Testimony by Michael Kennedy



on behalf of



The Associated General Contractors of America



presented to the



Subcommittee on the Constitution



of the



House Committee on the Judiciary



on the subject of the



Civil Rights Division of the U.S. Department of Justice



February 25, 1998

Good morning. My name is Michael Kennedy and I am the General Counsel of the Associated General Contractors of America (AGC). Let me begin by thanking you for this opportunity to express the association's views on the Civil Rights Division of the U.S. Department of Justice.



AGC is a nationwide trade association founded in 1918. It has 101 chapters and approximately 33,000 members across the United States, including nearly 8,000 of the nation's leading general contractors.(1) These firms perform many different types and kinds of work, encompassing everything but single family homes. AGC members have constructed the majority of the nation's commercial buildings, factories, warehouses, highways, bridges, airports, dams, waterworks, waste treatment facilities, defense facilities and multi-family housing projects. AGC members also prepare sites for housing development, and install the needed utilities.



As you can imagine, the association's members are an extraordinarily diverse group of businesses. Some perform all or nearly all of their work with their own employees. Others subcontract most of their work. Some are heavily invested in equipment. Others own little. Some engage many of the seventeen construction trades. Others engage only a few. Some work year round. Others have a limited construction season. Some perform only public work. Others work for private owners. Some work under collective bargaining agreements. Others are entirely open shop.



There are, however, some common denominators, and with your indulgence, I would like to touch on a few, for they may begin to explain AGC's policy on special preferences in government contracting. As many of you are well aware, AGC has long opposed set-asides and other special preferences in federal, state and local procurement.



First, the vast majority of AGC members are small family businesses. The association's members include the nation's largest general contractors but many more of its members are small firms that may employ several family members. Husbands, wives and cousins have long worked side-by-side, and in many cases, they continue to do so. These firms are not large impersonal corporations. They are people, with names and faces, and mortgages to pay.

Second, AGC's members share a great pride in the public and private infrastructure they have put in place. These men and women do not merely dream of great and wonderful things. They actually get them done. Roads, bridges, schools and hospitals do not simply grow. Wastewater treatment plants do not simply spring from our collective desire for a cleaner environment. They all have to be constructed.



AGC's members also share at least two experiences. One is competition. And the other is risk. Both permeate the construction industry, and influence its views.



The construction industry may well be the nation's most competitive. In the public sector, the competitive bid system has long required sealed bids for most if not all construction contracts. It has also required public officials to open those bids publicly, and to award each contract to the lowest responsive and responsible bidder. The private sector is less structured, because private owners are spending their own money, but even there, competition is fierce. Few private owners are willing to pay more than absolutely necessary, and to determine that price, private owners also solicit several competing bids or proposals.



All construction contractors also experience risk. It simply does not matter that every construction project is unique. Contractors still have to predict the ultimate cost of the road, bridge or building. They have to calculate quantities and costs for thousands of items, including the labor that a project will require. They have to gamble on site conditions, on weather, and on changes in the price of labor and material. They have to count on subcontractors, suppliers and others beyond their direct control. They have to count on the owner to make timely payments. To get a performance bond, they typically have to give their surety a legal claim to their personal assets, including their home.



For well over a decade, AGC has remained at the very center of the national debate over set-asides and other special preferences in federal, state and local procurement. These four factors may begin to suggest the reasons. Set-asides and other special preferences impose a heavy and fundamentally unfair burden on small family firms interested in public work. These measures give the government's social objectives equal if not greater weight than the engineering and economic objectives that construction firms are geared to meet. They denigrate the industry's many accomplishments, implying that almost anyone can do the work. Ignorant of the competition and risk that make construction a tough and demanding industry, public officials confuse volume with profit, and assign the construction industry a disproportionate share of the blame for the larger failures of American society.



