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A Quota by Any Other Name-The Cost of Affirmative Action Programs in the Construction of DIA

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A Quota by Any Other Name:The Cost of Affirmative Action Programs In the Construction of DIA IP-6-1994 (May 1994) Author: Charles King After months of delay and massive cost overruns, Denver International Airport (DIA) has found its opening indefinitely postponed. One of the most important reasons for the delay has been the affirmative action policies imposed on firms in construction of DIA. But for those affirmative action policies, Denver International might well have opened 'on time and under
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   A Quota by Any Other Name:The Cost of Affirmative Action Programs In theConstruction of DIA IP-6-1994 (May 1994) Author: Charles King After months of delay and massive cost overruns, Denver International Airport(DIA) has found its opening indefinitely postponed. One of the most importantreasons for the delay has been the affirmative action policies imposed on firmsin construction of DIA. But for those affirmative action policies, DenverInternational might well have opened 'on time and under budget.' This IssuePaper details the massive costs which have been inflicted on the people of Denver, and the city's reputation, through policies of racial discrimination. At least for the delays since March 1994, the primary cause has been problemsin making the automated baggage handling system work. While the baggagesystem was built by BAE Automated Systems, Inc., the BAE company was notchosen to operate and maintain the system. The 'OM' contract to run the baggage system was awarded to a different company which, however diligentits efforts, did not have the enormous learning curve advantage of having builtthe baggage system. According to Denver's construction chief at DIA, 'The worst decision that was made in the last six months was the decision not togive BAE the OM contract.' And why was the company that built the baggagesystem not given the contract to operate and maintain it'The city was concerned that BAE wouldn't hire enough local minority subcontractors,' reports the  Denver Post  .(1)Apparently the Webbadministration found that BAE would not hire 'enough'minorities, eventhough, according to BAE, the company had pledged to hire 36% minority  workers and 11% minority subcontractors.(2)Although BAE was eventually hired as a subcontractor, the firm's contribution was obviously less than if BAEhad been the prime OM contractor.Because of the numerous problems with the operation of the baggage system,the airport (and ultimately the traveling public) must pay about half a million  dollars a day on bond interest payments despite the lack of any revenue fromDIA. Some airports shops are teetering near bankruptcy, as the DIA delaysmake it impossible for the shops to generate enough revenue to pay back theshops' start-up loans. (And to the extent that the Denver government assiststhose shops, the losses are simply transferred to Denverites.)The DIA delays have also resulted in a lowering of the bond ratings to junk ornear-junk status by national rating agencies, thereby raising the interest ratesthat Denver (and ultimately the traveling public) will pay in future airport bondsales.No-one knows exactly how many tens of millions of dollars have been lost as aresult of the Webb administration's decision to reject BAE as the baggagesystem operator because, apparently, BAE pledged merely to fulfill, and notexceed, the Webb/Pena racial quotas at the airport.Significant as the baggage system fiasco costs are, they are only one part of thegigantic waste of public funds caused by the Webb/Pena racial quotas. Thisstudy provides a conceptual framework for measuring the costs of affirmativeaction, some estimates of these costs in construction of DIA, and some policy implications. WHEN DOES AN AFFIRMATIVE ACTION 'GOAL' BECOME A QUOTA Some persons claim that no quotas were imposed at DIA because theaffirmative action 'goals' are voluntary. It is true that affirmative actionprograms at the federal, state, and local level are stated in terms of 'goals' incontracting work to minority owned enterprises (MBEs) and female ownedenterprises (WBEs). If contracts are awarded to MBEs and WBEs only whenthey submit low bids, then there are no quotas, and no additional constructioncosts incurred. But, if contractors who fail to meet affirmative action 'goals' intheir bids are not awarded contracts, then the goals become quotas. Whencontracts are set aside for MBEs and WBEs even when these firms are not low  bidders the costs of construction are increased by these set asides.The argument that affirmative action 'goals' for contracts at DIA are voluntary   is not supported by the data. The appendix to this study compiles evidence onthe two affirmative action programs administered at DIA by the DenverMayor's Office of Contract Compliance in 1992. The federal governmentimplemented an affirmative action program in the award of both constructionand professional services contracts. The federal program makes no distinction between MBEs and WBEs, but rather lumps the two together into adisadvantaged business enterprise (DBE) program. Of the 16 federalgovernment contracts awarded under this program none were significantly  below the 'goals' for DBEs, and a number of contracts significantly exceededthose 'goals.'The City of Denver also administered an affirmative action program in theaward of contracts to both MBE and WBE enterprises. Of the 21 city contractsonly 3 were below the 'goals' for total MBEs and WBEs, while the majority of contracts exceeded those goals. WHAT WAS THE COST OF SET ASIDES IN CONSTRUCTING DIA Estimates of the cost of set asides varies considerably. At least seven bids wererejected by the Pena/Webb administrations because the low bidder did notmeet the 'goals' for subcontracting to minority firms. Those contracts werethen set aside to higher cost bidders who met the affirmative action 'goals.' When the city awarded those seven contracts to higher bidders who metaffirmative action 'goals,' the increase in construction costs was $3 million.(3) When prime contractors at DIA set aside subcontracts for MBEs and WBEsthat were not low bidders, their costs also increased. The firm awarded theprime contract for designing and constructing the computerized baggagesystem subcontracted $40 million to MBEs and WBEs. The firm stated that if ithad not been required to set aside subcontracts for MBE and WBE firms it would have done the work itself at a savings of $6 million.(4)This estimate forconstruction of the baggage system suggests that set asides increased cost by 15% of the value of work subcontracted. Estimates of the cost of set asides by engineers and prime contractors at DIA vary between 2% and 12% of contract  dollars.(5)Studies of other public works construction projects suggest that the cost of setasides in constructing DIA is probably at the upper end of these estimates. In aprevious Issue Paper the author reported estimates of the cost of set asides by the Associated General Contractors of California of 9% to 14% of the value of public works construction contracts in the San Francisco area.(6) A recent study of all federally funded construction projects estimates that about$10 billion of federal contract monies was channeled into these set asides.(7) The premium for awarding federal contracts to MBEs and WBEs is notsupposed to exceed 10%, but for some contracts the premium was as high as25%. That study concluded that 10% (or $1 billion) is probably a conservativeestimate of the cost of set asides in all federally funded construction projects. A total of $118 million in contracts was set aside for MBEs and WBEs at DIA in 1992. If we apply the 10% figure to this figure, the estimated cost of setasides at DIA was $11.8 million in 1992. Reports on affirmative actionprograms at DIA for 1993 and 1994 will soon be available which shouldprovide a basis for estimating the cost of set asides in those years as well. WHAT WAS THE COMPLIANCE COST OF AFFIRMATIVE ACTIONPROGRAMS IN THE CONSTRUCTION OF DIA The cost of set asides is only the tip of the iceberg in estimating the cost of affirmative action programs in public works construction projects such as DIA. All firms at DIA incurred labor and capital costs to remain in compliance withaffirmative action regulations, and recent studies provide a basis for estimatingthese compliance costs.Research by the Center for the Study of American Business at WashingtonUniversity estimates that for every dollar spent on regulatory enforcement,about 20 dollars is spent for compliance costs in the private sector.(8) Compliance with federal affirmative action regulations increased federalcontractors' costs by an average 6.5%. In 1991, $211 billion was spent by the

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