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Walmart Fails to Benefit Minority Contractors

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A Crain’s investigation shows benefits were less than suggested by the national hype

By Brigid Sweeney and Eddie Baeb
First published by ChicagoBusiness.com, April 11, 2011

When Wal-Mart Stores Inc. hired Margaret Garner in 2005 as the first black woman contractor to build one of its stores, she was hailed as a symbol of the benefits local businesses and minority communities would reap from the retail giant’s push into Chicago.

Six years later, her company is bankrupt, crushed by cost overruns on Wal-Mart’s first Chicago store, located in the Austin neighborhood on Chicago’s West Side. A Crain’s investigation shows that the benefits to minority contractors were less than suggested by the hype surrounding Ms. Garner’s hiring.

Much of the large-scale work on the Austin store went to non-minority firms. Ms. Garner herself engaged two such firms during much of the project to fulfill her role as general contractor.

“What happened at the end of the day is that (Wal-Mart) paraded her around the country as its African-American female (general contractor),” said Omar Shareef, founder of the Chicago-based African American Contractors Association. “And she wound up going down.”

The Austin project casts doubt on the predicted boon in jobs and contracting dollars for minorities from Wal-Mart’s plan to build several dozen stores in Chicago over the next five years. Wal-Mart and supporters, including Mayor Richard M. Daley, used such promises as a rallying cry to beat back opposition to the Bentonville, Ark.-based chain’s expansion in Chicago.

“It’s not at all what was promised to residents of that ward and the city of Chicago,” said Virginia Parks, a professor at the University of Chicago’s School of Social Service Administration, who is co-writing a book on Wal-Mart’s push into urban neighborhoods.

Contractors in Austin also learned a hard lesson about the risks of major construction projects on urban sites for a demanding customer like Wal-Mart. Some subcontractors wrote off from 10% to 50% of their bills as the project’s cost soared to $27 million from a budgeted $17.8 million.

Wal-Mart has been eyeing locations in New York City for several years and is reportedly gaining momentum to open its first store in the five boroughs.

Ms. Garner, 51, canceled a scheduled interview for this article and did not respond to subsequent requests for comment.

HARD-WON APPROVAL

The world’s biggest retailer won approval to build the Austin store in 2004 after months of debate that pitted Mr. Daley and aldermen who wanted jobs in their wards against unions and community leaders who cast Wal-Mart as a predatory company that pays low wages and kills small businesses.

Wal-Mart’s pitch to city leaders emphasized not just the jobs the store would create, but also the opportunities for minority contractors to help build it.

The following year, Wal-Mart awarded the contract to build the store to Broadway Consolidated Cos., the Chicago construction company Ms. Garner founded in 2000. Before launching the firm, she held executive posts at the U.S. Department of Housing and Urban Development and the Chicago Housing Authority. In its first five years, Broadway worked on government projects around the Chicago area, often paired with a more-established contractor such as politically wired Walsh Construction Co. The Wal-Mart job landed Ms. Garner on the pages of local and national publications, including Time and Ebony , in which Wal-Mart took out a full-page ad praising her work in Austin.

The partnership also was a coup for Wal-Mart, which was running out of room to grow in rural and suburban America. To crack city markets like Chicago, it needed to present a more multicultural image. Hiring a charismatic African-American woman to build its first Chicago store helped accomplish that.

But while Ms. Garner served as the public face of the Austin project, she quickly farmed out the nuts-and-bolts duties of a general contractor to a white-owned firm.

Just months after Broadway won the Wal-Mart job, in early 2005, Ms. Garner tapped Canadian construction giant Ledcor Group of Cos. as a subcontractor. The Vancouver-based firm, a general contractor that has built many Wal-Mart stores, was hired to “provide project-management supervision and coordination,” according to Ledcor’s October 2005 lien seeking more than $168,000 from Broadway and Wal-Mart.

