Out of Bounds?

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Out of Bounds?
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For North Hollywood-based Armorcast Products Co., competing with out-of-area companies for Los Angeles city contracts has been rough going.

The maker of traffic signal boxes and other encasements has to contend with some of the highest labor costs and business taxes in the country, which put it at a distinct disadvantage against companies based outside the region.

But the city awards contracts to the lowest qualified bidder.

“It puts us at an extreme disadvantage due to the sheer differential in the cost of doing business,” said Sydney Chase, vice president of business development for Armorcast.

That’s why Armorcast, owned and operated by father H. Paul Boghossian and son Paul H. Boghossian, other locally based city contractors welcome a proposed ordinance that would give companies with headquarters or operations in Los Angeles County a leg up in the bidding process.

But some companies outside the county say the ordinance would cripple their ability to bid or renew city contracts.

“I would have to cut my bid costs by 8 percent just to match this,” said Mladen Buntich, chief executive of Mladen Buntich Construction Co. in Upland. “And right now, I’m bidding the work at cost.”

The so-called local bid preference ordinance, introduced earlier this month, would give qualifying local companies an 8 percent advantage in bidding on city contracts. The ordinance could get City Council approval before the end of the year.

The preference could come in two forms: The 8 percent discount means that a local company’s bid of $1 million would be considered as if it were $920,000; or when the bid is in response to a request for proposal in which bidders are awarded points, a local business that got 100 points would be given an additional eight points for a total of 108.

Other cities

Several other cities in Los Angeles County have local preference bidding provisions: Long Beach, Palmdale and Santa Clarita have 10 percent preferences for local companies; Pasadena’s is at 5 percent. Redondo Beach is considering adopting a local bid preference ordinance.

Other major U.S. cities also have local preference provisions, mostly at 5 percent, including San Francisco, Cleveland, Milwaukee and Philadelphia.

Los Angeles officials say the local bid preference ordinance would keep more of the city’s procurement dollars in the local economy, creating more jobs. Currently, they say 84 percent of its $1.1 billion in annual procurement dollars are spent with businesses outside the city.

“This local preference ordinance could mean more than 10,000 jobs in Los Angeles,” Mayor Antonio Villaraigosa said on a recent “Ask the Mayor” segment on KABC (Channel 7), referencing a recent USC study on the job creation potential of such an ordinance. “Right now, with our struggling economy, we have to create as many local jobs as possible.”

But contractors outside of L.A. County are fuming. They say this ordinance unfairly penalizes them just because they have no offices in the county and they would be disinclined to bid on future contracts.

“This will absolutely hurt my company,” said Buntich in Upland, which has supplied pipeline casings and other infrastructure-related equipment and services to Los Angeles city agencies for 35 years. Upland is just across the line in San Bernardino County, so the company likely would not qualify for the local preference, although the final language of the ordinance hasn’t been finalized.

“If this passes and I find out that a Los Angeles company is bidding, there’s no point in me bidding,” he said.

Last year, Mladen Buntich had $17 million in contracts with the city, according to data obtained from the City Controller’s Office for the Business Journal’s annual list of largest city contractors. Buntich said that more than half of the company’s employees live in Los Angeles County, so much of that $17 million goes back into the local economy.

Critics of the ordinance said the possible loss of longtime contractors like Mladen Buntich is one of several problems they have with local preferences.

“It’s a counterproductive policy that is based on a false myth, that companies headquartered out of state that receive a city contract do not hire people locally,” said Leonard Gilroy, director of government reform for the Reason Foundation, which advocates for privatizing government services.

He said that a local preference as large as what Los Angeles is considering would likely scare away a large numbers of nonlocal contractors.

He added that some local contractors, knowing that they would receive an 8 percent discount, might submit higher bids than they would have otherwise.

“This could take some cost savings off the table,” he said. “At a time when the city is looking for every opportunity to save money, this is like shooting yourself in the foot.”

No ‘mass exodus’

But city officials say those criticisms are exaggerated.

“Are there some (out of county) contractors who might decide not to bid? Maybe,” said Austin Beutner, first deputy mayor and the city’s unofficial jobs czar. “But many other large cities have local preference ordinances in place and they haven’t experienced a mass exodus of contractors. They adapt to the new market conditions.”

Councilman Paul Krekorian, one of the authors of the proposed city ordinance, said he’s aware the city might lose some longtime contractors, but believes it’s more important to help local companies.

“There are many small businesses in the San Fernando Valley that are losing contracts to companies in Texas that have lower costs of doing business,” Krekorian said.

Beutner said that if companies really wanted to get city contracts, they should try to meet the ordinance requirements.

“To those companies, I issue this challenge: If getting an L.A. city contract is so important, then you should consider basing your business in L.A., opening an office in L.A. or hiring more people in L.A.”

Many city contractors have already done this, such as Carlsbad-based Petrochem Manufacturing Inc., which last year supplied $11 million worth of asphalt and pavement to Los Angeles. Petrochem has a plant in South Gate, so it would likely qualify as a local bidder under the proposed city ordinance.

“Assuming that we qualify, this ordinance would help us greatly as we go up against bidders from out of state and out of the country,” said Michael Burris, co-owner of Petrochem. If the company were to get more city contracts, it would have to ramp up local operations.

“We would definitely hire more people in South Gate,” Burris said.

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Howard Fine
Howard Fine is a 23-year veteran of the Los Angeles Business Journal. He covers stories pertaining to healthcare, biomedicine, energy, engineering, construction, and infrastructure. He has won several awards, including Best Body of Work for a single reporter from the Alliance of Area Business Publishers and Distinguished Journalist of the Year from the Society of Professional Journalists.

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