EXHIBIT A
FINDINGS: SHELTERED MARKET PROGRAM
I. BACKGROUND
The Sheltered Market Program (SMP) is designed to improve opportunities and build capacity of state certified, minority-owned businesses (MBE), woman-owned businesses (WBE), and emerging small businesses (ESB), (collectively “M/W/ESBs”) in the regional construction industry to compete in the open market at a prime contracting level. Firms participating in the SMP must have prior contracting experience. This is not a program for start up businesses. Participation in the program is limited to three to five years, with a maximum of five years.
The SMP allows participating M/W/ESB firms to compete among themselves as prime contractors for some of the City’s construction projects in the range of approximately $50,000 - $200,000. Construction projects that meet the dollar threshold are directed into the program, if it appears that sufficient SMP contractors will be available to provide competitive bids. Subcontracting opportunities are available within the SMP as well.
The City Council adopted the Sheltered Market Program (SMP) in 1997 in response to both the Oregon Regional Consortium Disparity Study (“Study”) and the need for increasing competition for public contracts awarded by the City.
The facts and findings that led to the creation of the SMP were set forth in Ordinance No. 171519 and its attached exhibits. The Study was accepted by the City Council pursuant to Ordinance No. 170278 and its attached exhibits. The facts and findings of both of those ordinances, and their attached exhibits, a part of the background to the current ordinance, are attached as exhibits A1 and A2 and hereby incorporated by reference.
Among the findings of the Study was that there was a disparity between the number of minority contractors available to receive the award of a City contract and the number of contracts actually awarded to such firms. For example, between 1991 and 1994 the City awarded 260 contracts but no contracts were awarded to African American or Native American prime contractors. Disparity was found between the number of contracts awarded to Caucasian Female firms and the number of available firms. These statistics and findings are set forth more fully in the exhibits to the 1997 ordinance.
Attached are the following Exhibits, which by this reference are incorporated herein:
A1: Ordinance 171519 and attached exhibits
A2: Ordinance 170278
A3. SMP Program Description
A4: SMP Number of Contracts awarded by Ethnicity
A5: SMP Contracts awarded by ethnicity showing dollar amounts
A6: SMP Participant Application for City/Multnomah County/PDC
A7. Chart: Percentage of bids over Engineer’s estimate with 3 or fewer bids
A8: Chart: Percentage of bids under Engineer’s estimate with more than 3 bids
A9: Chart: Formal Construction Contracts bid Outside SMP up to $200,000
A10: Letters of Support
A11: Survey Results
A12: SMP Bidding on City Formal Contracts outside SMP
II. THE SHELTERED MARKET PROGRAM
As noted above, the SMP provides prime and subcontracting opportunities for firms certified by the State of Oregon as MBEs (Minority Business Enterprises), WBEs (Women Business Enterprises) and ESBs (Emerging Small Businesses). A fuller description of the program is provided in Exhibit A3.
While in the SMP program, MBEs, WBEs and ESBs receive technical assistance from the City to help them become better contractors, including general business assistance, and specialized assistance such as in regard to bidding. SMP firms then compete against each other for City contracts that are placed within the SMP by submitting bids. SMP contractors are not in the program for life. Instead, they are included for a three (3) to five (5) year term.
The origins of the SMP program can be found in the Oregon Regional Consortium Disparity Study (“Study”).
A. Disparity Study
In 1989, the United States Supreme Court held in City of Richmond v. J.A. Croson Co. that public affirmative action programs utilizing racial classifications were subject to strict scrutiny review in the courts. Under this review, the question is not whether racial classifications are benign or remedial, but rather whether the classifications are narrowly tailored and further a compelling state interest in addressing proven discrimination. The statistical and anecdotal analysis involved in examining the predicate for affirmative action programs in public contracting has typically been undertaken in the context of “Disparity Studies.”
As a result of the Croson decision, the City of Portland eliminated its minority and women’s business goals program in 1990. To determine if and how discrimination had occurred in local public procurement processes, Portland Mayor Vera Katz proposed, and the Portland City Council approved, the funding and execution of the Study.
