The main T-REX builder asked concrete giant Aggregate Industries to share its work with a minority-owned company in order to satisfy a large chunk of the $1.7 billion project’s hiring goals.
David Armendariz saw it as a shot at the construction-industry big time for his tiny Delta company.
But the three-year partnership of Aggregate and Armendariz – one that both sides say was born of good intentions – is dissolving amid allegations it became a sham.
A government audit determined that the $39 million arrangement between Aggregate and Armendariz was really a “pass-through” in which Armendariz’s two-employee company served as a Latino-owned front that padded the project’s state-mandated minority-hiring goals.
For a time, the setup allowed T-REX prime contractor Southeast Corridor Constructors to count the money Armendariz was paid toward the project’s $177 million goal in contracts for minority- and women-owned businesses, known as DBEs – disadvantaged business enterprises.
And while none of the three companies has been accused of breaking the law, and all insist the concrete work on the huge I-25 project was not compromised, the failed partnership has had repercussions for all involved.
No winners in the mix
Armendariz Construction is in bankruptcy proceedings for business decisions unrelated to T-REX, but the loss of his Aggregate contract will likely close his business. Great Britain’s Aggregate Industries got a black eye for creating and controlling the arrangement with Armendariz. And SECC had to scramble to find other minority- and women-owned businesses to take on parts of the T-REX job or risk up to $12 million in fines for not meeting the goal.
Armendariz says he was just a patsy with the right last name and skin color.
“I guess I just wasn’t a good minority,” Armendariz said as he emerged from a bankruptcy court hearing last month, unnerved that his business might not survive.
“I wanted things to go right, so I didn’t rock the boat. … I wanted to be a viable partner instead.”
SECC says the entire issue is merely a hiccup on an otherwise stellar project, not enough to cause concern. Nearly 140 DBE subcontractors so far have been paid $159 million on contracts with a value of $186 million, T-REX officials said.
Aggregate lawyers say they were only trying to mentor a small business, an effort that just didn’t work out. Besides, Aggregate regional president Patrick Ward said, an official at T-REX “sanctioned” the deal beforehand, an assertion T-REX leaders deny.
Armendariz was state-certified only as a DBE concrete hauler, known as a “provider.” Under the rules, T-REX officials say, he never should have received DBE credit for work as a producer or manufacturer. Aggregate officials say they see no difference.
But Aggregate took credit for Armendariz as both a concrete producer and hauler, even though his company leased nearly all its equipment and employees from Aggregate, did little of the work and was in charge only on paper.
Late last year, T-REX officials ordered every dollar credited to Armendariz – more than $22 million at the time – discounted from SECC’s DBE tally, a huge hit that took SECC and subcontractors months to make up on other parts of the job. The remaining $17 million Armendariz was supposed to get under the contract also was scratched from consideration.
An Aggregate official said company officials have accepted T-REX’s decision despite the company’s objections to the audit findings.
“There are quite a few things in the audit we don’t agree with,” said Ward, who is based in Golden.
Apart from the mathematical deductions, no other punishments were issued.
“I’m not blaming anybody,” said Laurence Warner, T-REX project director who works for the Colorado Department of Transportation. “We took action, and we’re moving on.”
Armendariz said he was scared to unveil the truth behind his deal with Aggregate. Though it looked like he was in charge, his corporate benefactor was actually running the show.
To speak up would have meant risking the loss of his business in a cutthroat industry.
Now he faces certain bankruptcy if Aggregate can convince a judge that it should be allowed to dump Armendariz.
“A big hill to climb”
It started simply: T-REX prime contractor SECC – a joint venture of construction behemoths Kiewit Construction and Parsons Transportation Group – hired British-owned Aggregate, one of the world’s largest concrete makers, to provide the roughly 1 million cubic yards of concrete T-REX would devour. Cost: $47.6 million.
In bidding the job, Aggregate pledged to use some minority- owned companies to help with trucking the concrete.
But with a need to award more than $177 million in contracts to minority- or women-owned businesses, SECC wanted more from Aggregate. They suggested a short list of DBEs that could work with Aggregate and share the concrete production, said former Aggregate regional president Jim Ad dams, who helped negotiate the deal.
“They had a big hill to climb,” Addams said of SECC’s $177 million goal, “You can’t do it with baby steps; you needed big steps.”
Though Armendariz had just two employees – often his son and son-in-law – Aggregate hired the company to make much of the concrete for T-REX.
Anxious to please, Aggregate negotiated a $39 million deal with Armendariz, and SECC agreed to pay an additional premium to have the minority company on the job – roughly a $2 million thank-you that was to go directly to Armendariz in the form of a $1.50-per-cubic-yard surcharge.
Armendariz agreed to buy or lease a number of critical components directly from Aggregate: the stone and materials to make the concrete, the portable plant Aggregate owned to mix it, and the employees to supervise and deliver it.
The cost: $39 million.
For his own pocket, Armendariz was to get the $1.50-per- yard surcharge SECC was paying. He contends he was to be paid even more, up to $10 a yard, because the cost to make the concrete was less than what buyers paid.