AGC strongly opposes special preferences in federal, state and local procurement, but with equal force, it supports equal opportunity. And for that precise reason, AGC has found the courts supportive of its cause. In 1989, in the Croson case,(2) the Supreme Court endorsed AGC's legal position on special preferences in state and local procurement. In 1995, in the Adarand(3)

case, the Supreme Court also endorsed AGC's legal position on special preferences in federal procurement. The Supreme Court expressly held that federal preferences, like their state and local counterparts, are subject to "strict scrutiny."



The Adarand case grew out of a specialty contractor's bid for a subcontract to construct the guardrails for a new stretch of highway running through federal lands in Colorado. The Federal Highway Administration had promised to pay the prime contractor a bonus for subcontracting at least 10% of the project to small "disadvantaged" businesses.(4)

The Supreme Court held that the bonus had to meet the same legal standard already being applied to special preferences in state and local procurement. The Court declared that "all racial classifications, imposed by whatever federal, state, or local governmental actor, must be analyzed by a reviewing court under strict scrutiny."(5)

The Court emphasized that the Constitution contemplates "congruence between the standards applicable to federal and state racial classifications."(6)

In other words, wherever they originate, racial preferences are constitutional only if they further a compelling government interest and are narrowly tailored to that end.<(7)



One might have expected the Civil Rights Division to respond promptly, for Adarand went to the very core of its mission. It was a decision based on the Constitution. And it went to the very nature of the civil rights that the Constitution protects. It reaffirmed that civil rights are personal rights guaranteed every American, on an individual basis. And in the process, it raised grave doubts about the many federal preferences for minority business enterprises. By everyone's account, "strict scrutiny" is an extremely tough standard. It is the same legal standard that would apply to any intentional federal or state discrimination against minority business enterprises. It is a standard that state and local preferences have consistently failed to meet, even after their sponsors have spent huge sums on "disparity studies."(8)



The Civil Rights Division has, however, been quite slow to respond. It took nearly a year to fashion a timid proposal to establish "benchmarks" for the industries that contract with the federal government.(9)

The division took another year to respond to the public comments on that proposal.(10)

Nearly three years after Adarand came down, the division has yet to take any action on even that proposal. The "benchmarks" have yet to appear, and lacking any further guidance, the federal contracting and funding agencies are now proposing to expand the federal preferences for minority and women business enterprises.



Nevertheless, there are several reasons to question whether the federal government can justify any special preferences for minority or women business enterprises in the construction industry. Census data reveals that this industry has been quite open to such firms. In fact, they have been entering the construction industry in record numbers.(11)

Between 1982 and 1992, the percentage of minority and women business enterprises in the construction industry increased from 6.3% to 16.7%. During that period, in the construction industry:

the number of African American firms with employees increased 112%;

the number of Hispanic firms with employees increased 292%;

the number Asian and Native American firms with employees increased 225%; and

the number of women business enterprises with employees increased 380%.(12)



The readily available data on federal and federally funded procurement raise equally serious questions about the Civil Rights Division's great delay in responding to Adarand. Congress has set a 5% "objective" for defense procurement from small minority businesses.(13)

Excluding all subcontracts, and counting only prime contracts, such firms have still accounted for at least 10% of all defense construction -- and frequently, over 15% -- in each and every year since FY 1991. In its latest report to Congress, the Department of Defense (DOD) reveals that:

in FY 1991, small minority firms performed 10.5% of all defense construction;

in FY 1992, such firms performed 13.3% of all defense construction;

in FY 1993, such firms performed 16.5% of all defense construction;

in FY 1994, such firms performed 15.6% of all defense construction;

in FY 1995, such firms performed 18.4% of all defense construction; and



in FY 1996, after DOD had suspended the "rule-of-two,"(14)

small minority businesses still performed 16.1% of all defense construction.