Ledcor initially competed against Ms. Garner to become the general contractor. But when it appeared Ledcor wouldn’t win the job, the company approached Wal-Mart in hopes of teaming up with Broadway as co-general contractors so that the veteran firm could guide Ms. Garner, said Chad Bouck, Ledcor’s Oakbrook Terrace, Ill.-based regional manager.

Wal-Mart rejected such an arrangement, said Mr. Bouck, whose firm no longer does work with the retailer.

Nevertheless, Broadway hired Ledcor as a subcontractor, with the responsibilities of a general contractor, including hiring subcontractors and overseeing the site’s construction superintendents, Mr. Bouck said.

“It was a good move for Wal-Mart to go with a woman-owned (company),” he adds. “She had a lot of political connections that we needed.”

In a Jan. 5, 2007, letter seeking payment of about $368,000 from Wal-Mart, Ms. Garner says Broadway’s work on the project “included extensive community interaction, emotional and procedural guidance of minority subcontractors, regular intercession with the city building department in obtaining permits and correcting design deficiencies and regular assistance arranging meetings with city officials.”

Ledcor left the project in July 2005, after less than two months, over a payment dispute. Mr. Bouck says the firm received about $80,000 for its work—less than half of its $168,000 bill. Eight months later, Broadway hired another non-minority company for general-contracting duties.

Bush/Kowert Associates of west suburban Glen Ellyn, Ill., signed on in March 2006 and oversaw the project until quitting in a payment dispute in February 2007. The firm acted as the “de facto general contractor,” according to an Aug. 28, 2007, letter from Bush/Kowert’s attorney to Wal-Mart.

Broadway acknowledged as much in a court filing, saying Bush/Kowert’s “duties and responsibilities included, but were not limited to, the supervision of the entire Wal-Mart project until completion and acceptance by the owner, scheduling of the entire Wal-Mart project to ensure the Wal-Mart project was completed on time, supervision of the entire budget for the Wal-Mart project to ensure the project was within the allotted budget, and to oversee and obtain approvals from all change orders for the Wal-Mart project.”

Bush/Kowert executives didn’t return calls seeking comment.

Non-minority firms also were well-represented among the project’s subcontractors. Some of the biggest contracts—steel-framing, masonry, electrical and concrete—went to white-owned firms, according to legal filings and a partial list of contractors obtained by Crain’s .

Some 17 of the 19 subcontractors that filed liens against the project were not minority- or woman-owned. (Only firms that have done actual work on a project can file liens.)

A separate lawsuit also reveals that at least one minority subcontractor on the Wal-Mart job farmed out substantial work to a non-minority company.

Now-defunct United Demolition Inc. of northwest suburban Vernon Hills, Ill., sued in 2005 to collect on its lien of $417,000. The suit says the company, which filed for Chapter 7 bankruptcy liquidation in July 2010, entered into a contract with minority-owned Midwest REM Enterprises Inc. in February 2005—the same month Broadway awarded the job to Midwest REM.

Melrose Park-based Midwest REM, headed by Alberto Ramirez, later sued Broadway, saying it was owed $1.4 million, indicating Midwest REM also did significant work on the project.

Former United Demolition President August Pusateri didn’t return calls seeking comment, and a Midwest REM executive declined to comment.

So-called pass-throughs, when minority subcontractors pass along their assignments to white-owned firms, are a common way of undermining minority contracting requirements, according to a 2010 report by Chicago’s inspector general on that city’s Minority and Women-Owned Business Enterprise Program.

According to the report, the city’s program is “beset by fraud,” and it found that in 2008 the program overstated by about 15% the amount of actual payments to minority firms for city construction projects.

Inspector General Joseph Ferguson says rampant gaming of the system impedes the mission of bolstering minority- and women-owned businesses. He’s calling for better oversight and auditing “to make sure the money is going to the sort of businesses that were intended.”

