written by James Ylisela Jr.
Fullerton Industrial Supply isn't much to look at. From the street, the Lincoln Park storefront appears to be vacant, with a couple of gang symbols smudged on the windows. The front door, with the occupant's name pasted in tiny letters, is locked even in the middle of the day.
Inside, random boxes of hardware and janitorial supplies rest on tables or sit on the floor. Fullerton owner Lauren Bellagamba emerges from a back office, but she is reluctant to talk about her business, which on paper looks far more prosperous than this modest headquarters would suggest.
Yet records show that this nondescript business plays a central role in a shell game perpetrated by Chicago's biggest general contractors and the public entity that awards them hundreds of millions of dollars for taxpayer-financed construction.
The city of Chicago has certified Ms. Bellagamba, who is Latino, as proprietor of both a minority- and woman-owned enterprise. That makes her very popular with the area's largest construction companies. Since 2008, they have hired Fullerton 22 times on projects awarded by the little-known Public Building Commission of Chicago, which oversees construction contracts for schools, libraries, parks, police and fire stations and other municipal developments.
The PBC requires general contractors to spend at least 24 percent of their project dollars on minority firms and 4 percent on women-owned businesses. To qualify, these businesses must fulfill a "commercially useful function," which means actually performing, managing or supervising the work involved. Brokers do not qualify.
Commission contracts show more than $10.6 million in payments to Fullerton for plumbing, electrical and other construction materials over the past four years. But Crain's can find no evidence that the company maintains a supply warehouse or delivers materials to job sites. In fact, based on PBC records and numerous interviews with other subcontractors, Fullerton appears to be nothing more than a pass-through broker.
Some of those in the building trades call Ms. Bellagamba a "2 percenter," a reference to the typical fee she receives for passing those payments to actual suppliers while allowing the construction companies to list her as a minority subcontractor to meet the PBC's requirements.
This kind of financial sleight of hand is pervasive among the handful of big contractors that control most PBC projects, a Crain's investigation shows. Crain's reviewed 63 agency contracts since 2008 — about $1 billion in construction — and found, in at least half of them, tens of millions of dollars funneled through businesses that did not seem to provide the necessary "commercially useful function."
"This has been going on for years," says John Luckett, the African-American owner of Glass Designers in South Deering, in business since 1984. Referring to the widespread use of pass-through subcontractors, he adds, "The system is set up for corruption at the top, and at the bottom it's set up for legitimate minority businesses to ultimately fail."
Prompted by Crain's inquiries, Mayor Rahm Emanuel has directed the city's Department of Procurement Services to audit at least eight minority- or women-owned subcontractors. A mayoral spokesman says any evidence of wrongdoing or fraud will be turned over to the city inspector general. "The mayor takes allegations of abuse very seriously," the spokesman says.
Employing 2 percenters to meet PBC requirements is one way the big construction companies deprive legitimate minority and women businesses of a greater share of municipal construction dollars. They also underbid the competition by squeezing subcontractors to accept lower fees,Crain's finds. Minority contractors say they can't afford these concessions but are reluctant to lose the work or risk being blacklisted.
Though big construction companies may game the system, the PBC does nothing to stop them, say subcontractors including Harold Harvey, owner of A&H Mechanical, a heating, ventilation and air-conditioning firm in Grand Crossing. "If you're a legitimate minority contractor, these guys do not want to do business with you," says Mr. Harvey, an African-American who has 30 years in the trade. "The PBC gives the jobs to the big companies, then they allow them to run their stuff through these pass-throughs."
Few other minority or women business owners are willing to speak out on the record against what they privately call abuse. "If I talk about this publicly, I'll never get another contract," one small-business owner tells Crain's. Says another: "It's happening, and it has happened to me. But I've got a family to feed."
No one else is talking much, either. Ms. Bellagamba and others who appear to be 2 percenters did not return phone calls or answer emails. Some owners also duckedCrain's visits to their business.
The general contractors that hire them decline to comment, too. Executives at F.H. Paschen/S.N. Nielsen Inc., a Chicago-based construction giant with more PBC contracts than any other firm, left it to a secretary to tell Crain's that they "would not participate" in this story.
