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Martinez questions weatherization contractor’s business model

Monday, August 16, 2010 by Josh Rosenblatt

One of the six primary vendors doing business with the city as part of Austin Energy’s weatherization assistance program is under increased scrutiny after the Council’s MBE/WBE and Small Business Advisory Committee expressed concern about its business model.

 

The company in question, Go Green Squads, is a general contractor for energy efficiency in Austin. It is one of six companies awarded a contract with Austin Energy to weatherize homes as part of the federal government’s American Reinvestment and Recovery Act. Under the guidelines of the two-year program, Austin Energy will provide weatherization services to households at or below 200 percent of Federal Poverty Income, up to $6,500 per home.

 

The controversy concerns the company’s use of subcontractors. Of the six vendors doing business through the program, only Go Green Squads is employing a “total subcontract” model, using subcontractors for the entirety of the job for which they have been contracted.

 

Mayor Pro Tem Mike Martinez told the committee that he wanted to address the issue because he was concerned that the total subcontract approach is an unsustainable business model and could lead to the mistreatment of subcontractors.

 

“The concern isn’t specific to minority participation,” he said, “it’s just a bad business practice in my opinion. And I don’t know why we as a city would enter into an agreement with a contractor who would employ such practices. It seems like we’re lending ourselves to some issues if we don’t address this now.”

 

Karl Rabago, Austin Energy’s vice-president of distributed energy services, told Martinez that though his office and the Small and Minority Business Resources Department were keeping an eye on the situation, the utility has little jurisdiction over the contracts vendors have with their subcontractors, outside of their compliance obligations. “We don’t have contracts with our subcontractors, only the prime (contractors),” he said. “We don’t a have legal basis for entering into their legal terms. Our contract doesn’t call us to review all our payment practices.”

 

“We’re going to stay on top of it,” he said.

 

“So are we,” Martinez said.

 

Veronica Lara, director of SMBR, told In Fact Daily that Go Green Squads’ total subcontract model was brought to her attention by a subcontractor who had chosen not to do business with the company. Rabago said he believes that the dispute, therefore, probably has to do with profit margins.

 

“Federal weatherization contracts are not like typical construction contracts,” he said. “They’re fixed amount, fixed things you can do determined by an audit, fixed amounts that we can pay according to a schedule. They are capped at the top, so there are very tight profit margins.

 

“Most of the companies doing this are doing most of the work themselves. You’re passing down all the profit if you’re only using subcontractors. Most do some of the work themselves so they can keep the profit. That’s the challenge in a fixed-price contract. They can’t just bid higher. There’s no give in this federal work. It appears the dispute over the margin is straining things.”

 

Susan Meredith, co-founder of Go Green Squads, said that her company’s business model, despite the concerns of the committee, works well both in terms of the energy-efficiency industry and the federal weatherization program. “Our approach is we’re growing the energy-efficiency industry and we have to make a model that works for everybody,” she said. “People in this industry like to work for themselves and we feel like we’re really supporting the whole MBW/WBE intention by using small subcontractors. We find our subcontractors and us are all happy with it and it seems to be working.”

 

One of Martinez’s main concerns is that Go Green Squads takes 35 percent of the profits from the weatherization jobs without “doing any work.” Meredith takes issue with that claim, saying that she starts at 65-35 but adjusts contract terms to fit the needs of her subcontractors. “You can’t change the prices with these federal contracts,” she said, “so we work it through case by case with our subcontractors.”

 

She also said she had had a dispute with a potential subcontractor who chose not to work with her company when that subcontractor learned about the total subcontract approach.

 

“We did a good-faith effort to look for subcontractors in the small minority businesses,” she said, “and when we talked to one that responded they basically said that we should give all of the money from Austin Energy to them. We can’t do that. I think that person really doesn’t understand how business works. It’s recognizing the amount of overhead there is for this program. You’re dealing with city, state, county, and federal, and all of them have their paperwork. Every single one has their checks and balances.”

 

Her company’s job, she said, is to navigate those checks and balances and, in the process, provide work for local businesses. “We are providing work for a bunch of different subcontractors. We have six subs and we’re giving them business. It’s perfect for what this program is about. There is no way the subcontractors could handle all the paperwork.”

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