Contract Dispute

The economic downturn fuels Hawaii contractors' longtime call for stricter regulation on federal projects.

July, 2002

Bracing for a work slowdown after Sept. 11, many local contractors have exerted extra effort to pursue military contracts. But the economic downturn has also magnified a more than decade-old debate over whether out-of-state firms have the advantage in the awarding of federal contracts.

“With federal contracts, you don’t need to be a licensed contractor in the state of Hawaii, so you don’t have to abide by the rules and the regs,” says Bruce Coppa, executive director of the Pacific Resource Partnership, a joint program of unionized contractors and the Hawaii Carpenter’s Union. “You’ve just got to know how to do construction, get a bond, have insurance and you can get a job. That invites competition from all over without any real mechanism to ensure they are playing by the rules.”

The situation relieves offshore construction firms from paying gross receipts taxes imposed on all contractors licensed in the state. Out-of-state companies are also not bound by Hawaii’s contract regulations.

“For instance, if you were a base business out of Idaho, and your workers’ comp rate is one-tenth the cost of ours, obviously that’s a major disadvantage to people working out of Hawaii,” says Denny Watts, president of Dick Pacific Corp. “Or if you’re paying all your people piecework and not paying them as contractors or as employees, there’s a huge difference, because we can’t do it and won’t do it. We fall under specific government rules, and how we do it has to be to the letter.” Many Mainland companies bring their workers for these projects, Coppa says. That translates into a tremendous loss of potential jobs for local workers.

Says Ron Taketa, financial secretary and business representative for the Hawaii Carpenter’s Union: “Of all the government agencies — state, county, federal — the federal is the most lax in enforcing regulations, which allows a lot of Mainland-based contractors to take work here, where money was appropriated for federal projects. I don’t think it was the intent for that money to be taken back to the Mainland.”

Hawaii anticipates nearly $228 million in military construction projects in fiscal year 2003. As of this story’s writing, the defense bill appropriating those funds had been approved by the U.S. House of Representatives and was headed to the Senate.

“The military work has been a God-saving grace for a lot of contractors in the last five years, when state, county and private work was scarce,” says Glen Kaneshige, president of Hawaii-based Nordic Construction Ltd. “There’s still not enough work in those other three sectors that a contractor of our size won’t look at military work to help survive at this level.”

Hawaii companies received more than 86 percent of $199.5 million in military contracts awarded in fiscal year 2001, says Doug MaKitten, public affairs officer for Honolulu Engineer District (HED) of the U.S. Army Corps of Engineers. That’s almost double that of the previous year, when Hawaii companies were awarded about 46 percent of the $79.2 million in construction.

All HED contracts require contractors on military projects to employ Hawaii residents when the state’s unemployment rate exceeds the national average, MaKitten says.

However, that economic situation rarely occurs, says U.S. Rep. Patsy Mink. For the past three congressional sessions, Mink has unsuccessfully pushed for a bill that would require contractors to obtain a tax clearance from the state upon submitting their bids for federal projects. The bill would have also required contractors to be licensed in the state in which they planned to build the federal projects. The U.S. Department of Defense has consistently disapproved of the bill, saying it would add an unnecessary step in the bidding process.

“It’s simply a standard procedure, and it helps everybody, because every state would want to collect their fair share of taxes,” Mink says. “It’s trying to level the playing field for our local contractors in winning bids. When Mainland contractors come in, they don’t pay taxes and don’t live under the same rules as local contractors, so their price is lower and they win the bid. Local labor has to be a priority.”

Hawaii contractors could bid more competitively if large-scale or bundled military projects were broken down into smaller jobs, Coppa says.

“Sometimes in the military, the bar is there, because of the capacity of the job,” he says. “There might be a 10-year, $500 million project. Can somebody bond like that locally? I don’t think so. It narrows the competition, because of the criteria that’s set.”

At least one local contractor prefers that Hawaii contractors rise to the challenge of competing with offshore firms, rather than have the state deter offshore firms from bidding on Hawaii projects.

“Never have I seen a lot of progress made if you’re not being competitive in the giant marketplace and putting up barriers in the state of Hawaii,” says Mark Richards, co-owner of Kona-based Maryl Group Inc. “There’s a short-term gain there. If we’re not competitive with Mainland people, we need to find a way to be competitive. It’s as simple as that.”

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