$3.7M extra paid in Detroit's blight fight
A controversial deal between Detroit’s land bank and several large contractors designed to speed up demolitions at a set price instead ended up costing the city at least $3.7 million more than expected, according to records reviewed by the Free Press.
Contracts awarded last summer to major demolition companies rose above what the Detroit Land Bank Authority said were take-it-or-leave-it prices, records show. The land bank approved the higher payouts, which the demolition companies submitted as change orders — extra billings to cover costs in excess of the set price for each home demolition.
The higher costs meant fewer blighted eyesores would be torn down with the $20 million spent on contracts with three demolition companies. The contractors demolished 1,453 houses, at an average price of $13,748 per home, between July and December last year, according to land bank records.
Bing questions rising blight costs under Duggan
The arrangement, part of Mayor Mike Duggan’s blight demolition efforts, bundled home demolitions into large-scale contracts with three demolition companies. It was an approach that officials in his predecessor’s administration say they were told by the feds not to use because it risked surprise price increases.
The unit-price contracts awarded in June 2014 are only three of numerous demolition contracts now under heavy scrutiny because costs have soared under Duggan’s blight elimination program to an average of $16,400 per home, up from $8,500 to $10,500 under former Mayor Dave Bing. The mayor's office said a recent round of demolitions put out to bid came in at $14,040, showing that prices are coming down.
Still, at the request of City Council President Brenda Jones, the entire demolition program under Duggan now is under review by the city’s auditor general.
The unit-price contracts included a standard price for each home to be demolished — 0.52 cents per cubic foot. Yet the Detroit Land Bank approved change orders after the contractors billed for additional costs to complete demolitions that exceeded the previously established price.
Records reviewed by the Free Press and interviews show:
- Detroit-based Adamo received $1.96 million in change orders, while Monroe County-based Homrich's change orders totaled $1.78 million.
- The Land Bank approved some change orders for the third unit-price contractor, MCM Management, of Bloomfield Hills, but overall the company was paid less than expected because it returned 156 properties to the Land Bank that cost too much to tear down.
- MCM ultimately was terminated from the blight elimination program because it under performed, according to Brian Farkas of the Detroit Building Authority, which works hand-in-hand with the Land Bank.
The Free Press sought records detailing specific charges included in the change orders but the land bank did not immediately provide them. Aside from the three unit-price contracts, other demolition contracts awarded by the land bank under Duggan have been competitively bid.
Duggan and land bank officials said they deviated from the traditional, competitively bid deals and pursued the unit-priced model to speed up the pace of demolitions. The framework was expected to attract major players in the demolition industry to Detroit, an objective officials later admitted was not achieved. The unit-price model also was supposed to shift some risk to contractors, making them responsible for any fluctuating costs unless the Land Bank approved change orders.
Duggan on Friday acknowledged that the land bank's attempt at speeding up demolitions may have been an overreach.
Detroit to get $21 million more for blight demolition
"What I told the team was, if they made a mistake trying to do too much, I would support them, but if they tried to do too little, I would replace them," Duggan told the Free Press. "Did we try to go too far, too fast? Maybe. But if you were living next to one of these abandoned houses and went to sleep every night wondering whether it was going to catch fire and spread to your house, I think you'd want us to attack it with some urgency."
Duggan said the city is learning as it goes. He defended the use of pre-arranged, unit-price contracting as not unusual when dealing with large-scale, multiple-site contracts.
"We tried the unit-pricing pilot in June of 2014. It didn't work. We didn't do it again," Duggan said. "In the city right now we're trying a lot of different things that haven't been tried before, and I think we're making progress at a rate that hasn't been made before and we're learning from our experience."
The federal government last week authorized an additional $21.25 million in demolition money for Detroit. The money likely will be used to pay competitively bid demolition contracts that could take down nearly 1,300 blighted structures if recent averages hold.
