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defending or settling such claims. This bill will not replace the need for commercial insurance coverage.
In the State of California, as an example, nearly half of all the practicing architects have no liability coverage. As a result, California citizens may find themselves unable to receive compensation for valid liability claims. Our legislative proposal will not only assist architects and engineers in meeting the cost of their insurance, but also their responsibility to the consumers of this nation with valid liability claims.
It will also benefit the insurance industry by making insurance more affordable to those who are presently uninsured. The premiums paid for professional liability insurance is a recognized cost of doing business by the Federal contracting agencies. Thus, a reduction in our overhead expenses should provide for a reduction in cost of services to Federal agencies. Since most architectural and engineering firms are small businesses, these firms are themselves a part of the public, and their continued economic viability will be essential in designing and helping provide employment and in building capital facilities the country requires for continued economic growth.
Senator Danforth, I thank you for the opportunity of appearing before you this morning. I can assure you that I and the American Institute of Architects stand ready to assist in developing with the Federal agencies a more desirable and equitable plan to construct our Federal buildings as economically as possible with the highest degree of quality. Thank you.
Senator DANFORTH. Thank you, sir. Mr. Garney?
Mr. GARNEY. Senator, my name is Charles Garney and I am the president of a construction company that employs between 200 and 250 persons working in the Midwest and South. The opinions expressed here today are my own.
The construction industry today may need a psychiatrist. The stresses and frustrations in our industry seem to be ever increasing along with competition. Anxiety and tension are the highest in my 25 years of experience.
The two most devastating external factors that are beyond our control are inflation with its widely gyrating interest rates and Government regulations with the costly, frustrating, never-ending bureaucracy. These external factors are beyond our control but they are not beyond the control of our Government, and I appreciate the opportunity today to have some impact in this area.
I want to be brief so I'll get to the point. It costs 25 percent more to work for the Government than it does in the private sector. Therefore, it might be assumed that elimination of Government regulations and improved procurement practices could save usand I can't believe this—$20 million per year, because that's the number I came up with, which somehow or other matches the number you have there. This would go a long way toward relieving inflationary pressures and balancing the budget.
The construction industry is presently under-utilized. The Heavy Constructors of Kansas City recently estimated that they are operating at about 50 percent of capacity. In this environment it makes it very costly and difficult for the Government to institute social The word is frustration. Ten percent of our clerical staff is involved full time in compliance with Government regulations. These staff people are frustrated. Contractors are frustrated. Meanwhile, the construction workers are out of work. Money saved with more efficient procurement processes could be used for worthwhile projects in putting people back to work. Many of us agree that social reform is necessary. Minorities and women in business need to be encouraged, but there has got to be a better way to encourage them than the present Government programs.
I know that your subcommittee would like some answers. I suppose if you need a little help I can give you as little as anyone, but
First, let's not take efficient contractors off the job if there's any way to avoid it. Let's not under-utilize these important resources. There wouldn't be a problem if women and minority enterprises could compete with established firms in today's marketplace. How then do we solve the social problem of women and minorities participating in the construction industry? Before I make concrete suggestions I would like to say that there is a possibility, if we go about this the wrong way, of creating economic cripples in business who would be dependent on long-term Government support. Ideally, we want to encourage economic activity that is viable and strong enough to stand on its own in the future. Another thing we would like to avoid is tremendous cost, cost measured in terms of huge amounts of taxpayers' dollars and under-utilized productive capacity. Our answer would be simple and would eliminate unproductive redtape. It would be preferable to be able to measure the cost. My suggestion is to give clear-cut and measurable economic credit to contractors using women and minorities. I don't believe it would have to be a large amount. It would also have the advantage of being visible and measurable. Women and minority enterprises thus could be given an advantage without mandatory bureaucratic guidelines. My second recommendation is to support the President in his endeavor to balance the budget. The National AGC passed a resolution supporting the President's program, even though it involved a multibillion dollar cut in construction spending. I think this would help us in the area of inflation and gyrating interest rates and perhaps give us a little stability in our industry. Thank you.
