Promises Not Kept? Some Small Businesses Say High-Speed Rail Has Cost Rather Than Benefited Them

Central Valley Small Business advocates say the High-Speed Rail projects delays and failures to obtain proper rights of way before beginning construction have nearly put companies out of business.

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The promise of an economic windfall for small businesses has instead put a handful of companies on the brink of financial ruin, according to several Central Valley contractors working on California’s multibillion-dollar high-speed rail project.

“They had, quote unquote, promised us a whole lot more work on this high-speed rail,” said Kristin Nelson, corporate secretary for Bill Nelson General Engineering Construction, Inc. “We were way in over our head. We had to get rid of everything if we were going to survive (financially.)”

Nelson said her father’s company had to sell off dozens of road graders, earth movers, loaders, water trucks, crew trucks and more to avoid going out of business after the company failed to get paid what they were promised.

The family’s general engineering construction company has been doing wet and dry utility work on projects large and small based out of their headquarters south of Fresno. The company was started by Nelson’s grandfather, in 1954.

After initially signing a contract in 2017 with DragadosFlatiron Joint Venture to complete subcontract work on the high-speed rail project Nelson’s father, Bill Nelson, said his investment hiring more manpower and buying new machinery all sat idle because high-speed rail authorities did not obtain the proper rights of way to actually begin construction.

“We signed the contract for $2.2 million, and we got started off (hiring and) putting one crew on” the high speed rail project Bill Nelson said.

Bill Nelson says that most of that promised work never materialized.

“Not one work order that we ever did, did we ever complete it. Not one,” Bill Nelson said. “We (gave) them some quotes (for contract work) of up to about $30 million worth of work. None of that ever came to fruition.”

California’s High-Speed Rail Authority “just never had the permission for right of way,” said Kristin Nelson. “And so, you would go out there and expect to perform the work and it was never ready for what work you were supposed to be doing.”

As for the work the company actually did perform, Kristin says it took up to seven months for the money to funnel down from the state, to DragadosFlatiron Joint Venture, and then finally to Nelson’s bank account.

And when the progress payments did arrive, Kristin says the checks didn’t cover the company’s costs.

“We receive(d) a little over $5,000,” said Kristin – far less than the $60,000 they were expecting. “As a construction company, you have more than one job. But this was a big one that we were truly banking on.”

NBC Bay Area reached out to Dragados/Flatiron for comment. A company spokesperson responded with a statement: “The Dragados/Flatiron Joint Venture values its relationship with all of its contractors and suppliers, especially the small business enterprises working on the Project, and makes payments within the timelines agreed between the joint venture and the respective contractor or supplier.”

Nelson Construction isn’t the only small business to struggle with idle crews, late payments or other compensation issues.

In January 2018, another small business, West Pacific Electric Company Corp., filed a federal lawsuit against Dragados/Flatiron alleging very much the same issues facing Nelson Construction.

In its answer to the federal lawsuit, lawyers for Dragados said the company wasn’t to blame for CA High-Speed Rail Authority’s failure to obtain the proper right of way and that West Pacific still had to honor its obligations.

According to the lawsuit filed in the US District Court for the Eastern District of California, West Pacific Electric was hired on as a subcontractor on the high-speed rail project. The suit says West Pacific invested more than $2 million to ramp up for the work but then couldn’t make the deadlines signed in its contract with Dragados/Flatiron because the High-Speed Rail Authority didn’t have the rights of way to the land where the work was to occur.

It’s a pattern and problem David Mendoza said he’s seen again and again. Mendoza serves as Project Manager at the Minority Business Development Agency, a division of the US Department of Commerce, in Fresno.

“Very few (companies) are getting paid on time,” Mendoza told NBC Bay Area’s Investigative Unit.

Mendoza says many different business owners in the Central Valley tell him the same story.

He says that all of the companies he’s heard from are subcontractors who couldn’t put their crews to work because of failure to obtain right of way, who got paid late by the prime contractors, or who, in some cases, didn’t get paid at all.

A handful of other companies, Mendoza says, are close to declaring bankruptcy like Nelson Construction almost did.

“Several, not just one or two. Several,” Mendoza said. “Their (payments are) being delayed or not paid (at all.) And a couple (of companies where it’s) been over a year without being paid.”

HISTORY OF PROBLEMS FOR SMALL BUSINESS

“That's an issue, because if you take six months to get paid, it doesn't matter when the payment comes through, you're out of business,” said Frederick Jordan, president of F.E. Jordan Associates, a San Francisco based civil engineering firm that has helped build 35 different large public transit projects.

Jordan also serves on California’s High-Speed Rail Authority’s Peer Review committee for the state Legislature.