For its part, the commission passes the buck, writing that it "does not certify minority-owned and women-owned businesses" and relies on the city, the county and four other agencies and business councils to qualify them.
The city's Procurement Services Department has certified more than 2,300 of these businesses after going over their prior contracts, tax returns, business licenses and other documents. The department employs seven staffers to review applications and conduct site visits. Mr. Emanuel has added staff, strengthened certification requirements and increased training, his spokesman says.
The PBC checks those certifications at the start of a project and requires its contractors and subcontractors to sign sworn statements about the work they did. But neither safeguard appears to stop the construction companies from using the pass-through firms again and again, or to prompt the PBC to stop them.
In a report last June, Chicago Inspector General Joseph Ferguson revealed that the commission had "grossly overstated" the amount paid under its minority- and women-owned business program on 15 projects completed in 2009. PBC officials rejected Mr. Ferguson's claims, saying he had miscalculated the level of participation.
Without proper auditing, the agency can't be certain it is addressing past discrimination, Mr. Ferguson says. "The commission's (numbers) satisfy the political objective," he tells Crain's, "but there seems to be a lack of intent in actually achieving the goals of the program."
Created in 1956 by Mayor Richard J. Daley, the 11-member commission manages renovation and construction for the county, the city and its sister agencies, including Chicago Public Schools, the Chicago Transit Authority and the Chicago Park District, among others. As mayor, Mr. Emanuel is chairman and appoints six of the board members; the county and the city's sister agencies appoint one each. On average the agency awards $250 million in contracts annually.
Because the PBC administers construction projects for these other governments, however, Mr. Ferguson's office has only limited authority to investigate its contracting practices. In his mayoral campaign, Mr. Emanuel vowed to expand the inspector general's purview, but he hasn't done so after a year in office and won't comment on his plans.
Most of the projects examined by Crain's were awarded under former Mayor Richard M. Daley, but the same clutch of big contractors continues to win most municipal construction. Now that the City Council has passed Mr. Emanuel's $7 billion Chicago Infrastructure Trust, which may require the PBC to award even more contracts, Mr. Ferguson is hoping the mayor will fulfill his campaign promise.
"As urgently as the mayor is pushing his rebuilding effort," Mr. Ferguson says, "he should be pushing just as urgently to catch fraud and abuse and to make sure the (Minority and Women Business Enterprise) program is doing what it was meant to do."
In 2007, the PBC began "pre-qualifying" general contractors to encourage more competition. Since then, the agency says, it has qualified 62 new contractors, including 17 that have won low bids. Yet commission work is still dominated by a handful of well-known companies.
Of $1 billion in construction contracts the commission awarded since 2008, $736.4 million, or 73 percent, went to just three industry heavyweights: Paschen, George Sollitt Construction Co. and Walsh Construction Co. In all, 25 companies bid on those 63 projects.
Paschen leads the pack with 18 projects worth $321.6 million — nearly one-third of all contract dollars. The company finished second in the bidding five times.
Sollitt and its joint ventures have won 11 commission contracts since 2008, worth $308.6 million. Walsh places third with $106.2 million. But the company's relatively low numbers belie its previous success: Walsh won $200 million in projects in the early 2000s, including seven contracts for Millennium Park.
Familiar names pepper the rest of the list, including James McHugh Construction Co., based in the South Loop, which won the $53.7 million land development of the 31st Street Harbor; and Harbour Contractors Inc., with two police station projects worth a total of $52.3 million.
Project managers at Paschen approach minority contracting the same way Claude Rains' character tackled crime in "Casablanca": They round up the usual suspects.
Since 2008, Paschen, which is based on the city's Far Northwest Side, has used minority- and women-owned pass-through companies on at least 12 of its 18 Public Building Commission projects, according to a review of the contracts, interviews with subcontractors and visits to the businesses. Among those were nine contracts with Fullerton, for a total of $7.8 million.