Completed in May 1996, in partnership with other local governments, the Study found that discrimination and bias have impeded opportunities for minorities and women in the regional construction industry and hindered the City’s ability to include them in its contracting and procurement processes. The Study also identified inefficiencies in the City’s procurement system that limited the ability of all contractors, regardless of race or gender, to successfully bid and perform work for the City.
B. Fair Contracting and Employment Strategy
The Fair Contracting and Employment Strategy was crafted in response to the Study’s findings and recommendations for the City of Portland. The Strategy establishes as a unified vision the principle of “race and gender parity in the amount the City spends to procure goods and services by awarding contracts to a diverse and competitive group of local contractors while providing significant employment opportunities to minorities and women.” Its mission is to “create a procurement system that is fair, efficient, effective, and accountable to all citizens while embracing the values and achieving the vision, goals, strategic outcomes, and objectives of the Fair Contracting and Employment Strategy.”
The Disparity Study specifically found that minority and women-owned businesses were underutilized at a prime contracting level and recommended that the City develop a program to enhance opportunities for such firms to do business with the City directly as primes.
The Sheltered Market Program (SMP) was developed as the key tool to address this recommendation. The City of Portland, Multnomah County and Portland Development Commission are all partners in the Sheltered Market Program. Multnomah County and Portland Development Commission contract with the City of Portland to perform some of the SMP program functions, but they remain responsible for their own bidding processes.
C. Program Details
The SMP is directed at state certified MBEs, WBEs and ESBs. It is helpful, therefore, to remember that each of these firms are defined by state law. MBE and WBE are defined as:
A small business concern which is at least 51 percent owned by one or more minorities or women, or in the case of a corporation, at least 51 percent of the stock of which is owned by one or more minorities or women and whose management and daily business operations are controlled by one or more of such individuals. ORS 200.005(6).
An ESB is defined by state law as:
(a) A business with its principal place of business located in this state;
(b) A business with average annual gross receipts over the last three years not exceeding $1 million for construction firms and $300,000 for non-construction firms;
(c) A business which has fewer than 20 employees;
(d) An independent business; and
(e) A business properly licensed and legally registered in this state. ORS 200.005(3)
Under state law, an ESB also can be certified as an MBE or WBE, provided they meet the criteria for both classifications. The application that M/W/ESBs fill out for the program is attached as Exhibit A4. In order to qualify for participation in the SMP, M/W/ESB construction firms must also meet the following criteria:
a) A firm’s average annual gross receipts must not exceed one million dollars a year, for the prior three years;
b) The firm must agree to an assessment of technical assistance needs by a consultant named by the City of Portland and to participate in training opportunities;
c) Firms applying for the SMP must have the ability to perform a commercially useful function – typically at least 50% of the construction involved on any contract they are awarded; and
d) At the time of application, the firm must have been in business for at least two years and must have experience bidding and performing in their specific areas of work.
The program adopted by the Council hoped to funnel approximately one-half of all City construction contracts between the “informal” purchasing limit and $200,000 into the SMP.1 That meant that the City hoped to have only MBEs, WBEs and ESBs compete for contracts that went into the SMP program. The remaining contracts were competitively bid through the open market.
III. SMP
The SMP has been utilized by a large number of MBEs, WBEs and ESBs. Since inception, over 240 MBE, WBE and ESB firms have participated in the program and approximately 145 contracts have been awarded to certified firms.
During fiscal year 2003/2004, over 80 MBE, WBE and ESB firms participated in the SMP. Although that fiscal year, unlike some others, did not see SMP participants being awarded many prime contracts through the SMP, SMP participants did receive 10 subcontracts on the City’s Westside Combined Sewer Overflow project and 19 subcontracts on other City projects. Nonetheless, the overall picture from the SMP is that since its creation, 145 prime contracts and $14,863,322 have been awarded to SMP participants.
