Detroit firms get 38% of Red Wings arena work

Of the more than $200 million in construction contracts awarded for the new Red Wings arena project so far, nearly $77 million will end up in the pockets of Detroit companies.

But the financial gains for Detroit companies, as tallied by the Free Press, are significantly less than the figures publicly reported by the Ilitch-owned arena developer, Olympia Development of Michigan.

Companies headquartered in Detroit or with offices here have been awarded about 38% of the arena contract amounts so far — a mark exceeding the Ilitch family’s promise to include Detroit companies in at least 30% of the new arena’s construction contracts, according to a Free Press analysis of 11 arena contract packages awarded so far.

By Olympia’s calculations, however, Detroit companies have received more than $126 million, or about 63%, of the $200 million worth of construction contracts. The developer has used this method to promote Detroit participation in the arena project through news releases and public appearances.

Public records show Detroit-headquartered businesses will end up with about $53 million. Detroit-based companies, which have operations in the city but corporate headquarters elsewhere, will get about $24 million. Companies outside Detroit will get paid about $124 million.

The contract recommendation forms reviewed by the Free Press are the same forms the Detroit Downtown Development Authority board evaluates before voting on arena contract packages.

Why are Olympia’s numbers higher?

Detroit companies got a boost under Olympia’s method because subcontracts to companies outside Detroit were not deducted when a Detroit company is labeled the prime contractor.

For example, the contract for arena structural steel is valued at $50.7 million. The prime contractor is Midwest Steel, a Detroit-headquartered business that will get $18.1 million of the contract. Subcontractors for the job include eight companies outside Detroit that will get $32.4 million and one Detroit-based company that will get $190,000.

Yet, according to Olympia’s figures, 100% of the arena structural steel contract is being handled by a Detroit company (Midwest Steel), even though most of the work and money will go to companies from outside the city.

This method of counting Detroit participation is memorialized in a contract governing the arena development between Olympia and the Detroit Downtown Development Authority, the public body that will own the arena and lease it to the Red Wings for free.

Another example of a Detroit business getting a statistical boost is the arena’s $16.8-million mass excavation contract. A Detroit-headquartered business, Blaze-Iafrate JV, is the prime contractor and will end up with $6.3 million of the contract. The rest will be handled by four subcontractors from outside Detroit. Again, Olympia counts this contract as being handled 100% by a Detroit business because Blaze-Iafrate is the prime contractor.

However, the same formula is not used when a contractor outside Detroit is the prime contractor. In those cases, sub-contracts awarded to Detroit companies are included in Olympia’s calculations to reflect the participation of local businesses.

‘Doing it by the book’

Douglass Diggs, a workforce participation consultant Olympia hired for the arena project, said the developer’s method for tracking participation by Detroit businesses is consistent with how the Detroit Downtown Development Authority measures it.

“From a calculation standpoint, I am confident we are doing it by the book,” Diggs said Friday in an interview at Olympia’s offices. “I think that our goal is to continue to grow Detroit businesses.”

Diggs’ company, Heritage Development Services, has a $1.9-million contract with Olympia for work related to the arena. Prior to working in the private sector, Diggs was director of the city of Detroit’s planning and development department.

While Diggs and the DDA stand behind Olympia’s calculations, the executive director of the Michigan Minority Contractors Association, Jason Cole, said the developer’s method is a commonly-used technique that inflates true inclusion of Detroit companies.

“No, that’s not proper by any stretch of the imagination,” Cole said. “But I know how the game is played.”

The arena’s construction budget is about $248 million. The total budget, which includes costs for architects, engineers, legal fees and land acquisition, is $533 million, according to a spreadsheet of costs the Free Press obtained under the Freedom of Information Act.

Many of the architectural, engineering, legal firms and other companies hired to work on the arena project are not from Detroit. But those contracts are not included in any calculation of Detroit firms doing construction work on the arena.

Construction companies fined

Only construction contracts are subject to scrutiny of where the companies doing the work are located, per the contract between Olympia and the DDA.

Though Olympia appears to be meeting its goal to hire Detroit companies, some of those companies so far have failed to reach the developer’s goal when it comes to employing Detroiters.

Olympia has committed to hiring Detroit residents in at least 51% of the arena’s construction jobs. Companies that do not meet the standard can be fined. Detroit’s human rights department has two compliance officers who monitor the arena construction site five days a week, checking to see how many hours are worked by verified Detroit residents.

From April to June, the first three months of construction, Detroit residents have worked 50.9% of the 23,675 labor hours at the site, according to city records.

Three of eight contractors monitored were not fined because they were in compliance with the residency requirement, according to Portia Roberson, the city’s group executive for human rights and ethics.

The others were fined more than $28,000. The money will be put toward scholarships for apprenticeship programs and materials for training programs.

Hardman Construction was fined $22,159; Dore Construction was fined $4,612; Blaze-Iafrate JV was fined $591; Quality Re-Steel was fined $551; Spalding DeDecker was fined $218; Blaze Construction, DMC Construction and Rohrscheib were not fined.

“I think we’re doing well,” Roberson said. “We’re not completely where we want to be ... there is that learning curve for any contractor or subcontractor to give us their numbers and to realize we’re actually going to verify those numbers and if necessary assess penalties around those numbers.”

Communication is key

Construction of the arena is backed by $250 million in bonds to be repaid in property taxes collected within the DDA district downtown. Olympia Development of Michigan is responsible for repaying an additional $200 million in bond proceeds. The Red Wings, owned by Mike and Marian Ilitch, will keep all revenue from arena operations.

The DDA approved the most recent batch of construction contracts last week.

Detroit corporation counsel Melvin Butch Hollowell, who chairs a DDA subcommittee that reviews contracts, said it is important to continue informing Detroit businesses about opportunities for work on the arena project.

“Clearly we want to make sure that the price is competitive, that the quality is there,” Hollowell said at last week’s DDA meeting. “But we also are pushing real hard in terms of participation of long-term Detroiters.”

The arena is under construction at a 12-block site in the Cass Corridor and is scheduled to open in September 2017.

Olympia’s commitment to include Detroit businesses in at least 30% of construction contracts is based on an executive order Mayor Mike Duggan issued last year that supersedes similar executive orders issued by former Mayors Dennis Archer and Kwame Kilpatrick.

Duggan’s executive order directs city departments to set goals to award Detroit-headquartered or Detroit-based businesses 30% of the total dollar value of city contracts.

Contact Joe Guillen: 313-222-6678 or jguillen@freepress.com. Follow him on Twitter @joeguillen.