Determining how much money these subcontractors make — and what they funnel to others — isn't simple. In 2009, for example, Paschen won with a low bid of $4.4 million to build the 8,800-square-foot Dunning Branch Library on the Northwest Side. The company committed $415,000 to Fullerton for mechanical, electrical and plumbing supplies.
But sworn statements signed in June by Paschen and Ms. Bellagamba record payments to Fullerton of $163,928, and revised records three months later show payments of $39,000. PBC officials cannot explain the reduction. Furthermore, Fullerton is listed as a second-tier subcontractor under two white-owned firms: Portage, Ind.-based Global Mechanical, now out of business, and CLE Electrical Services Inc. of Palos Heights.
CLE owner Tom Connelly says Paschen "suggested" he buy his supplies for the Dunning project from Fullerton, even though, he notes, the company "doesn't have any supplies." When it was time to get paid, he says, Paschen issued a joint check to CLE and Fullerton. Mr. Connelly says he signed the check over to Ms. Bellagamba, who paid the supplier and "kept her 2 or 3 percent." He adds that he got the materials from another supplier.
When asked about Dunning and other projects, Ms. Bellagamba says she can't recall the specifics and would have to look through her records. "We got paid," she says. She declines to say more.
For the Dunning job, Paschen also agreed to buy $134,000 in construction materials from E. E. Bailey Building Materials & Supplies. Bailey is certified as both a minority- and woman-owned business, and records show the company agreed to $1.2 million in payments on four municipal projects, including three with Paschen.
Bailey's Far South Side business looks more like a neighborhood hardware store than a building supply house. Browse the aisles and you'll find screws and bolts, masking tape, paintbrushes and other household supplies. A half-dozen two-by-fours rest on a shelf in a corner, along with a few cinder blocks and some plastic piping.
From all appearances, this constitutes the entirety of Bailey's "building materials." On a recent visit with Crain's, contractor Anthony Garth asks for a catalog and order form listing supplies and prices. A young clerk tells him the store doesn't have one, and Bailey's rudimentary website doesn't offer supply lists or online ordering. Like Fullerton, Bailey has no warehouse on-site, and Crain's could not find any delivery trucks parked near the store. Mr. Garth, whose business is just a few blocks away, says he has never seen any trucks there.
Edna Bailey, the African-American woman who owns the store, isn't on the premises that day. She didn't return numerous telephone calls and emails requesting an interview.
PBC officials say Paschen has not submitted a final payment record for Ms. Bailey, even though the Dunning job was completed last year. The last commission documents available show payments to Bailey of about $86,000 for glass doors and hardware, but they do not specify where those supplies came from.
Steven and Carol Garth, an African-American couple, each run a certified minority business out of their home near a horse-riding stable in a secluded corner of south suburban Chicago Heights. (Anthony and Steven Garth are distant cousins.)
Ms. Garth is president of Garth Building Supplies. She's listed on 16 commission contracts, including nine with Paschen, for more than $5 million. Ms. Garth scored her biggest contract in 2011 with Sollitt Construction, which agreed to pay her $1.5 million at Back of the Yards High School in Chicago's New City neighborhood. The $63.9 million development is expected to open in fall 2013, but so far Garth Building Supplies isn't listed on any payment records.
Ms. Garth did not return phone calls, and it's not known whether she provides any services. But Anthony Garth says she orders her materials from Lance Construction Supplies, a white-owned company on the city's Southwest Side, and then marks them up 3 percent. He provides documents on a non-PBC project that show a supply order from Lance but a bill from Ms. Garth.
Daniel Chodora, president of Lance, did not return phone calls or answer an email with specific questions about his business dealings with Garth and other minority subcontractors.
John Pridmore, president of Wood Dale-based Sollitt, says both Fullerton and Garth have been certified by the city of Chicago, but he could not say whether the companies maintain warehouses or deliver supplies to his construction sites. "That's what we have to go on," he says. "They've been vetted, and their compliance plan lists them for the commodities they're providing."
The pool of minority- and women-owned subcontractors is small, and working with the PBC can be bureaucratic and complicated, Mr. Pridmore adds. "I think the PBC is trying to do more outreach, but I don't see the results of that yet."
