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Games Contractors and Subs Play – Double Breasting or Alter Ego?

A former chairman of the Port of Houston told me once that the Port was “double breasting” its contracts on Houston Ship Channel. I had really only heard that in regard to the suits and blazers that hung on the racks at the men’s clothing store. Boy, was I naïve. Maybe I still am, but I learned quickly what the term means and how it can be used in the construction industry and in the games that contractors and subs play.

Essentially, the term “Double Breasted” means that an owner contracts with both union and non-union (also known as “merit shop” or “open shop”) companies, thus the use of the term, “Double Breasting.” This approach to contracting results from the need for services or contracts where both union shops and open shop companies provide competitive services.

In some markets like New York City, the majority of construction companies are union shops. Recently, some owners and contractors have been hiring open shop subs, and that is where the games really start. According to some sources, using qualified open shop subs can create a savings of 30-50% in overall costs. That is potentially a big savings and creates a big margin. This is especially problematic for some states and cities like New York where there are long standing agreements with the unions for both private and public work.

New York is currently in transition in its contracting forms for project construction. The union control of the city is slipping even though the politicians are solidly behind the unions. After all, they do need to be re-elected and the unions support them. The rise of more open-shop subs though is creating some friction amongst the GCs and subs and the games are under way.

One example is where an owner, usually a private company, decides to build a high-rise condo project and wants to use open shop subs to save development and building costs. The owner talks to his construction manager or consultant about doing that. The consultant talks to his GC buddies about it and the GC who usually hires union labor decides to hire some open shop subs for some of the work.

In order to do that, the GC decides to create a new open shop company to do, let’s say, concrete work and maybe tile work. They set it up. Now that act is in violation of the standing union agreements that say that there can be no “alter-ego” companies set up. An “alter-ego” company is a company that is in management and operational control of the original company but claims to be a separate company under totally separate management with no sharing of facilities, operations equipment of labor. As many companies over the last 50 years have learned the hard way, this is tough to do under the best of circumstances.

The GC then makes a deal with the new sub (his new company) as a way to save costs for the owner on the build and to increase profits for the GC. Sounds good? Only if it meets a set of criteria spelled out in the agreements that have been negotiated with the unions.

Gaming the system. Sometimes it escapes scrutiny, but sometimes the GC gets a suit filed against them by the unions and sometimes they lose big time.

That is what happened in a recent case in New York and reported in ENR, when the contractor Navillus played this game, set up a “separate company” that the court judged was an “alter-ego” company when Navillus got caught by the unions who filed suit and won a $76 million award from the courts. The nature of the award forced Navillus into bankruptcy court, the details of which are spelled out by the attorneys at the law firm Troutman Sanders.

According to the ENR article, “Terrence Moore, a key plaintiff in one of the lawsuits and business manager of reinforcing ironworkers Local 46, said in a recent letter to members that, 'during 2014, it became very apparent to all of the trades that Donal was setting up alternate shops in order to build reinforced concrete high rises.'"

Even though this game took place in New York City where there is an on-going tension between the unions and the open shop contractors, this is a game that is taking place across the country and is another of the Games that Contractors and Subs play.