The SMP is narrowly tailored to achieve its objective. For example, only a portion of the City’s contracts go into the SMP. The 1997 ordinance anticipated that 5% of the City’s total construction contracting dollars between the “informal” limit and $200,000 would be diverted into the SMP. Since that time less than 5% of the City’s total construction dollars have been diverted into the SMP as follows:
1997/1998: 2.14%
1989/1999: 2.88%
1999/2000: 2.30%
2000/2001: 2.91%
2001/2002: 4.05%
2002/2003: 4.33%
2003/2004: 2.04%
The SMP program also is narrowly tailored because it is available to not just MBEs and WBEs, but also ESBs. The results of the SMP program are displayed graphically in Exhibit A5, which shows contracts awarded through the SMP program by ethnicity. Exhibit A6 shows the same results, but displayed in terms of contract dollars. On these exhibits the category “Caucasian males” reflects contracts awarded to ESBs.
In contrast, the percentage of contracts awarded to Caucasian Male firms outside the SMP program is nearly 30 percent higher each year than inside the SMP. For example, in the fiscal year 1997-98, before the SMP program was fully underway, no prime contracts were awarded to minority or women firms whatsoever.
IV. CONTINUED NEED TO GROW PRIME CONTRACTORS
At the time the SMP was adopted in 1997 the City was aware that in Fiscal Year 1996-1997, only 30% of the City’s construction contracts were awarded at an amount below the City’s cost estimate when there were three or fewer bids received. In contrast, 69.4% of construction contracts were awarded at an amount below the City’s cost estimate when more than three bids were received. Ex. A1.
In 1997, the City found a similar pattern when it looked at construction contracts between the “informal” limit and $200,000 from the 1991-1992 fiscal year through the 1996-1997 fiscal year. There were a significant number of contracts in which three or fewer bids were received, ranging from a low of 33% in one fiscal year to a high of 58% in another fiscal year. Ex. A1.
A. All formal construction projects
There continues to be a need for competition for City contracts. For example, from fiscal years 1997/1998 through 2003/2004, there were 452 formal construction contracts awarded by the City. Of that amount, 238 of those contracts received three or fewer bids, or 52.65% of all contracts. Ex. A7.
When three or fewer bids are received the lowest bid often exceeds the City’s cost estimate for the work. For example, in fiscal year 2003/2004 there were 34 projects bid where three or fewer bids were received. Of those 34 contracts, 15 exceeded the Engineer’s Estimate for the cost of the work, or 44.11% of those contracts in which 3 or fewer bids were received.
In contrast, when the City receives more than three bids on a project, the lowest bid almost always is less than the Engineer’s Estimate for the cost of the work. In the 2003/2004 fiscal year the City received more than 3 bids on 24 different projects. Of those 24 projects, the lowest bid was under the City’s cost estimate on 21 occasions and exceeded the City’s cost estimate only 3 occasions. Thus, when more than three bids were received in that fiscal year, only 12.5% of the time was the lowest bid above the City’s cost estimate.
Therefore, in fiscal year 2003/2004 alone, the City’s contract price for a project exceeded its cost estimate over 44% of the time when there were three or fewer bids and less than 7% of the time when more than three bids were received. Therefore, the City saves money when it can encourage more bidders to participate.
B. Construction Contracts less than $200,000
A similar pattern is detected when contracts between the “informal” limit and $200,000 is considered. Between fiscal years 1997/1998 through 2003/2004 there were 176 contracts bid between the “informal” limit and $200,000 outside the SMP program, that is, on the open market. Of that amount, 121 contracts received three or fewer bids or 68.75% of the total number of contracts awarded. When three or fewer bids were received, the City’s contract amount exceeded its cost estimate on 57 occasions, or 47.10% of the time. Ex. A9.
Therefore, there remains a need for the City to encourage prime contractors to bid on its construction contracts under $200,000 in order to reduce the cost of those contracts to the City.
As noted below, SMP graduates and past participants have been successful in obtaining City contracts. However more work remains to be done. Outside the SMP, within the “informal limit” to $200,000 range, no African American firm received a City contract, Asian, Native American and Hispanic contractors received only four (4) contracts and Caucasian females received 10 contracts within the past seven (7) years.