A Wal-Mart spokesman says the company isn’t involved with the hiring of subcontractors, but it urges its general contractors to meet or exceed city procurement mandates and minority set-aside requirements for public works projects. On the Austin project, the spokesman said, 57% of the contracts went to minority- or women-owned firms. That far exceeds the requirements for city work—that 24% of contract amounts go to minority-owned firms and 4% to women-owned firms.

One reason local officials and community leaders press for minority contracting set-asides is to increase the number of minority group members and neighborhood residents hired to work on local projects. Wal-Mart’s Austin store was expected to generate well-paying construction jobs in a neighborhood beset by unemployment.

A Wal-Mart spokesman said “nearly 100” tradesmen from the Austin community were hired for the job. No record of total hiring on the project could be found.
But a black subcontractor who worked on the site questions Wal-Mart’s figure. Silas Williams, chief executive of Chicago-based TVS Mechanical Inc., says no one on the project verified names and addresses of laborers to prove that they lived in the neighborhood. He says the 100-worker estimate is too high, based on his observations at the worksite and the fact that Wal-Mart pledged to hire only union labor.

“How many neighborhood union (members) are there? Not that many,” he said.

NEW TO THE CITY

Ms. Garner and her subcontractors encountered problems early. Unlike most Wal-Mart stores, which often are built on greenfield sites in suburbs or outside small towns, the Austin project was on an old industrial site in a densely populated city neighborhood.

“(Wal-Mart is) used to having a big open farm field in the suburbs to do what they need to do,” said Todd Kalesperis, the Ledcor project manager on the Austin store. “Producing stores in inner cities is just a different ballgame.”

The Austin site, a former Helene Curtis hair-care products factory at 4650 W. North Ave., sat atop a huge underground storm-water system. Ultimately, more than 40,000 cubic yards of hazardous materials and buried concrete structures had to be removed at a cost of $4 million, according to the Jan. 5, 2007, letter Ms. Garner wrote to a Wal-Mart executive.

Removing the materials took longer than expected, delaying construction and increasing costs. What was supposed to have been a 30-week project stretched to 63 weeks.

According to Ms. Garner’s letter to Wal-Mart, the project racked up $10 million in cost overruns on top of an original budget of about $17.8 million.

Calling site conditions “amongst the most difficult and complicated in the city of Chicago,” the letter said preliminary cleanup work “pushed the completion of the majority of the weather-sensitive activities like concrete, masonry and other structural work from a normal fall construction season into the more demanding and expensive cold Midwestern winter months.”

She also cited numerous changes and design revisions required because of the “prototypical nature of this building and the unique building standards required by the city of Chicago.”

Recovering unexpected costs requires a general contractor to submit “change orders,” a meticulous process on any job and more so with demanding clients like Wal-Mart and other large retail chains.

Subcontractors say the process didn’t go smoothly on the Austin site. Weeks or months passed without payment. Some say they still haven’t been paid what they’re owed.

TVS Mechanical’s Mr. Williams says his firm has received only $70,000 of the $86,000 it was to be paid for completing the store’s heating, ventilation and air-conditioning systems, putting him in the red on the project. “I just paid to work on that Wal-Mart,” he said.

Thomas Mooncotch, owner of La Grange, Ill.-based All Erection Co., says he has never encountered such a messy project in more than 25 years building Wal-Marts. He had to file a lien to collect $182,000 of the $612,000 he was owed for erecting steel framing.

All told, contractors filed liens for unpaid claims totaling $4.4 million, or 16% of the project’s total costs. Most were paid eventually, although some accepted lesser amounts.

A TOUGH BOSS

Contractors say it’s difficult to make money building for Wal-Mart in part because the company is such an exacting client and also because fierce competition for the work forces bids lower.

Generally, subcontractors provide their own materials and add a 3% to 4% markup that’s passed on to the owner. But Mr. Williams says subcontractors lose one opportunity for profit when working for Wal-Mart because the company, like other large retail chains, provides its own materials and supplies as a cost-cutting measure.

