Small, diverse contractors face new opportunities, old hurdles
As they prepared to start work on the Nationals’ baseball stadium, executives at Clark Construction confronted a seemingly impossible requirement. On a $300-million-plus development, participation by small, minority- and women-owned companies would have to reach 50 percent.
“We realized it was going to be very, very difficult to meet the 50 percent small, diverse business goal on that project,” said Wes Stith, Senior Vice President of Purchasing for Clark. “We could either fall back on best efforts or we could try to solve the problem and help build capacity.”
Clark began talking with small, diverse companies about the biggest challenges they faced in growing their businesses. Clark blended that input with insights from construction industry experts and Dr. Leonard Greenhalgh, Director of Programs for Minority- and Women-Owned Businesses at the Tuck School of Business at Dartmouth College, to create the Strategic Partnership Program (SPP) – a free, 10-month, MBA-style program for small, diverse businesses. It focuses on increasing business leaders’ skills in five key areas: capabilities, terms and conditions of contracts, true scope of work, schedules and pricing.
In the short term, that initiative enabled Clark to achieve 51 percent small, diverse participation on the stadium project. Over the next 15 years, Clark expanded SPP to seven markets (including Baltimore), graduated more than 1,500 business leaders, contracted more than $1 billion to SPP graduates and facilitated major growth in some diverse businesses.
“We had a woman-owned company who when she started in the program, her revenue was about $500,000. Today, her revenue is at $15 million,” Stith said.
Heightened commitment by governments, institutions and corporations to diverse contracting along with expanded outreach and educational programming by companies, such as Clark Construction, have created more opportunities for small, diverse contractors and suppliers.
Those measures, however, haven’t leveled the competitive playing field in the construction industry. Small, diverse companies still face inordinate challenges when it comes to financing, bonding and business development. And diverse contracting initiatives don’t always generate good business opportunities. Diverse and mainstream contractors, however, say the industry has opportunities to improve the situation and foster a successful, more diversified business landscape.
For small, diverse companies, “the largest challenge is being able to scale up both financing requirements and bonding requirements,” said Wayne Frazier Sr., President of the Maryland Washington Minority Companies Association (MWMCA). “Folks can get financing on the street but at 15 to 20 percent interest. That eliminates your profit.”
When Joshua Matthews founded JCM Control Systems in the 1980s, he had to expand his search for financing all the way to Texas in order to secure bonding “and I still had to sign my life away with the indemnity agreement,” he said.
Because of those challenges, many small companies find it difficult – and sometimes impossible – to successfully manage finances during the early months of construction projects. Any error in their first invoice could result in first payment being delayed until 90 days into the project and “some companies could be six months into a project before they catch up on payments,” Frazier said.
Running out of money and defaulting on a project in those early months can lead to devastating consequences for a small firm.
“You get a lot of minority subs who default within the first 60 days because they don’t have enough money to carry the project beyond that,” Frazier said. “In those cases, the prime will keep the money that the sub has billed plus they may back charge the sub for failure to perform and for the cost of bringing in a replacement which could be a charge of $30,000 or more. It’s heartbreaking. You could be talking about potential bankruptcy.”
Changes in how construction budgets are managed, he said, could help small, minority contractors successfully navigate those financial challenges. In particular, weekly invoicing and mobilization funds would help small contractors.
“When you take on a project, you have to set up a staging area, maybe a trailer and fencing,” Frazier said. “If funds could be advanced to cover those initial reimbursables – not even money that goes into the pocket of the minority business owner – that could be a big help.”
Becoming certified as a small, diverse firm under the myriad of contracting programs operated by governments, institutions and some corporations can open up business opportunities. JCM’s success and growth as an HVAC contractor was driven partly by the company’s decision to gain 8a certification and pursue prime contracts, Matthews said.
But building a business based on small, diversified contracting programs isn’t easy and it isn’t guaranteed to succeed.
“I will be brutally honest. The big initiatives to do more business with women-owned companies are not what they appear behind the scenes,” said Annette Walter, President and CEO of Timber Industries.
Walter’s company has secured multiple certifications as a small, diverse contractor “and I think it is necessary to have the certifications,” she said. “It can be a great channel for business development and, when you start to win larger government contracts, it certainly pays off.”
But there are hitches. Obtaining and maintaining certifications is challenging and time-consuming. Timber Industries devotes a full-time staffer to that task. Firms must register on the individual contracting portals of each government agency, institution and corporation, and then sometimes encounter conflicting priorities within those organizations that ultimately stymy diverse contracting goals.
“I never lead with the fact that we are a woman-owned business. Whenever I have done that in the past, it seems to make the process of getting business more difficult. We like to earn the business then let them know they can check the box,” said Walter, who estimates that just five percent of her revenue is connected to her small, woman-owned enterprise certifications.
Walter, who also provides coaching services to business owners, urges entrepreneurs to carefully weigh the effort required to maintain certifications against the type and quantity of contracts that could result from that effort. She also urges small, diverse companies not to base their business plans solely around certification programs.
Amid all those challenges, one approach that has generated positive results is networking, mentoring and education.
“There are two ways to learn – either from mentorship or mistakes,” Matthews said. Growing any company “gets easier when you meet people who want you to succeed and help you to learn more about the contracting landscape. Gary Berger at HMS [Insurance Associates] became one of my biggest supporters and has been a big asset to JCM for 37 years.”
“Probably the biggest gift that has come to minority businesses is super GCs – like Whiting-Turner, Hensel Phelps, Turner and Clark Construction – going out of their way to ensure minority contractors learn about their projects, meet project executives, and learn about design requirements so they can develop pricing models that are consistent with final costs,” Frazier said. “Education and connection are the key elements to success.”
Clark Construction executives say that partnership can happen in daily activities, not only through special initiatives like the SPP.
“We make a genuine commitment to partner with and mentor companies to make sure they are an integral part of the team so that in addition to performing a scope of work on a project, they are growing their capabilities,” said Jay Grauberger, Executive Vice President of Corporate Affairs at Clark. “We want to make each project experience a growth opportunity.”