Keeping the Jobs in House

Humboldt Construction Company, a wholly owned subsidiary of a Chicago CDC, has been providing local employment and high-quality work for over 30 years.

In the 1960s, the West Town/Humboldt Park area of Chicago was suffering from arson, abandonment, redlining, and the loss of manufacturing jobs. It was also home to the Northwest Community Organization (NCO), one of several Chicago groups started by legendary community organizer Saul Alinsky and his followers. NCO had been formed to give the residents of the neighborhood a voice on concerns ranging from housing to city services, crime, and education. It had been pushing the city for years to tear down vacant decrepit housing (with some success) and to encourage the development of new affordable housing to take its place (with less success).

Frustrated by its inability to get others to develop in the neighborhood, in 1967 NCO created the Bickerdike Redevelopment Corporation, named after an 1800s developer in the area, as “The Housing Arm of NCO.” The prevailing spirit was “No one else is doing right by this community—so let’s redevelop it for ourselves!”

Bickerdike’s early work consisted of seeking out, screening, and selecting home builders to develop affordable homes for sale on the vacant lots in the area. Buoyed by its early success with infill housing, Bickerdike moved on to rehabbing vacant properties, typically one- to four-unit buildings. It purchased some for a very low cost out of foreclosure and got banks to donate others. Over a five-year period in the mid-1970s, it developed about 30 units, all of which were sold to area residents.

Bickerdike formed a small crew of local workers to do general labor and carpentry and hired subcontractors to do all of the mechanical and other specialty work. It created a revolving fund to pay for labor, subcontractors, and materials, funded through foundation grants. The size of that fund limited the group to doing no more than one or two buildings at a time. At the time, other CDCs around the country tended to rely on private contractors to do the actual work on their housing developments, but despite the challenges, Bickerdike was biased toward continuing to hire local people and do the work itself. That way it had more control over the quality, the price, and the delivery schedule. Independent contractors, it had learned from its early experiences with the 235 program, had to be watched carefully, lest they take advantage of a small community group, low-income buyers, and/or government programs.

The Trouble With Local Hiring Agreements

In the early 1980s, Bickerdike continued to build housing to meet the needs of the area’s poorer residents, while at the same time joining in political/activist battles to stave off displacement, such as those aimed at preventing the conversion of affordable apartments to condos and places of employment to loft living spaces. To address the most pressing housing needs as costs went up, Bickerdike moved from a strictly single-family homeownership approach to developing affordable multifamily housing. Over the past 30 years the group has developed over 1,100 units of affordable rental housing and cooperatives. Its first rental project was 140 units of subsidized rental housing scattered in 30 buildings around the entire area. This matched Bickerdike’s entire housing production up until that point.

I became Bickerdike’s director in 1979 and I and the other leadership soon came to understand the significance of employment and poverty in the affordable housing crisis. “Anyone with a decent construction job doesn’t need a subsidized apartment,” was a saying heard frequently in meetings and strategic planning sessions at Bickerdike during that period. The larger developments presented obvious local job-creation potential. At the time, however, Bickerdike’s construction operations were too small to take on a major project. So it hired private contractors, but required them to hire a portion of their workers from the community. This was moderately successful, creating over 50 short-term construction jobs on the first large project alone.

But it was hard to do. Contractors resisted the hiring requirements and often completed jobs without adding to their crews, therefore not creating any “new” jobs that local residents could fill. Some small subcontractors were resistant to adding anyone to their crew, preferring to maintain a consistent workforce even when they got behind in their commitments. In other cases, race was apparently a factor—historically if not directly: passing by a job site on a Bickerdike development you would often see dozens of workers, and the only people of color on those crews would be the local residents referred by Bickerdike. General contractors would sometimes sign a “local employment agreement” with Bickerdike in order to get the contract, and then fail to pass that obligation on to their subcontractors, rendering the agreement almost completely unenforceable. In other cases the contractor would hire a Latino worker regardless of where the person lived, or transfer one already on their payroll to the Bickerdike job, assuming that was what Bickerdike was looking for.

In spite of these hurdles, there were projects where the contractor would screen and hire some of the unemployed local residents referred by Bickerdike. To the best of our knowledge at the time, however, only a handful were kept on by the contractor after their work on the Bickerdike project was finished.

