Dive Brief:
- Contractors that work with the city of Chicago have been asked to trim their invoices to the city, according to a letter the city’s procurement office sent businesses last month.
- A copy of the letter, signed by Sharla Roberts, Chicago’s chief procurement officer, asked vendors for a price reduction of at least 3% off all invoices sent to the city for the next 12 months regarding any contracts they currently hold as a prime contractor.
- The letter shocked the city’s construction industry. Jacqueline Gomez, the executive director of the Hispanic American Construction Industry Association, located in Chicago, said that the request wasn’t evenhanded, given that contracts have already been signed. “We don't think it's a fair ask,” she said.
Dive Insight:
Henry Lopez, the president of Chicago-based Accel Construction, said his company has performed jobs for the city for a little over a decade. Accel gets as much as 70% of its business from public contracts.
When he first received the letter, he initially thought it was a joke. He said that his company’s profit margin is often 3%.
“To ask for, essentially, 100% of our profits back is an insult,” Lopez said. He told the city he wouldn't be changing anything, and that he has yet to have a conversation with any other construction pros who would participate.
The March 16 letter didn’t describe the specific economic conditions that precipitated the request — however, the city is facing a $175 million budget shortfall due to a failure by Chicago Public Schools to reimburse the city for pension payments, according to local news outlet ABC7.
It also raised taxes and fees on parking, streaming services and grocery bags to help close a larger, $982 million gap from its $17.1 billion budget, which was passed in December.
Sheila Marionneaux, director of public affairs for the city’s procurement department, said that it’s regular practice for municipalities to search for cost savings across different budgets in times of urgent need.
“The purpose of the cost reduction request to vendors is the rollout of the budget commitment to support the department budget goal,” Marionneaux said in an email.
Gomez said that the city has made similar requests for price reductions in the past, under the administrations of former Mayors Rahm Emanuel and Richard Daley, but not without giving a warning first. But doing so now puts contractors in an almost impossible position, she said, “particularly of small businesses that feel that, ‘If I don't do it, will I get future work?’”
The letter states that the city would appreciate a response “even if you are not able to accommodate the request at this time.”
Gomez warned that the request, should vendors comply, could put small businesses under significant financial strain. If a prime contractor takes the 3% cut and they funnel it down to their subcontractors, Gomez warned, already thin profit margins could dwindle further.
“We’re talking about small businesses potentially going out of business,” Gomez said.