Senator DANFORTH. Thank you, sir. Mr. Dunn?
Mr. DUNN. Senator Danforth, I am prepared to leave reports and documents. My discussion today will be more extemporaneous rather than reading a speech.
Senator DANFORTH. Fine.
Mr. Dunn. I am president of J. E. Dunn Construction Co. We work primarily in the Midwest. And I am a director of the Builders' Association of Missouri that represents 350 construction and material firms. I'm first vice president of the AGC Building Contractors in this area, representing 55 general contractors who work in central Missouri, western Missouri, and the eastern part of Kansas. I would like to preface my remarks that I have no criticism, in general, with the people that work for Government agencies. I find them to be very dedicated. I find that they work hard. I caught up in a system that needs drastic overhauling. Doing business in the eighties, as contrasted to doing business in the forties, really takes us back to the horse and buggy stage. We find that there is a great contrast in the way that different agencies handle their procurement and the administration of their projects. We would think there would be a great deal of merit to consider a uniform procedure that is updated and adaptable to today's world, particularly with the double digit inflation and double digit interest rates that the construction industry is experiencing. I think that of the multitude of reports that are required by agencies some of them are necessary; some of them we wonder about as to whether they fulfill a purpose or whether they are used to build another warehouse to handle Government records that are not used. The slowness of the process is something that is cutting away at the cost of these projects. Several years ago at the time I was president of the Chamber of Commerce of Greater Kansas City, there was an announcement of an IRS building to be constructed at the site of
Union Station. At the time, budget figures were prepared, and I was astounded at what I could determine to be the cost of this building, and I questioned one of the people preparing that. And I said, “How could this building cost twice what it would be costing today?” They said, “Well, the process would require that we wouldn't start construction for 7 years." I said, "Well, now you explained it to me." Because in our industry we have been in a cycle since 1969 where costs are probably doubling every 7 years. So here is a situation where a building will cost the taxpayers, if it is built, twice what it would've cost at the time that it was announced. We find that this same situation occurs in many of the agencies, not to the degree of the example that I mentioned. I am very familiar with the procedures of the Department of Housing and Urban Development. We have done a number of projects for this agency. The group of people that administers this agency in this area- I have nothing but compliments. I find that they are very dedicated. They know their job. They do their job. They're caught in a web of machinery that will not quit. I was appointed chairman of a minority business advisory council for HUD. It'll soon be 3 years this November. We found in setting up this council-on which we put business people; we put all the minority organization heads; we put contractors; we put bankers; we put insurance people; we put bonding people. We went through a grinding out process that narrowed down to six areas that made it very tough for either minorities or non-minorities to do business with the Federal Government in relation to the Department of Housing and Urban Development. We conveyed these to the Assistant Secretary of Housing and Urban Development. We met with him here in Kansas City. There were three of us that went back to Washington last August and met with approximately 8 or 10 top heads of the Department-various departments of Housing and Urban Development—to convey our message-primarily, the problems that we see that need to be overhauled in that particular agency.
The fee structure for contractors that is set up by the Department of Housing and Urban Development may have been fine in the forties when it was the FHA, but the contract that goes along it nigh onto impossible because of the process for monthly payments that the average, instead of 15 days, is approximately 6 weeks. I've gone back on a number of jobs-i'll leave these as part of the documents today-we are probably averaging 6 weeks on these projects. It makes it very difficult for contractors to finance these projects when their contract does not call on them to finance it.
Senator DANFORTH. Could you, I'm not clear on that; 6 weeks from what to what?