And local employment was not the only frustration. General contractors would at times make commitments on the work schedule and then fail to meet them, tried to charge the owners for cost overruns that were not caused by changes in the scope of work, and were often slow to respond to call-backs for repairs to work that had not been done well.

Becoming a Business

Bickerdike decided it could do better. As it continued to plan more large multifamily housing developments, it began expanding its own construction operations.

In 1979 Bickerdike won a two-year grant to increase the capacity and effectiveness of its construction operations from the Carter administration’s competitive Neighborhood Self-Help Development program. The expansion brought new questions with it. Should the construction operations continue as a function of Bickerdike itself, or separate into a distinct corporate entity? If it separated, should it be wholly owned and controlled by Bickerdike, or bring in other investors and broader governance? Should it be structured as for-profit or nonprofit, taxable or tax-exempt? Bickerdike sought out technical assistance from the University of Illinois Center for Urban Economic Development (UICUED), which helped Bickerdike decide on a wholly-owned subsidiary corporation that would be for-profit and taxable. There was some concern about whether or not grant funds could be used to create a for-profit subsidiary; Reagan’s election in 1980 effectively answered that concern.

Bickerdike proposed to HUD, the agency source of the initial funding, a grant amendment that would allow the second year’s budget of about $34,000 to be converted to stock in a construction subsidiary. As expected, the new administration loved the idea. When Humboldt Construction Company was incorporated in 1981, Bickerdike used the balance of the grant funds to provide the capital for all the shares. Humboldt has been in continuous operation since that time, with a crew size averaging 15 carpenters.

Mixing Up the Crew: Unions and Integration

The building trade unions in Chicago were for decades predominantly composed of white men. This meant that many community-based organizations, though supportive of worker protections and good wages, were ambivalent about having their construction work done by union companies.

Progressive activists within the Carpenters Union sought to alter that dynamic. When Harold Washington was elected Chicago’s first black mayor in 1983 on a platform that included community development and fairness in hiring, with overwhelming support of black, Latino, and progressive white voters, those union activists saw an opportunity to open up their membership.

They approached Bickerdike and other housing groups with a proposal: if the CDCs would agree to join the union, the union in turn would agree to modifications to the basic agreement they require for unionized construction contractors that would open up access to new union members from the CDCs’ constituencies.
There were three main modifications:

    1. Journeyman/Apprentice Ratio: Under the usual agreement, the standard ratio for a carpentry crew on a construction worksite is three journeymen to one apprentice. The CDCs were offered an opportunity to run crews instead at a ratio of one journeyman to three apprentices. Apprentices are paid a percentage of journeymen wages, ranging from 40 percent in the first year to 80 percent in the fourth, so a crew with a modified ratio would cost the employer less overall. But at the same time apprentices are typically less productive and need more supervision than journeymen, which offsets the savings in wages. The greater advantage to the ratio modification was having more opportunities to bring local residents into the union through the apprentice program.
    2. Route to Apprenticeship: Entry into the apprenticeship program usually came only after waiting on a very long list. The CDCs were offered the chance to identify qualified candidates who would be screened for admittance to the apprenticeship program without waiting on the list. This enabled the groups to hire locally and to create openings at the entry level for motivated residents. Those workers could continue in the four-year apprenticeship program and eventually become journeymen, and all along they would be eligible for employment on any union carpentry site.
    3. Pay Scale: The CDCs were allowed to pay journeymen 75 percent of scale for year-round work on small projects benefitting low-income people and paid for by public subsidies. The justification for this modification was that carpenters in Chicago working “outside” on construction sites typically work about nine months each year, due to winter weather. Those employed at “inside” shops, such as cabinetmaking factories, typically worked year-round and were also paid at 75 percent of the scale for their “outside” counterparts. If a CDC could commit to employing carpenters 12 months a year, the union would agree to them being compensated at the “inside” rate.

This approach was seen by activists at the union and community groups as beneficial for all: the union would be able to diversify its ranks, consistent with the stated goals of the new city administration, and the community groups could join the union and offer local workers a chance at participation in the apprenticeship program, union benefit plans, and access to union carpentry work anywhere in the area.