But while SECC was crediting a DBE for doing the work, Armendariz said Aggregate wasn’t letting him manage the project. Aggregate was doing it all.
Armendariz’s name appears on every permit, on every invoice, on every contract for concrete associated with the small production plant Aggregate set up at South Santa Fe Drive and West Mississippi Avenue.
But the two employees of Armendariz, the company that once had 20 employees to produce concrete for Invesco Field at Mile High, were reduced to doing little more than sweeping floors and pushing buttons, Armendariz said.
Hardly in charge
DBEs are required by federal regulations to supervise, manage or perform a job in order for the money they are paid to count toward hiring quotas. This is known as a “commercially useful function.” DBEs cannot be figureheads or a “pass- through” to make it appear as if they are working.
Aggregate officials said they intended to let Armendariz run the plant, but after a series of missteps by the junior partner, they had to take over or risk a financial disaster.
Armendariz disputes that account, saying he never got a chance to prove himself, but kept quiet anyway.
“What can I say?” he said. “I needed the money.”
Eventually Aggregate also credited Armendariz – and the all-important DBE quota – for producing T-REX concrete that came from other Aggregate plants, according to the government audit.
SECC project director William Murphy insists Armendariz’s deal had been approved by T-REX officials. “That’s why SECC agreed to it,” he said. T-REX records contain no documents reflecting that the arrangement was authorized.
Addams, now president of Aggregate’s southwest operations in Las Vegas, said he sought T-REX approval because he was nervous about the arrangement.
“It’s too ripe for fraud,” he said. “I was leery of it because I’ve seen so many go bad.”
But T-REX boss Warner said the agency overseeing the project – a consortium of CDOT and the Regional Transportation District – never agreed to anything.
“We don’t give seals of approval on any subcontract. The only person that can provide that direction is me, and I didn’t.”
SECC and Aggregate said it was T-REX employee Lavonna Stathes who gave the thumbs up. Stathes, the project’s DBE compliance officer, later was part of the eight-person audit team that determined the Aggregate-Armendariz deal was improper.
“I explained to them the regulations and what needed to happen generally for them to be in compliance and get the DBE credits,” Stathes said of her 2002 meetings with SECC, Aggregate and Armendariz.
When Aggregate lawyers eventually asked her to approve the final subcontract, Stathes said she refused.
“I don’t approve subcontracts, and I gave it back,” she said. “That’s the last I heard until we did the audit.”
Meeting DBE participation goals is important to SECC not only because it ensures that disadvantaged businesses can compete for work fairly, but also to avoid the state fines for failure.
The companies that worked with SECC on T-REX try to foster ongoing relationships with DBE firms. This tends to help them land future jobs that also have minority-hiring quotas, contractors said.
“I’ve found generally when you help people, they’re appreciative,” Addams said of why his company agreed to take on Armendariz. “It could mean other work.”
Additionally, Addams said, the intent on the T-REX project was to foster a mentoring relationship with Armendariz in order to compete for lucrative contracts in downtown Denver. But CDOT records show that neither Armendariz nor Aggregate registered for CDOT’s normal mentoring program.
“Too trusting”
Good intentions aside, because Armendariz did not supervise or do the work himself, the arrangement ran afoul of federal regulations that require DBE firms to perform a “commercially useful function.”
“If David Armendariz was managing and supervising the operation of that plant, then it probably would have been fine,” Warner said.
But it didn’t stop there.
Auditors found that Aggregate took DBE credits for concrete that the company sold to other T-REX subcontractors, even though Armendariz had no involvement with it.
Since federal law was tightened in 1999 to prohibit the kind of pass-through arrangement Aggregate and Armendariz had, several companies have been convicted of manipulating the DBE program. But no one’s gotten into trouble on T-REX, a project partially funded by federal dollars that has been scandal-free since it began in 2001.
Local federal highway officials monitoring T-REX said they decided not to inform the U.S. Department of Transportation’s office of inspector general about the Armendariz audit.
The reason: “I didn’t think it rose to the level,” said Doug Bennett, assistant division administrator for the Federal Highway Administration’s Denver office. “It’s not like we’re paying for something we’re not getting.”
Bennett said he was satisfied with the penalty T-REX officials imposed on SECC: discounting the $22.6 million credited toward the hiring goal, and forcing the company to find other DBEs to make up the shortfall.
Everyone involved in the arrangement remains on the job today. Only Armendariz faces expulsion.
Since T-REX ruled SECC can’t take DBE credit for Armendariz’s work, and SECC has stopped reimbursing Aggregate the $1.50 premium, the concrete giant has no use for the little company.
A bankruptcy court hearing is scheduled for Thursday to determine whether Aggregate can cancel its T-REX joint venture with Armendariz.
“They set up Armendariz, trying to fool T-REX that they had a DBE in place,” said Philipp Theune, Armendariz’s bankruptcy lawyer. “Now that they’ve been caught, they want to dump Armendariz to the side. Their hands are not clean in all this.”
On the brink of shuttering a business he built from scratch, Armendariz said he’s bitter about the experience:
“I guess I was just too trusting for all of this.”
Staff writer David Migoya can be reached at 303-820-1506 or dmigoya@denverpost.