Many defense construction projects are too big for any small business to perform, whatever the race of its ownership. The small business size standard for a general construction contractor is $17 million.(15)

A firm with less than $17 million in annual volume cannot hope to bond a $50 million or $100 million project. Such a firm has to concentrate on a very different segment of the defense construction market. Comparing apples to apples, and looking at only the work awarded to small businesses in each of the same six years, the numbers are even more impressive. DOD reports that:

in FY 1991, small minority businesses performed 19.5% of all of the defense construction awarded to small businesses;

in FY 1992, small minority businesses performed 26.4% of all such work;

in FY 1993, small minority businesses performed 33.6% of all such work;

in FY 1994, small minority businesses performed 35.2% of all such work;

in FY 1995, small minority businesses performed 41.4% of all such work; and

in FY 1996, after DOD had suspended the "rule-of-two," small minority businesses still performed 36.4% of all such work.(16)

The readily available data on the highway construction industry is equally difficult to square with the notion that the federal government has a compelling interest in imposing special preferences on the construction industry. While the Department of Transportation (DOT) contracts for little highway construction, it funds a large portion of the state contracts for such work. In the process, it requires the states to establish "goals" for contracting and subcontracting to small minority and women business enterprises.(17)

In 1994, the General Accounting Office (GAO) reported that the states had either met or exceeded their "goals" for federal-aid highway construction "93 percent of the time" in the five fiscal years running from 1989 through 1993 .(18)

The overall nationwide "goal" for federal-aid highway construction is 10%. If the states had all kept their individuals "goals" to 10%, the highway construction industry would have done even better. Fifteen of the states had set even higher "goals" for one or more of those years. In addition, in each year, the total contracting and subcontracting to small minority and women business enterprises well exceeded 10%. The Federal Highway Administration reports that:

in FY 1989, the total contracting and subcontracting to such firms was 14.8%;

in FY 1990, the total was 14.3%;

in FY 1991, the total was 14.6%;

in FY 1992, the total was 14.2%; and

in FY 1993, the total was 16.1%.

In more recent years, the highway construction industry has continued to perform well. The Federal Highway Administration also reports that:

in FY 1994, the total contracting and subcontracting to small minority and women businesses was 15.4%;

in FY 1995, the total was 15.7%; and

in FY 1996, the total was14.8%.

In FY 1997, the percentage dropped to 13.5%, but the total dollars awarded to small minority and women business enterprises still increased from $2.06 billion to $2.25 billion.(19)

On their face, these statistics belie any claim that the highway construction industry has systematically excluded minorities or women business enterprises. When put into context, they are even stronger. The Federal Highway Administration has informed AGC that materials and subcontracts account for approximately 90% of the work awarded to minority and women business enterprises in the federal-aid highway construction industry. The 1992 Census of Construction Industries reveals, however, that highway, street, bridge, tunnel and utility contractors typically put only half of their contract dollars into those two areas. They typically put 32.5% percent of a contract into materials, and they typically subcontract only 19% of their work.(20)

Excluding the prime contracts awarded to small minority and women business enterprises, the work awarded to such firms in each of the last four years ranged from a low of 12.1% in FY 1997 to a high of 14.1% in FY 1995. Those numbers came, however, out of something less than 52% of the work. It necessarily follows that small minority and women business enterprises are regularly and consistently performing at least 24% total that goes into materials and subcontracts. If nothing else, the competitive bidding statutes make it extremely difficult for state officials to discriminate against minorities or women business enterprises. These numbers make it equally difficult to discern a legally defensible basis for the subcontracting requirements that the Department of Transportation continues to impose on the federal-aid highway construction industry.

Neverthless, almost three years after Adarand came down, the Civil Rights Division remains silent. It has yet to address these or any of the other statistics that I have included in my testimony. It has yet to explain the census and other data readily available to everyone. It has even failed to produce the "benchmarks" that it proposed in May of 1996.

In sum and substance, Civil Rights Division has failed to exercise leadership, and in the absence of such leadership, the Departments of Defense and Transportation have continued to give or require preferential treatment for minority and women business enterprises in the construction industry.