The modification agreement has remained in effect since then, automatically renewing each year. Humboldt has over time dropped its use of the 75 percent of pay scale modification because as it grew to take on larger projects that were not covered by the “inside” rate, it became untenable to have some employees paid the full rate and others the lower rate. The flip in apprentice to journeymen ratio has remained in effect, however, and Humboldt continues to identify local workers who then go through the apprenticeship program and reach journeymen status.

Humboldt has typically found these local candidates through word of mouth or walk-in applications for work. The screening is basic, with background and reference checks. Humboldt typically hires likely candidates for a brief trial period before sending them to apply for union membership. During that time they are paid at a rate equivalent to union scale with benefits. Only when Humboldt is convinced they have someone who is dependable, responsible, and reasonably likely to succeed in the apprenticeship program does it refer the person to the union.

Over its 30 years, Humboldt has employed an average of 15 carpenters at a time. Most of them were either hired at the journeyman level or successfully completed the four-year apprenticeship program to achieve that level. Assuming carpenters stay with the company for an average of three years, we can conservatively estimate that about 150 people have been employed at Humboldt in these skilled positions. From 1981 to 1990, Humboldt maintained a crew size of about 8 carpenters. That grew to 11 in the 1990s as the workload increased, with Humboldt serving as the general contractor on close to 200 residential units and acting as a carpentry subcontractor on two other large projects. Since 2000, Humboldt has maintained an average crew size of about 21 carpenters, completing over 650 units of housing as a general contractor.

Who are the people working for Humboldt? Overwhelmingly they are neighborhood residents, as Humboldt tries to adhere to a strict policy of hiring from the local community. About 3 percent have been white, 74 percent Hispanic, and 23 percent African American. Humboldt has been deliberate in its attempts to craft a workforce that reflects the population of the community, and has largely achieved that. And each of the predominant ethnic groups—Hispanics and African Americans—have been represented at all levels, including supervisory.

Slowly, Slowly Scaling Up

Bickerdike started off hiring Humboldt for jobs in its minor repair program and the rehab of small buildings, and Humboldt secured a couple of small private jobs. Having an “in-house” construction operation gave Bickerdike control over cost, quality, and scheduling, while using crews made up of all local residents. Right from the start the local employment benefit was realized: 100 percent of Humboldt’s carpentry crew lived in the community; no other qualified independent contractor would have created more than a handful of jobs for local residents.

The benefits in job quality and control were clear from the start, but also difficult to quantify. One problem many owners encounter with private contractors is scheduling: the contractors are either over-booked or weak managers of their own workload, resulting in delays and missed deadlines that cause frustration and often financial losses for the owner. At the very least, if Humboldt was going to be late on a schedule commitment, Bickerdike knew about it in advance and could plan accordingly.

Not long after Bickerdike proudly celebrated the completion of Phase I of its new rental housing in 1983, which had been built by a private general contractor, the property manager was distraught when residents of the apartments began calling with complaints of toilet roll holders that would fall off and closet doors that didn’t function properly. Small things, but the kind that give the new residents the impression that the people responsible for the work were sloppy, or just didn’t care about quality. In the end, the contractor on that project failed to make the necessary repairs or replacements on several items. Pete Landon, the architect on that project and many Bickerdike projects since, says Bickerdike could never have produced so much affordable housing over the years if it had been dependent on contractors like that.

Bickerdike and its joint venture partner decided to hire Humboldt to do all the repairs with funds withheld from the contractor’s final payout. Based on that relatively small contract cleaning up and completing a private contractor’s work, it was clear to Bickerdike—and its partners and funding agencies—that it had created a construction company that had as a core value getting the work done right and standing behind the quality of its finished product.

Nevertheless, Humboldt’s early growth was slow, and it was almost a decade before it became the primary contractor for Bickerdike’s larger projects.

One of the things that kept its growth slow in the early years was the challenge of hiring a manager. Bickerdike was committed to hiring an individual from the community who was bilingual and demonstrated a shared interest in the group’s mission. And at the same time it wanted to hire someone with good construction management skills. As is often the case when community groups seek to hire management personnel, it is hard to find all of those qualities in a single individual. Humboldt’s first manager lasted only a year, and for a couple of years the group returned to its earlier approach of having the lead carpenter serve as a sort of “superintendent,” with responsibilities that included running the work crews and managing the subcontractors, material deliveries, and overall job progress. This was less expensive than having a distinct manager who did not work on-site, but it also limited the enterprise’s growth, as a working superintendent has limited time to look at and bid on prospective work. After a few years Bickerdike again hired a manager to oversee Humboldt’s operations, but that person also lasted just a short time.