Set-price contracts vs. competitive bidding
The return to set-price contracts surprised former Mayor Dave Bing and Robert Anderson, Bing's planning and development chief. Both said in an interview last week that the Bing administration packaged demolition projects of 25-75 homes and then put them up to competitive bidding, awarding the contracts to companies with the capacity and capability to do the work. The contracts were approved by the City Council.
Anderson said that when the Bing administration first started contracting demolitions, it did so on a unit-price basis but was forced by the feds to switch. The U.S. Department of Housing and Urban Development “required us to change our model to address-by-address in bundles,” Anderson said, based on concerns about reasonableness of costs.
“HUD has a standard of cost-reasonableness,” Anderson said. “You’re just bidding a number of homes on an average cost, and I think they felt we could get better pricing by making all the contractors have bundles of 50-75 homes.”
That approach allows contractors to check the homes before they bid, and reduces the likelihood of unforeseen surprises that can jack up costs. (Traditional, competitively bid packages put out under Duggan's demolition program include asbestos surveys that estimate abatement costs, allowing contractors to submit more accurate bids. The unit-price contracts did not include those estimates.)
HUD is not involved in administering the city’s current round of federal blight removal funding. The money instead comes from the U.S. Treasury’s Troubled Asset Relief Program, which was set up to help keep people in their homes in some of the areas of the country hardest hit during the national foreclosure crisis. A HUD spokesman did not respond to a message from the Free Press seeking comment.
Anderson, now the city manager in New Buffalo in southwest Michigan, said the city moving back to risky unit-price contracting was unexpected.
"When I’m hearing that they’re going back to unit price, I’m curious how they got there,” Anderson said. “It’s a go-fast strategy, but maybe that’s part of the explanation for the cost differential, because if (contractors) aren’t even evaluating them home by home, they’re just ball-parking the price.”
Record pace of demolitions
It's clear that Detroit has significantly sped up demolitions in the last 18 months, now at a record pace for a city already running the largest demolition effort of its kind in the nation. Since May 2014, when Duggan’s program began, roughly 7,000 of the city’s approximately 40,000 significantly blighted homes have been torn down.
Officials involved in Duggan’s demolition program have asserted that the state's Department of Environmental Quality has toughened standards for asbestos removal in the last year and a half, marking a big difference from the standards the Bing administration faced.
In previous years, the city received far more emergency demolition permits in which asbestos removal wasn't required. But the state now requires that emergency demolitions be granted only in cases where there's an immediate danger to a neighborhood, such as the risk of an imminent collapse. In addition to increased costs for asbestos abatement, the Land Bank has been faced with higher costs to transport clean dirt to fill holes left by demolished homes.
The unit-price contracts offered last summer also have come into question for the manner in which they were awarded. Detroit’s blight elimination program handpicked four contractors — including the only three to get the work — to participate in meetings to discuss price before the contracts were publicly released.
At the meetings, the unit-price cost was offered to the companies as a “take-it-or-leave-it” offer, Farkas told the Free Press. “There was no understanding that these (change orders) would be automatically approved."
The Michigan State Housing Development Authority is a partner in Detroit's demolition program and reviews demolition costs before releasing federal money to the Land Bank to pay for contractors. MSHDA spokeswoman Katie Bach said in a statement that the agency did not approve specific language in the unit-price contract offer, known as a request for qualifications.
"MSHDA and Michigan Land Bank staff supported the policy direction laid out by the Detroit land bank as it relates to setting a bid bundle package price," Bach's statement read. "However, no MSHDA or Michigan Land Bank staff saw or approved the city’s RFP/RFQ language. No state employees were present at the pre-bid meeting with Jim Wright," who is a Duggan appointee involved in demolition procurement.
Rather than approve the change orders, the land bank had the option to take back the properties that exceeded the fixed cost and include them in future bid packages. But the land bank was operating under a clear directive from Duggan to tear down houses rapidly.
Rebidding the properties would have delayed their demolition for another year, Farkas said. What’s more, demolition costs were trending upward and the land bank might have paid more for the demolitions in the end if the change orders were not approved.
