August 2014

As readers of this blog know, demonstrating “good-faith efforts” to subcontract work to disadvantaged business enterprises (DBE)  in order to meet a DBE participation goal has long been the law on projects receiving funding through the FWHA or FTA.  Recently, the Pennsylvania Department of Transportation made a revision to its regulations requiring that the same be done on 100% state funded projects in the Commonwealth.  This means virtually every transportation prime contractor performing work in the Commonwealth will have to document “good-faith efforts” of subcontracting work to DBE firms.  Because many firms will be performing this task for the first time, it is worth reviewing what qualifies as a good-faith effort and why it is important to demonstrate those efforts.

A Refresher on Good-Faith Efforts

Federal law requires that transportation projects receiving funding, in whole or in part, through the federal Department of Transportation, establish a goal for the percentage of work subcontracted to DBE firms.  The law explicitly states that the goal is not a quota and a contractor’s bid cannot be rejected simply because it failed to meet the DBE subcontracting goal set forth in the invitation to bid so long as the contractor demonstrates “good faith efforts” in attempting to meet the goal.  Appendix A to the DOT’s DBE regulations, Appendix A, 49 C.F.R. 26, provides guidance on what qualifies as a “good faith effort” to meet the DBE participation goal.  The regulations state the following are examples of good faith efforts:

  1. Aggressively soliciting from certified DBEs who have the capability to perform the work of the contract and taking appropriate steps to follow up initial solicitation
  2. Selecting portions of the work to be performed by DBEs in order to increase the likelihood that the DBE goals will be achieved. This includes, where appropriate, breaking out contract work items into economically feasible units to facilitate DBE participation, even when the prime contractor might otherwise prefer to perform these work items with its own forces.
  3. Providing interested DBEs with adequate information about the plans, specifications, and requirements of the contract in a timely manner to assist them in responding to a solicitation
  4. Negotiating in good faith with interested DBEs. It is the bidder’s responsibility to make a portion of the work available to DBE subcontractors and suppliers and to select those portions of the work or material needs consistent with the available DBE subcontractors and suppliers, so as to facilitate DBE participation. Evidence of such negotiation includes the names, addresses, and telephone numbers of DBEs that were considered; a description of the information provided regarding the plans and specifications for the work selected for subcontracting; and evidence as to why additional agreements could not be reached for DBEs to perform the work.

The New Requirements for ALL Pennsylvania Transportation Projects

In 2013, the Pennsylvania Assembly passed a law requiring contractors on projects receiving 100% state funding to demonstrate the same good-faith efforts that were previously limited to federally funded projects. In August 2014, PennDOT implemented regulations pursuant to those changes that are significant in several ways, including some that go beyond the current federal requirements.

First, PennDOT’s example of good faith efforts, perhaps not surprisingly, is nearly identical to DOT’s example contained in Appendix A of the regulations.

Second, within seven (7) calendar days after a bid opening, the apparent low bidder must document to PennDOT its good-faith efforts in soliciting DBE subcontractors. Failure to submit this required documentation shall result in the apparent low bidder’s bid being rejected.  

Third, if PennDOT reviews the documentation submitted by the apparent low bidder and determines that it has not demonstrated good-faith efforts, the bid shall be rejected.

Fourth, all firms listed in the good faith efforts submission, including those providing professional and other services, must be submitted for subcontractor approval after the contract is executed and approved before the DB’s actual performance of work. You must submit for subcontractor approval any DB to be utilized whether or not they are listed in the good faith efforts submission approved by the Good Faith Review Officer. The request for approval must include:

  • A copy of the executed signature page of the subcontract;
  • A copy of the scope of work; and
  • A copy of the unit prices as the appear in the subcontract or agreement.

Fifth, if a DBE firm needs to be replaced, contractors must notify PennDOT. However, unlike under the federal rules, PennDOT’s permission is not required before the DBE firm is replaced.

Sixth, like under the federal regulations, contractors must use good faith efforts in subcontracting change order work to DBE firms.

Finally, a contractor’s duties do not end with the project.  PennDOT is requiring contractors to keep documentation of their good faith efforts for three years after final payment is accepted.  Furthermore, following the completion of the project PennDOT will review whether the contractor has complied with the new DBE rules throughout the life of the project.  Contractors that fail to comply may be subject to sanctions.

