I appreciate the opportunity to speak to the summit today.
I am Doug Stein, president of Stein Construction Co., Chattanooga’s oldest General Contractor. I am the 4th generation of my family to operate the business. We’ve been here since 1912.
I am not a politician and have no party affiliation. I have been told by a friend of mine who holds elective office that my political views would make me unelectable as a candidate.
I am in favor of Tennessee’s status as a “right to work” state, for I believe in the individual’s responsibility for his career.
I am against restrictions of trade of any sort, because I want the opportunity to work in other places as well as my hometown. I want to be able to procure services from anyone without regard to where they come from, in my own quest for the best value.
I have inherited a company philosophy that embraces the idea that the cheapest may not always represent the best value. I have used the following illustration many times before when addressing public entities that purchase contracting services:
When you walk into the clothing store to buy, say, a blue blazer, you generally don’t say, “Give me the cheapest blue blazer you have, size 44 long.” Nor do you say, “I’d like to buy the most expensive blue blazer in here, size 44 long.” You would most likely say, “Let me look at your blue blazers.” After consulting with a salesman, and assessing the blazers to the best of your ability, you leave the store with the blue blazer you believe represents the best value for you.
Now you likely don’t know very much about how to make a blazer, and you trust the salesman to point out the differences in construction and materials, and ask why one might cost so much more or less than another. At the end of the day, you make the best judgment you can about what you need or want, and buy the blue blazer you believe will best suit your needs.
Somewhere along the line in this country, we developed a different model for public procurement. The model is this: the low bid wins.
This is the equivalent of your walking into the clothing store and saying, “Give me the cheapest blue blazer you have, size 44 long.”
Now you may hear that our government procurement system awards the contract to “the lowest responsible bidder,” but how we determine who is responsible is irresponsible. And I want to tell you why I think so.
First, I understand why the low bid may seem like the right way to do things. It is supposed to work like this: the Architect or Engineer develops a set of plans and specifications that are designed to ensure that the Owner gets a quality project. The Contractor is required to meet the specifications prepared by the Architect or Engineer. There is an inspector, a work schedule, a schedule of values.
The Contractor is licensed by the government, after passing tests for financial ability and competence. He usually delivers a bond from an insurance company, guaranteeing his performance.
Sounds like a plan.
The common illustration of why this may not be what you would do yourself involves the Space Shuttle. I have overheard at more than one launch, while watching on TV: “There goes another brave crew into space on a rocket put together by the lowest bidder.” We all know that having submitted the lowest bid is an incentive to cut corners wherever possible. We actually- we knowingly- have a system that rewards the contractor that can cut the corners the sharpest.
One of the prime places that has developed where costs are cut is in health care and pension benefits.
I’m going to go back a bit. Back in 1912, if the Small Business Administration had existed, and the government had provided disability and workmen’s compensation benefits, Stein Construction Co. would not be here, because the Company was founded when my Great-Grandfather was injured on the job, and the company for which he worked could not pay him while he was off. There was no health care, no disability, no pension, no early retirement. As Grandpa said, it was “root hog, or die.”
Families, churches and charities kept up the safety net, to the extent that one existed, for people who couldn’t make it.
My Great-Grandfather, faced with this situation, decided to start his own company (actually, his wife decided he would start his own company). Luckily she was a pretty stout woman, and he was a pretty smart man. They made it work.
But that was a different day, before Social Security, Medicare, and Medicaid.
Now our government requires hospitals and doctors to provide “indigent care.” Public health agencies abound, funded by tax dollars.
Ignored in all of this is the employer who provides health care and pension benefits to his employees.
Ignored in all this is the employer who trains his employees in apprenticeship programs and other educational institutions.
Stein Construction Co. provides full health care coverage- in most cases full FAMILY health care coverage- at its own expense. It is not deducted from the employees wage. It is part of the compensation package.
Stein Construction Co. provides pension and retirement benefits- either through a pension plan or 401k- to all of its employees.
Last year Stein Construction Co. paid $4,432,263.15 in wages to its employees.
We also paid $906,533.33 in health care, retirement benefits, and training.
That’s 20.5% on top of our payroll.