Steven Garth is president of Garth Construction Services. He is listed on 11 commission projects for a total of $12.6 million, including six developments where his wife was hired to provide the supplies. Mr. Garth agreed to provide $1.3 million in general construction and terrazzo flooring at Southwest Area High School and $5.6 million in masonry services at Jones College Prep, a Walsh project in the South Loop.
Whether Mr. Garth's company performed or managed the work on the schools cannot be determined, and Mr. Garth is not talking. Walsh did not return phone calls asking about Mr. Garth's status on the Jones project, which is ongoing.
Four of Mr. Garth's PBC contracts, worth more than $5 million, come from a joint venture with Larmco Co., a white-owned contractor in south suburban Lynwood. General contractors can include joint ventures for minority credits only for the percentage of profits and losses shared by the minority partner, which must contribute employees, capital, tools or equipment, according to the PBC.
In 2010, the commission rejected Garth/Larmco's claim of 75 percent minority participation for work on the 23rd District police station near Wrigley Field. The agency concluded that "Garth's role and responsibilities were not consistent with a 75 percent stake in the joint venture." As a result, the commission did not allow Harbour, the project's general contractor, to include the joint venture in its minority credits. Harbour did not return phone calls. The commission granted Garth/Larmco a 50 percent minority credit for work on Mount Greenwood and Stevenson elementary schools.
Larmco Vice President Tim Mueller says the joint venture doesn't have its own equipment and uses gear from either of the partners. Mr. Mueller insists Mr. Garth is a full partner, though he says Mr. Garth has been slowed by a bad back and hasn't attended many meetings of late. A Larmco foreman attended an April meeting on the 12th District project without Mr. Garth, documents show.
Plainfield-based Harbour still paid Garth/Larmco more than $2.8 million for work on the 23rd District station and has since hired the firm to help build the 12th District police station, now under construction on the Near West Side, for $2.3 million.
Anthony Garth has been a victim of contractor subterfuge. In 2007, Chicago-based Castle Construction Corp. won a $9 million PBC contract to build a firehouse in Edgewater and hired Mr. Garth's GAG Masonry but paid a white-owned firm to do the work. Mr. Garth alerted the PBC, but it took an investigation by the Illinois attorney general to sort out the mess. Castle President Robert Blum pleaded guilty to fraud last year and was sentenced to two years' probation; he and his company also are banned from doing municipal business. Mr. Garth says his whistle-blowing has cost his business dearly, but he's still talking. "If I hadn't opened up my mouth, Castle would still be doing work for the city of Chicago," he says.
In November 2010, the PBC hired law firm Patricia C. Bobb & Associates P.C. to serve as its inspector general at a rate of $290 per hour, and $150 per hour for a paralegal, plus expenses. As part of her duties, Ms. Bobb reviews all complaints received by a PBC hotline created last year. Of the nine complaints received since then, three cases have been closed and six remain under investigation, the PBC says.
But Mr. Ferguson says Ms. Bobb tried to refute his 2011 investigation and block his access to PBC documents. And Ms. Bobb does not have full investigative authority, such as subpoena power, that a true inspector general would bring to the task. Ms. Bobb did not return phone calls.
The mayor's infrastructure trust poses a similar problem, since projects handled for related city agencies likes parks and schools are beyond the reach of Mr. Ferguson's investigators. But the inspector general is confident Mr. Emanuel can settle the jurisdictional issues. "The mayor is a remarkable mover of political mountains when the spirit moves him," he says.
Cover illustration by Sean McCabe
The following correction appeared in the July 9, 2012 issue: "A Crain's investigation in the May 14 issue mischaracterized the involvement of All Chicago Inc., a certified minority subcontractor, in the construction of William Jones Preparatory High School. Though the general contractor lists All Chicago on the Public Building Commission's website as a subcontractor for $10 million in heating and ventilation work on the project, All Chicago was not awarded the contract. Thus All Chicago could not have used its minority credentials to “pass through” work on the school to a white-owned firm." This online version has been updated to remove references to All Chicago Inc.
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