By Brian Johnson
Dolan Media Newswires
The owner of J&L Steel and Electrical Services thought she was on to something big when she landed a $62 million contract for installation of steel on the massive St. Croix Crossing project between Oak Park Heights, Minn., and St. Joseph, Wis.
But the high cost of carrying the work forced the Hudson, Wis.-based business to leave the $626 million project midway through its contract this spring — and close its steel operations after nearly 40 years in business.
J&L, a certified Disadvantaged Business Enterprise, was under contract to the joint venture of Black River Falls-based Lunda Construction and Burnsville, Minn.-based Ames construction, which took over the steel work after J&L left.
It’s another setback for the Minnesota Department of Transportation’s efforts to boost participation of women- and minority-owned businesses on its projects. MnDOT and other state transportation departments are required by the federal government to set goals for participation of DBEs on projects that receive federal money.
With a 6.1 percent overall participation rate for projects, MnDOT tracked well behind its overall DBE goal of 10.3 percent for the first half of fiscal year 2015. The setback also comes as MnDOT considers raising the participation goal to 11.7 percent for projects with federal funding.
Now MnDOT is likely to come up short on the 15.7 percent goal for the St. Croix Crossing, its highest-profile individual project.
Even so, J&L’s departure had nothing to do with its status as a DBE. Founded in 1977, the company has worked on more than 300 bridges in the state, and its electrical operations continue to thrive. Industry observers interviewed for this story say J&L’s predicament could have happened to any subcontractor, regardless of their DBE status.
J&L has worked on major projects such as the new Interstate 35W bridge over the Mississippi River in Minneapolis, which was completed in 2008 a year after the previous bridge collapsed. J&L continues to work on the $187.5 million Dresbach bridge project in southeastern Minnesota.
Why J&L left the project
So, what went wrong for J&L? LouAnne Berg, J&L’s president and CEO, cited the unusual nature of the project spanning the St. Croix River — it’s only the second bridge of its design to be built in the United States — and cash flow issues stemming from cost pressures that included a lot of overtime and an aggressive schedule.
“It cost me a fortune,” said Berg, who had about 150 ironworkers on the job. “We could not get any resolution. … It got to where I had to leave the job. I could not financially support it anymore.”
About 120 ironworkers walked off the job for a few days in April following a dispute between J&L and the joint venture. MnDOT and other parties involved declined to talk about the nature of the dispute at the time.
Berg said J&L will close its steel operations after completing its work next year on the Dresbach project. The company will continue to operate its electrical business.
“Everything is going fine down there,” she said of the Dresbach project. “The bonding company is managing it. … If they didn’t think we were capable of it they would put it up for bid.”
Berg said about $7.5 million of the work on her $12 million Dresbach contract has been completed.
For the St. Croix project, Lunda-Ames is tracking at about 11.9 percent DBE participation based on the most recent payroll reports, which means 11.9 percent of the money paid out to date has gone to DBEs, according to MnDOT.
As of July 1, MnDOT has paid out about $180.8 million overall on the project, said Michael Beer, MnDOT’s St. Croix Crossing project manager.
Beer said the departure of J&L is “an unfortunate situation for everyone involved.”
“We will look closely at the good faith effort and to do everything we can to meet the (DBE) goal,” he added. “Given this unfortunate situation, it may not be able to be achieved. But we are going to make every effort to achieve it.”
Beer said the Lunda-Ames joint venture is obligated to try to make those goals with other DBEs and is “reaching out to other firms that are available.”
Beer said MnDOT facilitated meetings with J&L, MnDOT’s Office of Civil Rights and the Lunda-Ames joint venture to consider options for keeping J&L on the job. But J&L’s contract was with Lunda-Ames and MnDOT was limited in what it could do, he said.
J&L was on the St. Croix job for about a year. Lunda-Ames will get DBE credit for the worked J&L performed, Beer said.
Lunda-Ames searches for DBEs
Dennis Behnke, president and CEO of Lunda, said the contractor worked with J&L and tried to keep the company on the project in a way that would be economically feasible for the joint venture.
“The dollar amounts were too high,” Behnke said.
Behnke doesn’t think the DBE goal is achievable at this point.