Now, what do I get for that? None of my competitors- not one! - provide benefits to such an extent. Not even close.
Well, I constantly tell my employees, that in return for paying the highest hourly wage- which we also do- and for providing the benefits that I believe every working person should aspire to have- in exchange for this, I expect the varsity construction team.
I expect our crews to be the best- to be more productive, to do the work right the first time, to ensure that the quality of their work be visible, even to people who don’t know what they are looking at.
For decades now, Stein has been operating in an environment wherein we must be the low bidder to get our jobs, despite the fact that our labor costs are obviously quite higher. We make up some of this in improved expertise. We make up some of this in the owner’s willingness to forgo larger profits. We make some of this up by managing our equipment and assets better.
Sometimes we can’t make it up.
But I have maintained a position that says, essentially, I am just not willing to ask people to give their lives in labor without health care and pension benefits.
I want to tell another story.
I have an employee who came to me within the last month to tell me he was going to need a liver transplant. The operation is estimated to cost $500,000. He’s going to have to retire, and get on the list for a liver.
This employee’s father began working for Stein in 1948. Although most companies did not provide health benefits in those days, health care was affordable for people who made a decent wage. Stein’s employees did- at that time about 20% more than a manufacturing job. So in some respects, every prescription, every broken bone, every trip to the doctor, was made affordable by Stein Construction Co.
In the ‘60’s, when health care costs began to accelerate, Stein began to participate in Health and Welfare and Pension funds, making health care and retirement benefits a part of the compensation package for all its employees.
This employee now has had 40 years of contributions to the International Union of Operating Engineers Pension Plan, most of those dollars from Stein Construction Co.
He has had full family health coverage for his entire career. All of the medical bills of his early birth weight daughter, and his wife, have been covered. Now he has grandchildren by that daughter.
Now when he needs health care, and he needs retirement funds, he has them. Supplemented by Social Security and Medicare retirement and health benefits, his operation will not cost him his home, will not force him into bankruptcy, and he will not become another burden to the taxpayer. He is entitled under the plan to continue his coverage- and not at COBRA rates, but at reasonable, lower rates- and for the rest of his life, not just for 36 months. When he goes to Erlanger, or Memorial, or Parkridge, his bills will be paid- and not by tax dollars.
I also know of another situation, another employee, of another construction company. I have known this man’s family for 23 years, since my own daughter was born (actually 23 years and 1 day). His wife helped take care of my daughter.
He has been diagnosed with a disabling illness, and has been forced to retire. He is 60 years old. He and his wife have no savings, no health coverage. They are facing ruin. The state is going to have to pick up the tab, one way or the other, because we just don’t let people die in this country. But this illness, recently diagnosed and still in diagnosis- could cost them their home, their car, and their lives, essentially. But tax dollars will have to make up the difference.
Now this other contractor is a good contractor. He provides good jobs for his employees, and they do good work. But the market and the system have led him to a situation wherein he simply must cut his costs as much as the law allows. And that means his employees don’t get health care and pension benefits- unless they negotiate them individually, one by one. That just doesn’t happen much.
So I ask you- when the government evaluates a contractor’s bid- should they consider whether or not that contractor provides health care and retirement benefits to its employees? I would argue that they should. Tax dollars are at risk.
Now, in any procurement method that allows the public agency to choose its contractors, we as human beings have proven ourselves unable to avoid corruption, graft, and cronyism. Despite the fact that most people are honest, in such a system it just takes one or two to despoil the entire process.
So how to reward responsible contractors? How to ensure that public entities truly get the best value for their contract dollars?
I am not sure. We have Davis-Bacon laws that dictate such things, though. And TVA requires contractors to pay for benefits. Perhaps we can figure out how much of the job is in labor costs, and say we are going to pay up to 5 or 10% more for a contractor who provides health care and retirement benefits. There are ways to consider the value of responsible contracting.
Being a bit of a contrarian, I would disdain a system that requires every contractor to use the same system- such a thing can stifle creativity and innovation. But assigning a value to knowing that a contractor’s employees have health care and retirement benefits- I think the time has come.
Thank you for listening.