In fact, in recent months, they have even proposed to make the current situation far worse. In May of 1997, the Department of Defense, the General Services Administration and the National Aeronautics and Space Administration jointly proposed to add several new preferences to the Federal Acquisition Regulation.(21)

The most pernicious would be a prime contract bid preference for small minority businesses.(22)

Another would be an "evaluation factor" that gave a competitive advantage to any prime contractor that agreed to subcontract a larger percentage of its work to small minority businesses. Yet another would be an "incentive payment" much like if not identical to the clause that lay at the heart of the Adarand case.(23)

In May of last year, the Department of Transportation also proposed to increase its demands on the construction industry.(24)

Like DOD and the other federal contracting agencies, the Department of Transportation proposed to add prime contract bid preferences to its current arsenal. Among other things, DOT also proposed:

to require the states to base their future "goals" on a headcount of minority and women business enterprises, without regard to the size of those firms, or any other measure of their capacity;

to require the states artificially to inflate their "goals" by an entirely speculative estimate of the additional work that the preferred group of firms would be able to perform "but for" past discrimination; and

to limit the use of certain specialty subcontractors to achieve future "goals."(25)

Finally, on August 14, the Small Business Administration (SBA) proposed dangerous changes in the affiliation rules that have long applied to the 8(a) program.(26)

Behind the banner of what it called a mentor-protégé program, SBA also hid a proposal to permit graduated firms to own up to 33% of certified firms, and otherwise continue to enjoy the 8(a) program's benefits.(27)

Without any meaningful guidance on the nature or scope of the problems that they have a compelling interest it addressing, the federal contracting and funding agencies are very obviously lost.(28)

The Department of Defense did suspend the "rule-of-two"(29)

but its only other action betrays its great confusion. In April of 1996, DOD implemented a "test program" (30) requiring all construction contractors to state the cost of their bonding on the face of every bid. If a small minority business submits a bid, but fails to submit the low bid, the contracting officer must subtract the cost of bonding from every bid. If the small minority contractor would then be the low bidder, the contracting officer must add the same cost back to every bid - and then give the small minority business a 10% bid preference. The problems with this program are many. The most obvious is that it does not discourage, much less remedy, the very discrimination that it presupposes. The program does not deter any surety from discriminating against its minority clients. Quite to the contrary, the program requires a subsidy for any such discrimination. It simply assures sureties that they can charge minorities more without increasing anyone's risk of losing business.

In closing, let me emphasize that AGC is and will remain committed to an equal opportunity for all construction firms. AGC welcomes the growth and development of minority and women business enterprises in the construction industry.

In an effort to forge new relationships, AGC has repeatedly met and will continue to meet with the National Association of Minority Contractors, Women Construction Owners and Executives, the Owners Council of the National Association of Women in Construction and other representatives. If it had the interest and will, the Civil Rights Division could encourage these relationships. It could also encourage the federal contracting and funding agencies to roll up their sleeves and begin to focus on real business development. In March of 1997, AGC announced a model mentor-protégé program for the construction industry, widely known as the Stempel Plan. In the past year, AGC has repeatedly sought the Administration's support for this program. In the weeks and months ahead, it will continue to do so. If nothing else, the Civil Rights Division should support the Stempel Plan.(31)

Thank you again for the opportunity to testify. I would be pleased to answer any questions you may have.

Judiciary Homepage

1. 0 Most of the association's other members are specialty contractors, and the remainder are material and service providers.

2. 0 City of Richmond v. J.A. Croson Co., 488 U.S. 469 (1989).

3. 0 Adarand Constructors v. Pena, 515 U.S. 200 (1995).

4. 0 As do other federal programs, this program presumed that racial minorities, and only such minorities, are disdvantaged.

5. 0 Id., at 235.

6. 0 Id at. 226.