“You’re taking these jobs to break even at best,” said Herb Lande, owner of Joliet-based Imperial Construction Associates Inc., whose steel-erection firm has done work for several large retail chains, including Wal-Mart.

Mr. Lande’s firm worked on the construction of a Sam’s Club store in Calumet City in September 2007, a project Wal-Mart awarded to Ms. Garner as general contractor despite the difficulties on the Austin store. The Sam’s Club project also resulted in a spate of liens and litigation.

Mr. Lande cites Wal-Mart’s rigorous inspections and “demanding” processes as the reason it’s difficult for some contractors to turn a profit building the company’s stores. He says he’s still owed $17,000 on his $400,000 contract to provide steel erection, decking and roofing detail for the Sam’s store.

“Before they pay you, they run you through the wringer and you wind up doing all the procedures 1 1/2 times,” he said. “Even if you doubled your bid, you’d have trouble making money.”

Ledcor’s Mr. Bouck says Wal-Mart pays promptly but only if the general contractor closely follows its bill submission processes.

The process can be daunting for contractors who haven’t worked for big companies like Wal-Mart before. Improperly submitted invoices get snarled in red tape, Mr. Bouck and other veteran Wal-Mart contractors say.

Mr. Lande says Ms. Garner struggled with Wal-Mart’s record-keeping requirements.

“The only thing Broadway may have been guilty of was not following Wal-Mart’s paperwork (requirements) as closely as they should have,” he said. Adhering to Wal-Mart’s “paperwork trail is very difficult.”

But many contractors, especially in a moribund construction market, can’t afford to wait weeks as payment vouchers are resubmitted and reprocessed.

“If you don’t have deep pockets, you’ll choke off and die,” Mr. Lande said. “You can’t pay your vendors, and then you won’t be able to staff your next job.”

BANKRUPTCY FILING

Ultimately, the burden of the cost overruns fell on Ms. Garner. General contractors often are required to obtain surety bonds guaranteeing their client that the job will be completed on time and within budget. When costs run over, the bonding company steps in to pay the subcontractors. Once the bills are paid, the bonding company then looks to collect from the general contractor.

“A bond claim can be fatal,” said Joshua Glazov, a construction attorney at law firm Much Shelist Denenberg Ament & Rubenstein P.C. in Chicago.

An $11.9-million claim stemming from a surety bond on the Austin project accounted for most of $14.1 million in liabilities listed in the Chapter 7 liquidation petition Broadway filed in Bankruptcy Court in Chicago on Dec. 7, 2010.

Despite the project’s construction woes, Ms. Garner’s public role didn’t change.

In April 2006, a month after bringing in Bush/Kowert to take over the general contractor’s role, Ms. Garner toured the construction site with Wal-Mart’s then-CEO, H. Lee Scott. When the store opened five months later, she appeared in newspaper photos with other Wal-Mart executives.

To give Ms. Garner another shot, Wal-Mart awarded her the Calumet City Sam’s Club contract in 2007. Expected to be a simpler job, that project also generated its share of payment disputes with subcontractors.

Even in January 2010, as her firm was months away from failing, Ms. Garner was a panelist at a Black Enterprise magazine forum conducted with Wal-Mart.

The promise of Wal-Mart still burns brightly for many in Chicago. Indeed, the Austin store created jobs in an area where they are scarce and brought groceries to a neighborhood abandoned by traditional supermarkets.

Last summer, the company overcame years of resistance from unions, community activists and Chicago aldermen to win approval to build two more supercenters on the city’s South Side. Construction starts on one in the Chatham neighborhood this spring and another in the Pullman area next year. After winning those approvals, Wal-Mart announced plans to open several dozen stores of varying sizes in Chicago by 2015.

Last month, Mr. Daley stood at a podium flanked by fresh produce to herald six additional sites in the Englewood, Chatham and West Loop neighborhoods of Chicago. Chiding rivals who fought Wal-Mart, Mr. Daley touted the jobs those projects would create for minority workers. “When construction comes, I’m going to see men and women of color on this job,” he said.