The weaknesses and turnover in the manager position in the mid 1980s had a significant impact on Humboldt’s early growth and capacity. First, as Bickerdike’s director, I was unable to pull back from active involvement in the management of Humboldt as long as we did not have full confidence in the abilities of its manager or his commitment to our core goals and principles. The first manager took on a project for a Bickerdike board member—a mistake from the start. When there were cost overruns that were clearly the fault of the construction company, the manager tried to pass those costs along.

Given our lack of confidence in how Humboldt was being run, we were reluctant to let it take on larger projects. Beyond management weaknesses, Bickerdike had also initially been timid about having Humboldt take on the general contracting role on its large developments for reasons of risk exposure: when a private general contractor signs a contract, it is assuming some of the risk for on-time delivery and cost; if Bickerdike were the developer and Humboldt the contractor, together they would be exposed to all of that risk. That reality never went away, but as Humboldt expanded its capacity and added experience, frustration with private contractors grew, and Bickerdike built up its cash reserves, the balance tipped toward taking that risk.

Humboldt expanded gradually. After the project completing the undone work of the private contractor on Bickerdike’s first large rental development, Humboldt worked on a commercial building Bickerdike purchased for office space. In the mid-1980s, a local bank donated a vacant six-unit apartment building to Bickerdike and the group decided this was a good opportunity for Humboldt to expand its operations into general contracting. The project was successful and came in within budget. Humboldt established itself as not only a competent carpentry contractor, but also as a general contractor, with the capacity to assemble and manage subcontractors to perform all of the mechanical and other trades outside the scope of its carpentry crews. It looked good from the outside, but the weak management was still an issue. This job was small enough that the carpentry foreman could really run the job site himself, but that wouldn’t be possible on a larger job. And even so, Efrain Vargas, Bickerdike’s long time project manager for housing development, and I put in a lot of time and effort covering for Humboldt’s manager.

So when Bickerdike placed a bid in the late 1980s to rehabilitate the 30-unit eponymous Humboldt Building (both the apartment building and the enterprise are named for the Boulevard that runs through the community), we saw this as a good opportunity for Humboldt to grow. At the same time Bickerdike realized that to take on the general contracting responsibilities for a project of this size, Humboldt would need new management, and that that manager had to be someone trusted by the organization.

Rather than risk another disappointing hire, Vargas assumed the additional role of Humboldt manager to meet that need. For the next two decades he served as director of housing development and of Humboldt Construction.

This contract—for about $1 million—was a major step up for Humboldt, and set the stage for it to take on all of Bickerdike’s future projects. Clearly, having the housing development and construction management roles combined—with property management also under Bickerdike—had worked well. It wasn’t until 2011, when Vargas retired after 30 years at Bickerdike, that the organization once again hired someone to be exclusively the Humboldt manager.

Since the mid-1990s Bickerdike has hired Humboldt Construction as the general contractor on all of its new construction and rehabilitation projects.

Does It Make Money?

There are two ways to measure financial success for a social enterprise—Does it further the mission without requiring grant support? And does it generate income for the parent organization?

Bickerdike never set out to earn profits from Humboldt, but it did expect to be able to sustain the construction operations from the revenues on jobs. This has been achieved. Humboldt has performed over $99,000,000 in construction work, mostly for Bickerdike, helping the parent effectively and efficiently manage its housing development efforts. And it has employed an average of 15 carpenters annually for over 30 years—all without relying on grant support.

Humboldt has technically lost money over the years, but the cumulative running total is about $155,000, a paltry 0.16 percent of gross revenues. And Bickerdike has invested in Humboldt beyond its original $34,000 stock purchase, providing much needed working capital. As of the end of 2011, Bickerdike’s total investment to date was about $970,000, including advances and covering Humboldt’s losses.

However, Humboldt has been paying Bickerdike for its share of administrative personnel and other expenses, and rent on its offices. The total paid to Bickerdike is almost $3.5 million; so after factoring in Bickerdike’s investments in Humboldt, it has earned some $2.5 million from the venture over the 30 years it has been operating. While these are not “profits,” per se, they represent earned income to Bickerdike, which helps support Bickerdike’s operating budget.