Opportunities for Veteran Owned Firms

While many prime contractors are likely pulling their hair out at the prospect of complying with yet another regulation, some firms that are likely cheering the new rules are veteran owned and disabled veteran owned small businesses.  Under federal law, only firms that are owned 51% or more by a female or minority can qualify for DBE status.  However, PennDOT’s regulations take a more expansive view and include DVOSBs and VOSBs in its definition of “Diverse Business.”  Therefore, DVOSB and VOSB firms should be aggressively courting prime contractors in the Commonwealth and, conversely, prime contractors should not limit their good faith efforts to only women and minority owned firms on 100% state funded projects.

 

 

Previously, I have written and warned about the Department of Labor’s Office of Federal Contract Compliance (“OFCCP”), which I like to call the most powerful federal agency you have never heard of.  The OFCCP purpose is to enforce federal affirmative action regulations applicable to contractors and subcontractors performing work funded, in whole or in part, with federal funds.  While OFCCP has been around for years, its level of enforcement activity was low.  That changed with the election of President Obama’s and his policy of taking executive action through regulation wherever and whenever possible.  Beginning in 2010, OFCCP enforcement activity, primarily in the form of affirmative action “audits,” has exploded.  This week the OFCCP issued a notice of proposed rule, which, by its own admission, will cost the federal contractors $50,000,00.

What is the Proposed Rule?

OFCCP is proposing to make changes to 41 CFR § 60-1.7.  Currently, that regulation requires federal prime and subcontractors to file an annual EEO-1 report, which requests information related to the race, ethnicity, and gender of employees.  The regulation was promulgated under Executive Order 11246.  That Order was signed by our last great Regulator – in –Chief, Lyndon Johnson in 1965.  It was signed during the Civil Rights Era when institutional racism was a reality.  The purpose of the Order was to prohibit discrimination in employment based upon race, creed, color, or national origin (but not sex, which apparently was still ok in 1965).  The Order authorized the Department of Labor to issue regulations to promote the goal of ended discrimination in the hiring of individuals by federal contractors.

                OFCCP proposed change will extend the reporting requirements intended to snuff racial discrimination in employment, a real problem in 1965, to include the requirements intended to snuff out “wage discrimination,” which a straw man problem is made up by the Administration.  The proposed rule would require federal contractors and subcontractors with more than 100 employees and federally funded contracts of greater than $50,000 to annually report to the OFCCP an “Equal Pay Report.”  The report would require contractors to disclose to the OFCCP:

(a)    The total number of workers by race, ethnicity, and gender;

(b)   Total W-2 earnings of all workers broken down by race, ethnicity, and gender; and

(c)    The total hours worked in each job category by race, ethnicity, and gender.

According to the OFCCP, the information on the report would be kept “confidential” (just like the tax returns of non-profit tea party organizations) and would not be used as the basis for an enforcement action.

What is Wrong With the Proposed Rule?

First and foremost, an overwhelming majority of employees of federal contractors, especially construction contractors, have wages regulated by the Davis Bacon act.  Therefore, there is no disparity in pay based on race, ethnicity, and gender.

Second, the OFCCP does not explain how it expects federal contractors to capture the data necessary to complete the report.  W-2 reports do not contain the race, ethnicity, and sex of the employee.  Moreover, the federal law prohibits an employer from asking an employee about his or her race, ethnicity, national origin, or gender.

Third, OFCCP goes beyond the power granted to it by Executive Order 11246.  OFCCP states that the legal authority for the proposed rules is Executive Order 11246. However, the Executive Order says nothing about regulations concerning wage discrimination.

In several previous posts, we have talked about the growing risk to contractors that violate the federal, state, and local D/M/WBE programs.  This summer we saw the sentencing of the remaining defendants in the infamous Schuykill Products case.  That case was a $136 million DBE scam that the FBI called the largest DBE fraud ever.

Today, the Wall Street Journal, the New York Times, and others are reporting about a DBE fraud indictment that could far exceed Schuykill Products in size.  The case involves DCM Erectors, Inc., who was the steel erector for the 1 World Trade Center project.  According to the reports, DCM engaged in a classic DBE pass through scheme in order to obtain nearly $1 billion in contracts from the Port Authority of NY/NJ.  The indictment seeks to hold the CEO of DCM personally liable for the fraud.

While the case is a reminder to all contractors to make sure their DBE compliance procedures are in check, those performing work in the NY metropolitan area should pay particular attention.  This case was brought by the U.S. Attorney for the Southern District of New York. In recent years, the Southern District of New York has been a hotbed for DBE fraud prosecutions, including several high profile cases that have resulted in guilty pleas and convictions.