“Most of the DBE firms we have reached out to are at capacity or can’t take on the work we have,” he said. “We are looking at every possible avenue to try to meet the goal, but it will be extremely difficult to make up the difference” after losing J&L.
This isn’t the first time DBE goals have been an issue for the St. Croix Crossing project.
Two years ago, on a separate St. Croix Crossing contract, MnDOT rejected a bid by Maple Grove-based C.S. McCrossan to perform approach work on the grounds that McCrossan didn’t make a good faith effort in its proposal to meet DBE goals.
McCrossan, which submitted the lowest bid and the highest technical score for the project, unsuccessfully sued MnDOT to get the contract. The work was awarded to the team of Ames and Lunda.
Lunda-Ames was later awarded the superstructure contract for the project, which included J&L’s participation.
Tim Worke, director of the Associated General Contractors of Minnesota’s transportation division, said in a recent interview that it’s difficult for emerging businesses to become established in highway-heavy construction because it’s a capital-intensive business, the profit margins are thin and there’s a high degree of risk.
For that reason, a relatively small number of DBE businesses regularly bid on MnDOT projects, even though the department has invested in DBE-focused business development programs, he said after the recent DBE report from MnDOT was released.
Observers say J&L’s predicament would have been a struggle for any subcontractor.
Mike Schmaltz, executive director of the Minnesota Subcontractors Association, said many subcontractors — DBEs and non-DBEs — find themselves in a similar situation.
Depending on how a contract is set up, they may have to wait 60 or more days to get paid to cover their costs, he said.
“As they do the work on something like this they are essentially financing the project in most cases, because they have to pay for the workers and to some degree materials upfront and carry that cost,” he said.
Barb Lau, executive director of the Association of Women Contractors, said if a DBE is lost from a project the prime contractor is required to make an effort to seek out other DBEs to replace that work.
“My question would be whether or not they entertained additional bids from other DBEs or if they just immediately were self-performing work and that was the long-term plan,” she said.
Federal Highway Administration spokesman Doug Hecox said the federal government would not revoke funds from a project or impose sanctions for missing a goal.
The DBE program is important, he said, because it creates a more “vibrant and diverse” group of contractors to work on projects, which supports small businesses and oftentimes creates more value for taxpayers.
Other public projects are making better progress on their goals. The $1.076 billion Minnesota Vikings stadium project in downtown Minneapolis, for example, is exceeding goals for targeted businesses.
But that project has an advantage because it can draw from a wider range of women- and minority-owned businesses, not just DBE-certified companies, Lau said.
For example, Danny’s Construction is a large, woman-owned steel erection contractor working on the Vikings stadium, but Danny’s isn’t DBE-certified, so it couldn’t be pulled into the St. Croix project and count toward the goal.
“The stadium has more options,” Lau said.
Besides establishing goals, state and local recipients of federal transportation dollars are charged with certifying the eligibility of DBE businesses to participate in projects receiving federal funding, according to the U.S. Department of Transportation.
“Some groups are presumed to be socially and economically disadvantaged for the purposes of participation in this program,” according to the U.S. DOT’s website. “In 1987, Congress added women to the groups presumed to be disadvantaged.”
What’s next for J&L
Last fall, J&L was honored by Gov. Scott Walker as a top woman-owned business.
Berg now says she plans to sell J&L’s headquarters building at 2365 Willis Miller Drive in Hudson to generate some cash for the business, though she might lease some of that space back to house J&L’s electrical operations.
J&L’s electrical division will do about $12 million worth of work this year, she said.
“We’re still in business. We have a lot of things going on. We won’t be bidding anymore on the steel side,” she said.
When the St. Croix Crossing project was being proposed, Berg was among its biggest boosters amid strong opposition from environmentalists concerned about the impact on the St. Croix River. She says she still supports the project despite her own circumstances.
“We kind of put all our eggs in one basket on a very big project and the project didn’t go well,” she said. “We gave 100 percent to the job and our people and I put a lot of effort into keeping it going.
“At some point you have to say, ‘I don’t think they understood how serious it was for J&L,’ and that we didn’t really have any money left,” she said.