Mayor-elect Rahm Emanuel has said repeatedly that he views Wal-Mart and other big-box retailers as a solution to Chicago’s “food desert” problem and, like his predecessor, welcomes them to the city.

NEW CANDIDATES

Although the Wal-Mart project sank Broadway, other minority contractors have stepped up for the retailer’s next Chicago projects. A pair of local African-American-owned general contractors, Powers & Sons Construction Co. and Ujamaa Construction Inc., are strong contenders to build the Chatham supercenter.

Chicago-based Ujamaa is an 8-year-old firm whose recent jobs have included a green-roof installation for FedEx at O’Hare International Airport.

Ujamaa also has been in a joint venture with Chicago-based Bulley & Andrews—a non-minority firm—to build the Lowe’s-anchored Chatham Market on the South Side, where Wal-Mart will build its next supercenter. The company has at least one Wal-Mart job under its belt: the remodel of the Austin store last year that added a full-size grocery department.

Gary, Ind.-based Powers & Sons has ranked among the 100 biggest contractors in the Midwest. The company has been building stores for Wal-Mart for several years and for other national chains including McDonald’s, Walgreen and Menards, according to its website.

Wal-Mart will require general contractors on all future projects to use an online system that tracks the amount of work done by minority- and women-owned firms.

“Across the country, Wal-Mart seeks to ensure minorities and women are a part of the process when it comes to building and remodeling our stores,” a Wal-Mart spokesman said.

Still, some wonder if the new Chicago stores will be a better deal for contractors than the Austin project.

“Might be, but I doubt it,” TVS Mechanical’s Mr. Williams said. “There’s just not much room to make money.”

Sidebar: A sad chapter in Garner’s rags-to-riches story

Before she won national media attention as the first black female general contractor on a Wal-Mart store, Margaret Garner was a single mother who built her firm, Broadway Consolidated Cos., from the ground up.

Ms. Garner, 51, grew up in a public housing complex in Pittsburgh, the youngest of eight children. She graduated from the University of Pittsburgh in 1981 with a degree in business and economics, married soon after and had a daughter.

Her marriage ended around 1990, forcing Ms. Garner to find subsidized housing and start a new career.

She went to work in Pittsburgh for the U.S. Department of Housing and Urban Development before joining the Chicago Housing Authority in 1995, overseeing housing redevelopment projects.

Ms. Garner founded Broadway in 2000. Her company worked on local construction projects, including Comer’s Children Hospital at the University of Chicago, the Randolph Street Metra station and the Wacker Drive restoration.

In partnership with Chicago-based Walsh Construction Co., she built a Near West Side mixed-income housing development and sites for the U.S. Navy on the Great Lakes Naval Base in North Chicago.

“We think that there’s unlimited opportunity for quality people like Margaret, in quality companies like Broadway Consolidated, in finding mentor companies like Walsh Construction and in pursuing a joint business plan together,” Walsh Construction President Dan Walsh gushed in a testimonial that once appeared on Broadway’s website.

Ms. Garner said in a media interview in 2006 that Broadway employed as many as 12 people and had annual revenue of $5 million to $20 million.

She often spoke of her commitment to creating jobs in city neighborhoods, especially during the Austin project. Problems on the job weighed heavily on her, according to a subcontractor.

“She was struggling,” said Christy Webber of Chicago-based Christy Webber Landscapes. “You could just see it on her face.”

Broadway filed for Chapter 7 bankruptcy protection in December, citing $14 million in liabilities—$11.9 million from the Wal-Mart project. In February, the trustee overseeing the case declared Broadway had no assets.

A Wal-Mart spokesman says the company will continue to give minority- and women-owned businesses key roles in building its Chicago stores.

“We worked with Ms. Garner throughout the process to give her company every opportunity to succeed and wish her well in her future endeavors,” the spokesman said.

©2011 Crain Communications Inc.