In 2010, Jordan helped launch a civil rights investigation into high speed rail’s hiring practices with the Federal Railroad Administration.

Through that effort, “I found out they had zip minority almost zip small business, zip, meaning zero,” said Jordan.

As a result, the FRA told CA High-Speed Rail in a letter dated Sept. 15, 2011, to establish a program to help ensure fair hiring, and that “The CHSRA (California High-Speed Rail Authority) must establish a Business Advisory Council within 60 days of the issuance of this letter to better communicate issues and concerns of the small and disadvantaged businesses to the CHSRA Board” and “must also address: prompt payment of subcontractors by prime contractors and timely resolution of the payment issues.”

But Jordan believes the High-Speed Rail Authority has yet to fully address these problems plaguing small and disadvantaged businesses on this project.

“That bothers me. I mean, that (not being paid on time) is an enormous problem,” said Jordan. “Sometimes I can’t sleep at night you know even though I’m not even a contractor with (High Speed Rail.)”

Brian Kelly, chief executive officer of California’s High-Speed Rail, acknowledges the project got off to a rocky start because many of the construction contracts were awarded and actual work started before all the proper rights of way had been obtained.

“I can’t tell you it didn’t play a role,” Kelly said. “I mean look, the right of way issue, after we’re already in construction (phase) is problematic.”

“Those (problems of subcontractors sitting idle) did happen. But I think that's not so much the case anymore,” said Kelly. “On our first construction package, we (now) have about 90 percent of the rights of way in hand. Overall for the entire program we now have about 75 percent in hand. There are enough places to work for our contractors now. So, our message, (to contractors and subcontractors is) ‘get to work.’”

As for the claims by subcontractors that they aren’t being paid as their contracts spell out and that some have nearly gone bankrupt: “That is disturbing, so I would like to understand what that problem was,” Kelly told NBC Bay Area’s Investigative Unit.

But Kelly insists things have improved and said California’s High-Speed Rail Authority now pays its bills and on time. Any disputes now, Kelly said, are between contractors and subcontractors, which he said it’s typical on a huge mega-construction project such as high-speed rail.

“High Speed Rail has something like 31 straight months of no late payments. So let’s be very clear about that,” Kelly said. “Now these are disputes largely between contractors and subcontractors. And we are hearing from the small business folks on that, and we will try to work with the contractors on more timely payment between the contractors and the subs.”

Kelly says he’ll do what he can to help but is constrained by rules that leave disputes between contractors and sub’s to be resolved between the companies, with an arbitrator or in court.

“We will work with the contractors in the small business, guys trying to figure out how we can do better on this payment,” Kelly said. “But it's important that the public understand the High-Speed Rail Authority itself is paying its bills and it's paying its bills on time.”

David Mendoza said that unlike other state agencies like Caltrans where subcontractors who don’t get paid can’t go directly to the state, in the case of high-speed rail because of the way the project was set up, subcontractors don’t have that remedy.

Mendoza said that should change, that the California Legislature should change those rules.

“I mean, they are the owner of the project. They should be able to dictate policy to the (prime contractors),” Mendoza said. “They don't seem to be able to do that. I'm very frustrated, very frustrated with the lure of local jobs to the Central Valley with the high-speed rail of opportunities, even going through all the hoops of doing the bonding, all the necessary of building it, which is very time consuming, expensive land in the work, and then having given the runaround on the project and then not getting paid.”

High speed rail construction at the San Joaquin River Viaduct

LESSONS LEARNED?

As they map out the next segment of construction to take the project into Bakersfield, Kelly says he will make sure his team will only hire contractors to begin construction only after the High-Speed Rail Authority either buys the land or obtains the proper rights of way.

“We care a great deal about our small business team members that we advocate for,” Kelly said. “We have a very high goal relative to other state agencies of 30% in one area (of construction) we’re at about 29% (small business participation.) And in another area (of construction), we're at about 17% (small business participation.) So, we've got work to do to always get better at that.

“We will work with the contractors and the small businesses,” said Kelly, “trying to figure out how we can do better on this payment issue. But it's important that the public understand the High-Speed Rail Authority itself is paying its bills and it's paying its bills on time.”

Tuesday, Kelly reported to the Board of Directors that the Authority reached a settlement with Dragados Flatiron/Joint Ventures to pay the company $133.9 million for delayed payments due to the agency’s failure to secure rights of way for construction.

Any improvements in payment or timely work schedules comes too late for small business owners like Bill Nelson.

“It seems like there’s an awful lot of money going out there someplace that you can’t see any end result there,” Bill Nelson said. “It sure as hell is not going to me.” 

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