Mr. Dunn. From the date that you are submitting monthly estimates, the contract very clearly-and this is the Department of Housing and Urban Development contract-very clearly states that it should be processed in 15 days. We find that payment does not occur in 15 days, even though the owner that we are working for, the owner-developer, means well; the Department of Housing and Urban Development means well; the machinery is so involved; there is so much redtape, that it takes an average of 6 weeks. In fact we are working on a project out in Grandview at the present time that I find that the average payment-and this is over a 7month period and this project will be completed in about 3 months—that the average has been 40 days for the monthly billings and nobody is angry with anybody. It just takes that long. Well, this puts an extreme burden, first of all, on a contractor because if he is being paid a total fee, for example, of 4 to 442 percent, he has a 10-percent retainage on the entire project until it's completed. He's having to pay his material bills and his labor bills on a weekly basis. I think it doesn't take a brilliant mathema
a tician to figure out that you either have to be in the business for love or punishment because it makes it very difficult to make a bottom line appear with this type of a procedure. We make a practice of paying our subcontractors and material suppliers on a timely basis, so it means that anytime we take a HUD project on we are aware of the fact that we use the project as a training-type project for people to get them familiar with Government redtape. We know that when we enter into these projects that it will not be a profitable bottom line. It is a good training experience, but with payments not coming on a timely basis, with a retention that is very much in contrast to other Government agencies—may go with a 5-percent retention or a 10-percent retention, up to 50 percent and then no retention; some agencies have the minimal retention. Every one of these projects are bonded so that if there is a problem the bonding company would see to it that the project is completed. That is an issue. The payment for materials stored offsite in a bonded warehouse is denied by the Department of Housing and Urban Development. It is allowed in the private sector and allowed in many of the other governmental agencies. It's a practice that's long been recognized by the American Institute of Architects and has presented no particular problems. Where it works a particular hardship would be on a gentleman that might be furnishing the carpets for a project that will not be needing his product for some 12 months. They cannot hold their prices on these items where they could buy the materials early on, put them in a bonded warehouse, be paid for them, as if they were in the private sector. The processing of monthly draws-I've alluded to that. The Government contract itself has excessive penalty clauses that are really tied back in to monthly payments on principal and interest, for delays in construction. A contractor doesn't mind this type of a penalty clause if he knows for sure legitimate delays will be granted; but the contract very clearly states that these delays will only be granted at the discretion of the Department of Housing and Urban Development. And if there is a conflict-if the architect and the contractor agree there was legitimate delay—the Department of Housing and Urban Development has the right to deny that delay. The contract also states that you give up your lien rights. In other words, if you are not paid, you have no opportunity to file a lien on that project—which is allowed in the private sector. This is sort of disenchanting for someone who wishes to do business with the Government-as far as the Department of Housing and Urban Development. We think that the overall contracts, the forms, need to be looked at. We think that the procedures in which the projects are administered need to be looked at. We think that people need to be paid on a timely basis. What is even more frightening is the final payment seems to be an elusive set of circumstances. In many cases, we have run some 3 to 6 months as an average to get a final payment on a project because of the fact that there is no incentive in many cases for the developer to close the project-since they do not start making payments on the mortgage until the project is closed. The Department of Housing and Urban Development is the only one that can be the catalyst to make this situation change. As the head of the minority business advisory council, I find that in cases that have been brought to my attention by the minority contractors there are cases where people have not been paid for over a year after a project has been accepted and fully occupied and the developer is collecting the rents-because of the redtape that occurs.
I know that I have probably used up my time. There is one other issue I think is extremely important. I read about it in the National AGC almost on a monthly basis, but I think that your area director of the Department of Housing and Urban Development arrived at a vehicle nearly 3 years ago-when he set up a minority business advisory council that I have been heading up since that period of time—that I think could go a long way to eliminate the problems of minority business enterprises and women in construction. In the first place, we have an organization in which groups, various minority groups, never talk to each other; they never talk to contractors; they didn't talk to each other; they didn't talk to the other agencies that were involved; and it was almost like a battleground that I think we have eliminated in this area by getting people to talk. We've also gotten results—I think that you will find by checking-that the amount of business that is done by minorities through the Department of Housing and Urban Development in this area has tripled in the last 3 years, and I think they have received an award the last 2 years for having the best record in the country. This is an issue that I think management and the Government have not been facing up to. It's an issue that takes additional work, but it is an issue that can be resolved by people