Since the 1980s, projects funded by the federal government have come with mandatory DBE participation requirements. Similar DBE participation requirements exist at the state and local level in jurisdictions across the country. Designed to increase the participation of minority and women-owned businesses (DBEs) in industries in which they have been historically underrepresented, DBE programs oblige contractors bidding on public work to employ a specific percentage of certified DBE subcontractors and material suppliers. Waivers from such requirements are available in limited circumstances.

While efforts to promote DBEs might be admirable in theory, the mechanism created to implement those goals—minimum participation requirements—has led to recurring instances of fraud. Some believe fraud in the DBE procurement process is rampant, widespread and pervasive, and has gone on for many years.

Examples of DBE fraud are surprisingly easy to come by. In March 2011, Skanska USA, one of the world’s largest general contractors, agreed to pay $19.6 million to settle a federal investigation into DBE fraud in connection with projects as prominent as the new World Trade Center transportation hub and a terminal project at John F. Kennedy International Airport. Skanska USA retained Environmental Energy Associates LLC (EEA), a certified DBE, but who did not have the labor, equipment or finances to actually perform work on the World Trade Center project. According to formal charges, Skanska USA mostly self-performed the work it claimed it subcontracted out to EEA. Skanska USA allegedly placed its own employees on EEA’s certified payrolls to create the appearance that EEA had done commercially useful work. In a related case, Moretrench American Corp., Rockaway, N.J., a geotechnical and engineering services company also retained EEA as subcontractor on the World Trade Center project. Moretrench was required to pay over $3 million in fines for similar allegations of DBE fraud.

With effective enforcement mechanisms in place, the federal government has begun to clamp down on DBE-related fraud. Under the Federal False Claims Act (FCA) individuals and companies involved in DBE fraud can be prosecuted under Federal criminal law. The FCA also provides a private right of action to private citizens, including employees and former employees, who can bring their own claims against contractors, subcontractors, and material suppliers for fraud against the government. The incentive to report instances of DBE fraud can be tempting. The plaintiff in a whistleblower suit keeps 15-30 percent of the ultimate judgment, plus their attorneys’ fees. State and local authorities have also re-doubled their enforcement efforts to prosecute DBE-related fraud.

With this much attention paid to DBE contract procurement, it is essential for contractors, subcontractors, and material suppliers to become familiar with DBE procurement requirements.  While failing to meet DBE procurement requirements on a particular job can mean losing that particular contract, DBE “fronts” or other DBE fraud can lead to millions of dollars in fines, possible debarment from future government work, and even criminal prosecution of individual owners. With that in mind, here are some basics of DBE Contract Procurement that are worth knowing. With the stakes so great, the following “Dos and Don’ts” may prove useful to ensure compliance with regulations and avoid fines, bad publicity, and possible criminal prosecution.

Dos:

1. Do – Document Your Good Faith Efforts

You should always document the efforts you make to obtain commitments from DBE participants. Even if you do not ultimately reach your DBE participation goal, you should always document that you have made a good faith effort to do so. The U.S. Department of Transportation has explained that “a one-size-fits-all checklist is neither desirable nor possible” in determining whether a contractor has met its good faith requirement. Instead, what constitutes a showing of good faith in a particular procurement requires a fact-specific judgment that your company must make. Because enforcement efforts have re-doubled in recent years, it may be prudent to err on the safe side. Short answer: make a conscious effort to obtain your DBE goal and always document your efforts.

Some states provide detailed documents that must be completed. But whether you work in one of these states or not, you should always have proof that you acted in good faith.

2. Do – Place DBEs on Solicitation Lists

Contractors must make DBEs aware of contracting opportunities to “the fullest extent practicable through outreach and recruitment.” You should place DBEs on regular solicitation lists and you should solicit DBEs whenever potential opportunities arise. DOT regulations require that advertisements remain open for a minimum of 30 calendar days before the bid or proposal closing date.

3. Do – Remain Competitive in the DBE Procurement Market

Take steps to make sure your company is competitive in the DBE procurement market. Your company will be assessed against your competition regarding your ability to obtain DBE contracts. If other bidders have been able to obtain the DBE goal, but your company has not, that could count against a showing of good faith effort.

4. Do – Maintain Relationships with Reputable DBEs

By maintaining good relationships with reputable DBE firms, you can minimize risk associated with contracting with inexperienced DBE firms. Healthy relationships with DBEs can ensure you meet your DBE goal without sacrificing quality of work.

5. Do – Find Replacement DBEs

Always make an effort to replace DBEs that have dropped out of the project with other DBEs. While you are not required to replace DBEs that have fallen-away with other DBEs, you are required to make a good faith effort to do so.

DOT regulations require you to make a good faith effort to replace fallen-away DBEs to the extent needed to meet your overall DBE participation goal.

6. Do – Use Government Resources

Government resources exist to help contractors find DBEs to work on their projects. Take advantage of services offered by the Small Business Association (SBA), the Minority Business Development Agency, and the Department of Commerce. Following DOT DBE guidelines and regulations, even if not legally applicable to your job, may provide insulation from liability.

7. Do – Make Reasonable Inquiries

Make reasonable inquiries to ensure a DBE you are involved with is not a pass-through but is actually performing a “commercially useful function” on the project. Contractors, subcontractors, and material suppliers that are “willfully ignorant” can be prosecuted to the same extent as companies that intentionally defraud the government. Ignorance is often not an excuse.

8. Do – Maintain Monitoring and Enforcement Programs

Particularly if you run a large operation, maintaining compliance programs including adequate oversight and enforcement may be necessary to comply with DBE procurement laws. While these programs may add costs, the expense can save your company millions of dollars and help you avoid criminal prosecution.

9. Do – Cooperate with Enforcement Officials

You should comply with enforcement officials and set forth proof of good faith efforts made. A lack of cooperation often brings additional scrutiny.

Don’ts:

1. Don’t – Abuse Your DBE Certification

Even minor involvement in pass-through DBE schemes can end in enormous financial penalties, including potential debarment from future contracting work, and significant criminal consequences. A small short-term profit is not worth the huge risk.

2. Don’t – Reject Reasonable Price Offers

If you do not meet your DBE participation goal and yet rejected a DBE offer that was within a reasonable range of the offer accepted (1-10 percent) that could establish a lack of good faith. You should carefully consider “reasonable price” offers made by DBE firms.

3. Don’t – Use “Time and Material” or “Cost Plus” Unless Reputation is Established

Using “time and material” or “cost plus” contracts with DBE subcontractors can be a risky endeavor. Unless the DBE can demonstrate a history of performing and managing its own work, this type of contracting is fertile ground for “front” companies.

Be on the look-out for companies with little more than an office and a handful of clerical employees to run a payroll, purchase materials, or pay project invoices.  Companies that offer “payroll” services for a fee should also be scrutinized. Use of such firms will likely draw the attention of government investigators. You should contract on a “time and material” or “cost plus” basis only after assuring yourself the company performs a commercially useful function.

4. Don’t – Terminate for Convenience and Self-Perform

Do not terminate for convenience and then self-perform the work. Doing so without the DBE’s consent can constitute a lack of good faith.

5. Don’t – Bury Your Head in the Sand

As ignorance is not an excuse, do not ignore warning signs that a DBE is not really performing a commercially useful function.

6. Don’t – Put Your Employees on the DBE’s Payroll

Companies that have placed their own employees on the payroll of the DBE to get work done have not fared well.

Companies that follow these guidelines will minimize the risk that a DBE minimum participation requirement will backfire into a significant legal problem.