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A Croson to bear.

The construction industry is a major force in the U.S. economy. It is a mainspring of economic growth and generates significant jobs and revenue. Yet, entry into the industry and opportunities to expand are severely restricted by discriminatory practices failing disproportionately on African-American contractors.

In 1991, new construction was worth $404.9 billion. This figure represented 6.3% of total business revenues and was equal to 7.1% of gross national product (GNP). By contrast, food manufacturing revenues were $398.1 billion. In the same year, an average of 4.7 million people worked in construction. This level was equal to 4% of total employment. About 327,000 blacks worked in the industry. They held 7% of the total jobs and accounted for 2.8% of total black employment.

In 1991, public-sector agencies made $109.2 billion construction expenditures. This amount was equal to 28% of total outlays. It was divided among the federal government (4%) and state and local governments (24%). The private sector accounted for 72% or $295.7 billion.

African-American In Construction

Black contractors and subcontractors play a modest role in the industry, and that role has expanded little during the last decade. In 1977, 976,724 U.S. construction firms had revenues of $73.87 billion. Also, 21,101 black construction firms had $758 million in revenues. Blacks represented 2.16% of the firms and accounted for 1.03% of total receipts.

These relative shares can be used to calculate disparity indexes and show roughly the size of the shortfall in black participation. In the landmark 1989 City of Richmond v. Crozon ruling, the Supreme Court held that such a disparity index is a yardstick of discrimination in a local construction market. The index is found by dividing blacks' percentage share of total industry revenues by their percentage of the total number of firms in the industry. The Court struck down Richmond's attempt to show discrimination by comparing construction revenues with the black percentage of the city's population.

In 1987 (see chart), the last year official statistics are available, there were 1.629 million firms in the industry and 36,554 were black-owned or. 2.24% of the total. The revenues of all construction firms that year were $202.5 billion and receipts of black firms were $2.105 billion or 1.04%. The disparity index was equal to 46.4% of 1.04% (revenues) divided by 2.24% (firms) times 100. If black firms' revenues had equaled their market share, it would have been $4.536 billion. If the disparity index equals 100$, blacks have parity status and no discrimination exists. If the ratio is below 100%, blacks suffer discrimination. If above 100%, blacks enjoy special advantages.

The disparity indexes for black construction firms in 1987 tell a woeful tale. In each segment of the industry, the disparity indexes were below 100%. For the broad construction industry, the index was 44.8%; for construction divisions, such as heavy or building construction, it was 44.8%. For land subdividers and developers, it was 66.7%. Within the construction industry group, the index that showed the lowest black participation index (40.2%) was in building construction, which includes low- and high-rise office and commercial buildings. The heavy-construction index, which includes bridges, water systems, airports and other industrial plants, was 44.7%.

The highest disparity index was found among special trade contractors, which include specialists in electrical work, elevator installation, heating and ventilation and air conditioning. In that category, blacks received 58.3% of what they were due. Also, few land subdividers and developers are black. This includes builders of single-family housing and developers of apartment complexes. The disparity index for this group was 66.7%.

Racial Bias Is The Cause

To a large extent, the disparity in black participation is because of bias. The impact of racial discrimination has been documented in officially sponsored studies for Atlanta, Dade County, Fla., and St. Louis by Brimmer & Co., a Washington, D.C.-based economic consulting firm. In carrying out these studies, hundreds of contractors and other businesspeople (black and white) and dozens of public officials were interviewed; thousands of pages of contemporary and historical documents were also examined. Other analysts have conducted similar studies in Chicago; Prince Georges County, Md.; San Francisco; and Seattle. Their evidence reinforced Brimmer & Co.'s conclusion: Racial discrimination is widespread and deeply rooted in the construction industry.

The discrimination is facilitated by industry organization, policy and practice. On the supply side, decisions flow from the general contractor (GC), which is typically a large firm that has assembled construction equipment and key personnel, including professional and technical experts (such as architects and engineers), master craftsmen and unskilled laborers. The GC has also gathered equity capital and has access to bank credit, bonding facilities and insurance coverage.

Despite the title, the average GC tends to concentrate on an industry segment, i.e., building construction, heavy construction or special trades. The subcontractor works below the GC. This is usually a small firm (it could be a single individual with a few employees) that obtains work from the GC. The subcontractor may also be highly specialized for certain projects.

The key general and subcontracting firms have typically gained expertise by specific experience. For instance, an electrical contractor is nearly always an electrician, a plumbing contractor is a plumber and a mechanical contractor is a mechanic. The opportunity to enter early and master these trades is vital to success.

Common threads, such as apprenticeship systems and trade unions, help connect the construction industry. Moreover, there is the old-boy network composed entirely of white males. The key link is the local contractors' association, but other trade associations and clubs also alert members about important information and early warnings of upcoming contractors.

Demand-side Hurdles

On the demand side, in the public sector, contracts are typically let by procurement and purchasing officers in open bidding. In most jurisdictions, contracts must be publicly announced with detailed specifications and considerable lead time. Contracts must be awarded to the lowest bidder who can obtain performance bonds and insurance coverage.

Frequently the officials letting public contracts belong to the old-body network. Once a contract has been awarded, the GC normally shares work with subcontractors. In the private sector, open bidding normally isn't used. Instead, construction contracts are usually negotiated after several GCs' capabilities are reviewed.

These elements produce practices resulting in institutionalized bias against blacks and women:

* Historically, apprenticeship programs were run by trade unions, and entrants were usually sons and nephews of members. Until the 1960s, both the programs and building trade unions excluded blacks.

* Limitations, including small size and thin performance records, have restricted black firms from working primarily as subcontractors.

* Blacks often do not get notice of upcoming public contracts. Blacks are often contracted only by GCs to satisfy affirmative-action and set-aside requirements.

* In many cases, GCs include black subcontractors only on public-sector projects--where such participation is increasingly required. Blacks are seldom asked to work with GCs on private-sector projects.

* Black contractors find it difficult to obtain insurance or bonds, which guarantee performance. In rejecting blacks' applications, bonding firms contend that black companies are small and lack demonstrated success. When they can purchase such bonds, the premiums they pay tend to be higher than those of comparable white firms.

* Black contractors find it difficult to obtain bank loans. When they do get them, they frequently must have collateral equal to 100% of the credit.

* In the construction industry, GCs can increase total revenue above the winning bid price by negotiating change orders as the work progresses. Blacks complain that it is nearly impossible for them to do this.

* Having access to a secure supply for construction materials at competitive prices is vital. Black firms are excluded from developing such ties.

These and other practices limit black construction viability, especially in the private sector. In Atlanta in 1989, black contractors got only 7.3% of their revenue from private projects, while 92.7% came from public-sector work; conversely 80% of white contractors' revenue was private-sector and only 20% public-sector.

This legacy of discrimination caused the federal government (followed by many state and local governments) to adopt set-aside and affirmative-action programs in awarding public-sector contracts. But the record shows that after the U.S. Supreme Court decision, which terminated Richmond's set-aside program, many state and local jurisdictions have suspended or abolished their own programs on grounds of reverse discrimination. It also shows that after programs are suspended, the black share of public contracts drops drastically. Since discrimination against blacks continues, reinstituting or adopting race-conscious programs in the construction industry is justified.
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Article Details
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Title Annotation:City of Richmond vs. Croson; discrimination against black-owned construction firms
Author:Brimmer, Andrew
Publication:Black Enterprise
Date:May 1, 1992
Previous Article:Multiple solutions.
Next Article:Black businesses woo hungry investors.

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