“If we kick it back out for bid, chances are the prices are going to be higher,” said Farkas, an assistant attorney general under Mike Cox. Duggan hired Farkas last year to help manage the demolition program.
The contracts set a goal for contractors Adamo, MCM and Homrich to tear down as many as 800 homes each in two months under the unit-price contracts, although 800 was likely an unreachable number because it would have required prices per demolition to come in below $9,000. MCM demolished 253 homes; Adamo demolished 607 homes, and Homrich tore down 593 homes, according to land bank records.
The purpose of the fixed-price contracts was to attract large demolition companies to Detroit, companies that had the capacity and expertise to tear down lots of homes quickly, Farkas said. But that didn’t happen, so the fixed-price model has been discontinued.
As it were, all four companies invited to discuss the contract before it was released were from Michigan — Adamo, Homrich, MCM and Bierlein of Midland; Adamo and Homrich already had been awarded land bank contracts, so they were not new to the program.
After the meeting in mid-June 2014 where the fixed price of .52 cents per cubic foot was discussed, the request for qualifications was released on June 17. Companies interested in getting the fixed-price work had two days to respond. Only Adamo, Homrich and MCM applied for the contracts; they all were approved.
Representatives for Adamo, Homrich, MCM and Bierlein did not respond to repeated requests for comment last week.
MSHDA, which oversees the land bank’s demolition work, recently sent a review team to Detroit to analyze certain contract awards.
“While the review did not find any glaring or significant problems, we are requiring five changes to their current process to further strengthen their selection of contractors,” MSHDA executive director Kevin Elsenheimer said in an Oct. 28 memo summarizing the agency's review.
Among MSHDA’s new requirements are the implementation of a consistent bid scoring system and documentation that clearly explains instances when contracts were not awarded to the lowest bidder. MSHDA gave the land bank 30 days to provide a written response.
Two observers of blight demolition in Michigan said the rising costs did not surprise them.
U.S. Rep. Dan Kildee, D-Flint Township, said Friday that, while he hasn’t tracked Detroit’s blight contracting closely, he’s not surprised to hear that as Detroit’s blight removal ramped up, so did costs. Kildee was one of the Michigan political leaders who convinced the Treasury Department to allow the state to spend federal funding on blight removal.
Kildee said the same thing happened in Flint when federal funds sped up the pace of blight removal.
“We were surprised to find that there was sort of an inverse economy of scale once we got to a certain level of activity,” said Kildee, who founded the Genesee County Land Bank and was a cofounder of a nonprofit group think tank on blight issues. “We actually began to see marginal price increases. Some of what I’ve been hearing about Detroit, what the mayor has been saying, rings true to me because we’ve seen it as well. You’re overriding the capacity and then the market has to go find more capacity.”
Kildee said that there are strong rationales for favoring speed over price. One is that federal funding has an expiration date, and unused money may not be available once its deadline has passed.
Another, he said, is harder to put a value on but is equally critical to stopping blight’s spread.
“The faster we take these properties down, the less we have continuous contagious blight,” Kildee said. He said that having eight years of continuing decline would prove much more costly in the long run than having to spend more over, say, two years to bring down houses more quickly.
Wayne State University law professor John Mogk, an urban development expert, said the rule of thumb for demolitions has generally been that it costs $5 per square foot, so that a 1,000-square-foot home would cost $5,000 to tear down, and a 2,000-square-foot home $10,000.
But those costs can rise substantially with factors including tighter environmental requirements and strain on the construction and demolition industry amid what in Detroit has been roughly a doubling of the pace of demolitions, Mogk said.
“I don’t think the numbers are any way shocking,” Mogk said. “There may well be clear explanations as to why that’s the case.”
Contact Joe Guillen: 313-222-6678 or jguillen@freepress.com.
Contact Matt Helms: 313-222-1450 or mhelms@freepress.com.