Bickerdike has three other “revenue centers” that earn income: housing development, property management, and commercial property rents. Bickerdike’s total annual operating budget—not including the gross income of these revenue centers—is about $1.8 million. The revenue centers combined contribute about 50 percent of that total.

Humboldt has been a significant contributor to Bickerdike’s budget, and at the same time it has relied more on working capital support than the other revenue centers. Still, it is a remarkable achievement for a nonprofit CDC to create the jobs and keep construction in-house without any public or private grant support, while at the same time helping sustain itself with fee income from the subsidiary.

Lessons

There are many lessons from the Humboldt story for CDCs looking into starting construction-related social enterprises.

  1. Know the landscape, and your market.
    Who is getting the kind of work you want to be doing now? What are the public policies and regulations and union agreements and goals covering it? What is the compliance burden (especially for government-funded work) and can you meet it? On what kinds of projects could you be competitive? Will the parent organization or a network of groups in the field be able to provide a steady level of guaranteed business on which to build?
  2. Identify others’ goals you can support while pursuing your mission.
    The union agreement worked because there were other advocates, as well as union members themselves, who realized that the union needed to diversify by bringing in new members from minority communities. Humboldt was able to get a long-lasting agreement that allowed it to pursue its own goals of local hiring by helping the union address its goals as well.
  3. Have sufficient working capital, and a source to get more.
    Working capital was and is one of Humboldt’s greatest challenges; not having it can really limit the amount and types of work you can get. Working capital can mean the difference between being able to scale up when you are ready and not being able to take advantage of those opportunities that come along. Humboldt’s relationship with Bickerdike was crucial on this front, and yet Humboldt still struggled at times with insufficient working capital. Parent organizations that are committed to their subsidiary social enterprise’s growth should think about their policies for working capital loans and repayment, and social enterprises should identify multiple sources.
  4. Scale matters.
    Once Bickerdike was able to develop its first project with over 100 units it was able to pursue its vision of one day growing the construction capacity to the point where Bickerdike could serve as its own general contractor on such large projects, responsible for most of the hiring decisions and exercising better control over the project. This scale also enabled Humboldt to grow in capacity, while providing fee income for Bickerdike.
  5. Don’t expect to turn a huge profit, if any. But don’t necessarily consider this a failure.
    Humboldt does not bring in a lot of profit. Sometimes it has even needed help from Bickerdike to cover gaps. But that does not make it a failure as a social enterprise. Humboldt has supported Bickerdike with rent and fees, entirely paying its own way even after working capital infusions from Bickerdike are factored in, not to mention that Humboldt renders Bickerdike a better service than other construction vendors. And it has achieved a mission goal—local job creation—without need of any additional grant money.
  6. A close relationship with the parent organization is a good thing…
    Shared administration and common leadership kept Humboldt’s mission front and center, and kept its growth closely related to what Bickerdike was ready to support. Bickerdike and Humboldt share and often express an explicit joint commitment to mission
    and values, while finding acceptable differences in approach and program. When a subsidiary strays from the parent’s values—whether related to social outcomes or operating principles—the enterprise can cause serious internal conflicts and damage the parent’s reputation in the community and among funders.
    …but remember business requires different skills and approaches also.
    One of Humboldt’s big struggles was with hiring people who were a good match for the parent, but lacked construction management skills. Business and mission don’t have to be in conflict; the skills and attitudes of both are needed. This makes hiring management a critical—and really challenging—part of the process.
  7. Be prepared to challenge clients’ perceptions of value and price.
    Bickerdike knows that Humboldt can save them money with predevelopment help and high quality work with few change orders. But that’s unusual enough that they appear “expensive” to others. Be prepared to have to make a serious marketing push that highlights your value; don’t expect your mission to earn you clients by itself.
  8. It’s tricky to measure construction job creation, but do it anyway.
    Construction pays well, but it’s inconsistent, often seasonal work. Think up front about how you will measure the employment you create—quality and quantity. How do you value helping someone step into a different union job, as compared to providing long-term year-round employment? If you have a steady and consistent measure, it will be easier to gauge progress on your employment goals. And if steady, year-round employment is one of your goals, you are likely going to have to aim for a fairly large enterprise.

This article was excerpted from a longer report on Humboldt Construction Company funded by the Annie E. Casey Foundation.

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