7. 0 In June of 1997, the U.S. District Court for the District of Colorado responded with a ruling that the relevant provisions of Intermodal Surface Transportation and Efficiency Act (ISTEA) and the Small Business Act "are unconstitutional as applied to highway construction in the State of Colorado." The Department of Transportation has now appealed that ruling to the Tenth Circuit.

8. 0 Engineering Contractors Association of South Florida, Inc. v. Metropolitan Dade County, 122 F.3d 895 (11th Cir. 1997); Contractors Association of Eastern Pennsylvania, Inc. v. City of Philadelphia, 6 F.3d 586 (3d Cir. 1966), cert. denied, 117 S.Ct. 953 (1997); Houston Contractors Association v. Metropolitan Transit Authority of Harris County, 1997 WL 713909 (S.D. Tex. Nov. 13, 1997); Associated General Contractors of America v. City of Columbus, 936 F. Supp. 1363 (S.D. Ohio 1996).



In fact, to this day, the Civil Rights Division will search in vain for any final ruling, by any federal court that any set-aside or other preference for minority business enterprises, at any level of government, satisfies "strict scrutiny." In Associated General Contractors v. Coalition for Economic Equity, 950 F. 2d 1401 (9th Cir. 1991), the Ninth Circuit held that it was not an abuse of discretion for a district court to deny a preliminary injunction against a local preference program, in light of the locality's "disparity study." The court did not, however, render a final decision on the merits. Instead, it remanded the case for further proceedings. The only federal court to come closer to upholding a special preference procurement program was the U.S. District Court for the District of Colorado. It was, however, reversed on appeal. See Concrete Works of Colorado, Inc. v. City and County of Denver, 35 F.3d 1513 (10th Cir. 1994).

9. 0 61 Fed. Reg. 26041 (1996). Attached for the record is a copy of the comments that AGC provided to the Civil Rights Division on July 22, 1996.

10. 0 62 Fed. Reg. 25648 (1997).

11. 0 No doubt, some will attribute the construction industry's performance to the special preferences that the federal government has put into effect. The statistical facts, however, belie that notion. The federal and federally funded construction markets are too small a percentage of the total. In 1994, for example, the total value of new construction put in place was $508 billion, according to the U.S. Department of Commerce. Forty-four percent of that total ($237 billion) went into private residential construction, including the construction of single family homes. Another 28% ($141 billion) went into private nonresidential construction. All public works construction, at all levels of government, accounted for no more than 26% ($130 billion) of all new construction put in place.



The federal preferences cannot, in any event, provide their own legal justification. "Strict scrutiny" requires a "firm basis in evidence" for concluding that remedial action is necessary. In the absence of such evidence, the federal government lacks a compelling interest in resorting to racial classifications. Even if the construction industry's performance could be attributed to the federal preferences, the fact remains that the federal government lacks any evidence of any contemporary problems broad or deep enough to justify future preferences for minority or women business enterprises in the construction industry.

12. 0 By comparison, the number of all other construction firms with employees increased only 36%.

13. 0 See 10 U.S.C. §2323. The authorized program is commonly known as the 1207 Program because it originated in § 1207 of the National Defense Authorization Act for Fiscal year 1987, Pub. L. No. 99-661. The statute and implementing regulations refer to small "disadvantaged" businesses but minority business enterprises, and only such firms, are presumed to be "disadvantaged," within the meaning and for the purposes of this particular program.

14. 0 See 60 Fed. Reg. 54954 (1995). The "rule-of-two" required contracting officers to set aside construction contracts exclusively for small minority businesses whenever they could reasonably expect at least two of these firms to bid for the work. DOD suspended the rule only after confirming that it had disregarded the discriminatory effect of its minority contracting practices. The second attachment is a 1995 letter from the Department of the Air Force to the Honorable Jim McCrery. This letter confirms that Barksdale Air Force Base set aside 100% of its construction contracts in FY 1994. The letter goes on to assert that even these set-asides were "not disproportionate" in their impact on the construction industry.

15. 0 See 13 C.F.R. §121.601.

