The Office of the Inspector General (OIG) of the U.S. Department of Transportation (DOT) has issued a stinging report that is highly critical of DOT’s management of the multibillion‐dollar Disadvantaged Business Enterprise (DBE) program. This report, the culmination of an 18‐month OIG inquiry that began in 2011, follows on the heels of several high‐profile episodes involving alleged fraud by DBE program participants as well as lax oversight by the state and local governmental agencies that receive DOT funds and are charged with monitoring and enforcing DBE program requirements. These incidents have also shone an unflattering light on DOT’s overall management of the DBE program, which distributes $3‐4 billion in government contracting funds annually to small businesses that have been certified as DBEs (i.e., majority‐ownership and control by a woman, minority or other member of a “socially and economically disadvantaged” class).

The 39‐page OIG report’s basic conclusion ‐ that DOT “does not provide effective management” of the DBE program and that this deficient administration has left the federal program susceptible to rising incidences of fraud and abuse – includes eight specific recommendations for remedial action. The report also includes DOT’s response to the OIG’s findings and recommendations. The full OIG report can be accessed here.

Background

The DBE program was created to help socially and economically disadvantaged individuals who own and control small businesses to participate in DOT‐funded contracts.1 DBE grant recipients include state highway agencies, airports, transit authorities, and other state and local agencies that receive DOT funds. These state and local agencies then administer the DBE program in connection with the particular DOTfunded project or projects and distribute the funds to certified DBEs working on those project(s).

Since 2009, DBE fraud and abuse cases have increased significantly, making up nearly 29 percent of OIG active investigations for procurement and grant fraud. Recent high‐profile investigations have included alleged fraudulent practices and poor governmental oversight in the DBE programs run by, among others, the Oregon and Washington state DOTs, New York City’s Metropolitan Transportation Authority and Cleveland’s Hopkins Airport authority.

The OIG Report

The OIG report assessed whether (1) DOT provides adequate DBE program management, (2) DOT’s Operating Administrations2 and recipients sufficiently oversee and implement the DBE program, and (3) DOT is achieving its program objective to help develop DBEs to succeed in the marketplace.

The report reached an unequivocal conclusion: DOT does not provide effective program management for the DBE program. “As a result,” the OIG states, “the DBE program is exposed to significant risk of fraud, waste and abuse.” The OIG faulted both the failure to issue comprehensive, standardized DBE guidance and to provide sufficient training to recipients responsible for implementing the program. More specifically, the report criticized DOT’s “fragmented approach” of assigning only limited DBE program management responsibilities to three separate departmental offices. It concluded that the lack of a single line of accountability for the DBE program made it difficult for DOT to (1) track whether the DBE program is achieving its objectives, (2) accurately account for billions in annual DBE spending, and (3) ensure adequate communication with state and local recipients responsible for program implementation.

One glaring shortfall in program monitoring by DOT and by state and local agencies, the OIG report found, was the failure “to ensure that DBEs complete the work [assigned to them] according to contract terms.” This particular criticism is double‐edged: highlighting projects where DBEs attempted, but failed, to adequately perform the work contracted to them, as well as the less benign problem – illustrated by the mounting federal investigations into DBE program fraud – of non‐DBE firms doing the federallyfunded work that was intended for DBE firms (whether real or “paper” DBEs).

The report also found that state certifying agencies do not always adequately verify that firms applying for DBE certification meet the regulatory eligibility requirements. In light of the poor controls in some states’ certification practices, the OIG report estimates that, in fiscal year 2009 alone, at least $124 million of the $4.1 billion in DBE funds distributed across 52 U.S. states and territories that year were wasted on firms that did not meet DBE certification criteria and had been incorrectly certified by the state certifying agency.

In addition to concerns about fraud and abuse, the OIG report also found that DOT was having limited success in achieving a key program objective of developing DBEs to succeed in the marketplace. This is so because many state grant recipients place more emphasis on getting firms certified as DBEs than on assisting them in identifying opportunities to market themselves for DBE work on federally funded projects. The report noted that the majority of certified DBE firms ‐ especially smaller firms ‐ have been unsuccessful in ever obtaining work on a federally‐funded contract.

In sum, the OIG report concludes that, despite the many billions of dollars DOT spent through its DBE program, “weaknesses in the program management and implementation have allowed ineligible firms to win DBE contracts while leaving the majority of DBE firms without work.” In addition, the OIG warns that “[i]f the Department does not provide more comprehensive guidance and training or strengthen its program management, the DBE program may continue to be exposed to billions of dollars in fraud, waste and abuse.”

OIG Recommendations for Remedial Action and DOT Rebuttal

The OIG report makes a series of recommendations for remedial action to DOT leadership. Those eight recommendations are:

  1. Develop comprehensive guidance and best practices for DBE program implementation by invoking DBE stakeholders from all levels. The guidance should provide direction for conducting certification processes, certification reviews and on‐site project reviews.
  2. Formally assign one department office the responsibility and accountability for integrating and managing the DBE program.
  3. Develop program performance measures to regularly assess the DBE program and evaluate whether it is achieving its objectives.  
  4. Establish a centralized departmental data system for collecting and tracking DBE commitment and award information and require that the operating administrations implement procedures to ensure that recipients are accurately reporting BE award and other financial information.
  5. Maintain the relevant DOT website to ensure it contains current information and includes accurate DBE program contact information.
  6. Develop an oversight and compliance plan with the operating administrations to identify specific, required oversight processes and reviews and ensure that a sufficient number of reviews are performed based on assessed risk.
  7. Require that recipients track and regularly report utilization data to the operating administrations, including each DBE’s number of years in the program and the number of DBE subcontracts or prime contracts received since first becoming certified.
  8. Require that the operating administrations work with recipients to develop ways to improve utilization rates and require the establishment of business development programs for firms that have not received DBE work for several years.

The Office of the Secretary of Transportation (OST) issued a written rebuttal to the OIG report that stated, among other things, that the agency watchdog’s findings and recommendations were “based primarily on the opinion of a handful of state officials, without apparent detailed causal analysis linking guidance and programmatic issues” and that these “community perceptions” are not “dispositive evidence of specific deficiencies.” Against this backdrop of skepticism, the OST partially accepted some of the OIG recommendations or declared them already achieved, and rejected others. The full text of the OST’s written response is summarized in, and appended to, the OIG report.

What to Watch For

This OIG report, like most, was not received with open arms by the leadership of the federal agency. Progress on the OIG’s recommendations for improving DOT’s management of the DBE program undoubtedly will be slow, if it occurs at all. But while the OIG may have limited success in winning gains on DOT’s internal administration of the multibillion‐dollar DBE program, this report signals that that office, and other government investigators and prosecutors with jurisdiction in that area, will continue their intensive focus on that which they can control: targeting fraud in DBE programs and poor program oversight by state and local agencies. DBE program participants at all levels are well‐advised to examine their practices and ensure they are compliant.