V. RESULTS
A. SMP Graduates and Past Participants
The first class of construction firms graduated from the SMP program in February of 2002. While in the SMP these 27 graduates were collectively awarded 254 prime and subcontracts, valued at over $14 million from the City of Portland. The following fiscal year, 2002/2003, past SMP participants received 19 City contracts while bidding outside the SMP for a total of $1,324,341.
Some of the responses that we have received from SMP graduates include the following:
“The Sheltered Market Program is a great opportunity for small businesses. It provides limited competition and individual support services and a prime contractor role for specialty contractors.” Rhonda Herschell, owner of Cherokee General.
“We found the program to be very helpful, because it didn’t just provide us with the opportunity to bid on work, but it also provided us with technical assistance. Anyone that is a smaller contractor should consider entering this wonderful program.” Manuel Castenada, owner of Pro Landscape, Co.
“Being part of the Sheltered Market Program helped us learn how to create a business plan and provided us with opportunities to more effectively obtain work with the City.” Maurice Rahming, Owner O’Neill Electric, Inc.
B. Survey of SMP Graduates
In 2004, a confidential survey of SMP participants was performed. Those results are shown on Exhibit A11. The results, on the whole, demonstrate that many SMP participants have increased their bonding capacity and their ability to take on both additional public and private work. Specifically, seven (7) firms increased their annual receipts by over one million dollars, eight (8) firms increased their bonding limit by $500,000 or more, and seven (7) firms increased the number of full-time employees by six (6) or more.
C. Current Participants
During Fiscal year 2003/2004, SMP firms were awarded a total of 49 prime and sub-contracts valued at over $2,000,000 on various City of Portland projects. In addition, last year 136 SMP participants participated in computer and business development classes for a total of 829 training hours.
The SMP program has received good reviews from participating contractors. Some of the letters received from contractors who have participated in the program, and who support it are attached as Exhibit A10. Some of the responses and feedback, include the following:
“While in the program we have been able to increase our pre-qualification limits, when we started in 2001 we were not bondable, since then we have obtained an aggregate bond limit of $500,000 and our payroll in 2004 increased 400% over 2001.The SMP builds for the future by providing opportunities for small firms to succeed and grow. The SMP is an investment in the future of Portland and it will ultimately benefit us all.” Julie Clevenger, White Buffalo Construction, Inc.
“The bidding opportunities that we have been given have been very helpful in learning to compete in this business. The educational opportunities that you have provided have been very helpful. They have been things that we could not have afforded to participate in without your help.” Chet Ralston, C&W Grading.
“I want to let you know how much the Sheltered Market Program means to our business. The financial classes have helped us improve the management of our business. The educational services and contract projects that the Sheltered Market Program provides is very important to small businesses that are in the City of Portland.” Cheryl Brookins, Alarm Tracks.
“As a result of this program we have garnered a very successful relationship with the City of Portland. Furthermore, we have taken advantage of the on-going educational programs available. We have had the opportunity to learn valuable computer training, bookkeeping and tax related information. In short, keep up this wonderful program. We are forever grateful.” Ken DeKorte, DeKorte Electric.
“I just wanted to say that I don’t know how my company would have gotten off first base. This program is such a win-win situation for the community. The program gives small companies like mine the chance and knowledge to compete.” Rose Christie, Rose Construction.
D. SMP Bidding Results
Since 1997, SMP primes have been actively bidding as primes on City of Portland projects outside of the SMP as provided in Ex. A12. Since 1997, 53 SMP primes have submitted a total of 76 bids on 66 projects and were awarded 23 contracts valued at $4,571,030. The 76 bids from SMP firms outside the SMP, which might not have otherwise been submitted to the City, increased the number of bidders on City projects, which as noted above, leads to substantial cost savings.