16. 0 The third and fourth attachments are charts included in DOD's "Report in Response to 10 U.S.C. §2323(i), Fiscal Year 1996." The third attachment is Chart No. 18 and the fourth attachment is Chart No.3. Chart No. 18 summarizes the data on the construction industry. Chart No. 3 shows that small minority businesses account for a far larger amount of defense acquisition and procurement than the prime contract data would suggest. If the construction industry reports included subcontracts, it is likely that the numbers for the construction industry would be even higher.

17. 0Intermodal Surface Transportation Efficiency Act of 1991, Pub. L. No. 102-240. The statute and implementing regulations refer to "disadvantaged" business enterprises but minority and women business enterprises, and only such firms, are presumed to be "disadvantaged," within the meaning and for the purposes of this particular program.

18. 0 GAO/RCED-94-168, at 3.

19. 0 The Federal Highway Administration's reports can be obtained from its Office of Civil Rights.

20. 0 The 1992 data on standard industrial classification codes 1611, 1622 and 1623, 162910, 162920, 162930 and 1629NSK indicates that these contractors performed $93.7 billion worth of construction, that they spent $30.5 billion of that total on materials, including fuel, and that they subcontracted $17.9 billion of that total to other firms.



The relatively low percentage of the work subcontracted to other firms may be a product federal and state requirements that highway construction contractors perform at least 50% of their work with their own employees. In addition, much highway construction requires heavy equipment in which prime contractors are heavily invested.

21. 0 62 Fed Reg. 25786 (1997).

22. 0 In sum and substance, that measure would require contracting officers to take 10% off the top of any bid or proposal submitted by a small minority business, for the purpose of determining the low bidder.

23. 0 When otherwise applicable, the bid preference and the "evaluation factor" would be mandatory, but the "incentive payment" would be left to the discretion of the contracting agency. The bid preference would apply to all procurements, whether bid or negotiated. The "evaluation factor" and the "incentive payments" would, however, be limited to negotiated work. The "evaluation factor" would also be limited to construction contracts expected to exceed $1 million.

24. 0 62 Fed. Reg. 29547 (1997).

25. 0 In public statements, DOT has claimed that its proposal would encourage the states to use race neutral measures to meet their "goals." Nothing in the proposal would, however, excuse the states from doing so." In addition, the preamble concedes that "it will probably be necessary to use race-conscious means," and even more to the point, that "[t]he Department does not . . . intend to say that race-neutral means must be used 'before' race-conscious measures . . . ." Id., at 29559.

26. 0 62 Fed. Reg.43584 (1997).

27. 0 In public statements, SBA has touted its proposal to change the burden of persuasion imposed on any non-minority seeking 8(a) certification from "clear and convincing" to "preponderance of the evidence." Id., at 43600. The legal significance of this change is very limited, for "strict scrutiny" applies to any and all racial preferences, however great or small they may be. The practical significance of this change remains more than elusive.

28. 0 These agencies have made no independent attempt to produce any evidence of past discrimination in the federal or any other marketplace. Nor have they made any other effort to define the nature or scope of the problems that they hope to address. Instead, they have cited and sought to rely on an appendix, in the nature of a legal brief, at the back of the Civil Rights Division's original proposal to establish "benchmarks." See 61 Fed. Reg. at 26050. The appendix does not, however, provide the practical guidance that the federal contracting and funding agencies require. In fact, the division's proposal to establish benchmarks was based on that very premise.



Before responding to the DOT's proposal, AGC requested Dr. George LaNoue, the nation's leading expert on "disparity studies," to analyze the appendix. Dr. LaNoue found that it could not begin to establish a compelling interest in the special preferences in federal and federally funded procurement. Also attached is a copy of Dr. LaNoue's report.

29. 0See note 14, supra.

30. 0 61 Fed. Reg. 18686 (1996).

31. 0 The last attachment to this testimony is a one-page summary of the Stempel Plan.