E. Program Partners
Since the inception of the Sheltered Market Program, the City has partnered and collaborated with Multnomah County and Portland Development Commission to work towards its goal of providing additional opportunities and building capacity of M/W/ESB firms in the region. The City has established strong working relationships with its program partners, which has contributed to the success of the SMP and the overall success of each agency goals. We have received the following feedback from our partners:
“The Sheltered Market Program has been a great addition to our M/W/ESB program because it not only provides the program participants with an opportunity to learn to bid and compete; it also gives them technical assistance necessary to become better at running their businesses. Without the Sheltered Market Program many opportunities to win contract awards and acquire technical support would not otherwise be available to many of the program participants.” Herman Brame, M/W/ESB & QRF Coordinator, Multnomah County
“The Sheltered Market Program has enabled the County to increase utilization of M/W/ESB contractors in different areas of work. We value our relationship with the City and the added benefit to the community in our partnership and the maximizing of our resources. We look forward to our continued partnership in the future and our joint efforts in making a difference for M/W/ESB construction firms in the region.” Lisa Williams, M/W/ESB QRF Outreach Compliance Specialist, Multnomah County
“Portland Development Commission appreciates our partnership with the City of Portland, Sheltered Market Program and continues to make every effort to utilize SMP Contractors on PDC projects. The SMP is invaluable to the M/W/ESB construction community because of its commitment to small Contractors. The program has created a competitive marketplace where M/W/ESB Contractors can hone their business skills within the SMP for greater success in the open market. The M/W/ESB Team at Portland Development Commission is excited about the construction opportunities ahead and looks forward to a continued collaboration with the Sheltered Market Program.” Tyrone Henry, Contracts Compliance Manager, Portland Development Commission
VI. ADDITIONAL FINDINGS
The following findings are required by ORS Chapter 279C in order to create a Class Exemption and allow the SMP to operate.
A. Operational, Budget and Financial data: A primary purpose of the Public Contracting Code is to protect the public’s finances. When public improvement work is bid, it is clear that when there are more than three bidders, the City’s cost for performing the work is far more likely to be lower than the City’s cost estimate than if three or fewer bidders compete.
B. Public Benefits: There is a public benefit when the City encourages smaller businesses to participate in City projects. Not only does this distribute funds among smaller contractors in the community it helps those contractors grow, which in turn creates additional competition on City projects, thus benefiting the public at large.
C. Value Engineering: This factor is not applicable to the creation of the SMP.
D. Specialized Expertise: Because the City prequalifies SMP participants in the same way based on the same factors as it prequalifies contractors outside the SMP, any necessary specialized expertise already exists within the SMP. If it does not exist within the SMP, then the public improvement contract is bid outside the SMP on the open market.
E. Public Safety: It is unlikely that the SMP has any impact on public safety. If it does, the SMP may increase public safety because SMP contractors are able to access the City’s technical consultant to assist them on projects. Technical assistance in organization of the work would tend to increase, not decrease, public safety.
F. Technical Complexity: Like the factor of “specialized expertise” the SMP does not, in and of itself, exist to address technically complex projects. To the extent that SMP contractors are prequalified for complex projects they can perform them like other contractors.
G. Funding sources: Funding for the SMP contracts is the same as other construction contracts, which means that the funding comes from the Bureau for whom the work is being performed. To the extent that SMP contractors are able to then participate in competitive bidding situations with the City outside the SMP, as shown in Section V above, the number of prime contractors is increased and the City is likely to receive a better contract price.
VII. COST SAVINGS AND COMPETITION
The Findings made above, together with the attached exhibits demonstrates that the Class Exemption will achieve substantial cost savings for the City, by growing prime contractors to compete on City construction projects. When there is additional competition for City construction contracts, the cost to the City is much more likely to be lower than the City’s cost estimate than when there are three or fewer bidders. Therefore it is in the City’s financial interests to grow such firms. Moreover, the growth of such firms is good for the City in general because their growth increases employment and provides good paying jobs for City residents.
The Findings also show that the SMP does not encourage favoritism or substantially diminish competition for public contracts. First, only a small percentage of City contracts are directed to the SMP. Provided a small firm can qualify as an ESB and is able to perform the work required by the City it is eligible to apply to, and get accepted by, the SMP program. Second, within the SMP there is competition among contracts. The SMP program allows these contractors to bid against each other for the projects that they are awarded. Therefore, the City encourages competition in this process.