Free DBE Compliance Audit

This blog repeatedly chronicles the ramifications of failing to comply with the Department of Transportation’s Disadvantaged Business Enterprise regulations.  Jail time for executives, disbarment, fines, and bid challenges are real threats to those contractors that run afoul of the DOT’s DBE rules.  Because of the amount of interest in this area, I am pleased to announce that I am now offering a scaled back version of a full DBE audit program for FREE.  My mini-DBE audit covers many of the topics discussed in my popular DBE Compliance Webinar, including:

1.  The importance of documenting good-faith efforts;

2.  Recognizing the red-flags of DBE fraud;

3.  Assuring your contracts are in compliance with federal and state DBE rules.

Interested parties can contact me for more information by email at wally@zimolonglaw.com.

Documenting Good Faith Efforts on 100% State Funded Projects

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.

This Could Be the Biggest DBE Fraud Case Yet

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.

Failing to Understand DBE Regs Leads to Bid Rejection

In an earlier post, I talked about bid challenges and rejections being one of the “hidden dangers” of failing to understand and follow DBE regulations.  I explained how strict minority set asides or quotas are almost always unconstitutional.  In fact, the DOT DBE regulations explicitly state that the DBE goals are not quotas. Rather, they are goals that contractors must use “good-faith efforts” to achieve. A State Transportation agency cannot reject a bid because it fails to include a commitment to subcontract work that meets or exceeds the stated DBE goal. However, for its bid to be accepted, the contractor must be able to demonstrate “good faith efforts” in attempting to meet the stated DBE contracting goal.

A Maryland case shows how one contractors lack of understanding of DBE regulations likely resulted in it losing an airport contract.  (For a detailed explanation of the case visit livingstonprocurment.com)  In that case, the Maryland Aviation Administration issued an Invitation for Bids for fence installation and repair at two airports. The Invitation for Bids stated a DBE participation goal of 15%.

Fence Connection, Inc. was the apparent low-bidder and stated that 25% of its subcontracted work would be performed by a single DBE subcontractor.  However, the because the DBE was a supplier only 60% of the value of the work subcontracted to the DBE could be counted towards Fence Connection, Inc.’s DBE goal.  MAA rejected the bid believing that it was not possible for Fence Connection to meet the stated DBE goal using the fuel supplier because Fence Connection could not accurately state the amount of fuel it would purchase from the DBE supplier.

Fence Connection appealed to the Maryland Board of Contract Appeals.  The Board of Appeals affirmed the MAA’s rejection of the bid Fence Connection “could not accurate calculate how much fuel it was use on the contract.”

Unfortunately for Fence Connection, its apparent lack of understanding of DBE regulations caused it to lose the bid.  How could Fence Connection saved its bid?  First, even if it could not exactly calculate the amount of fuel it intended to purchased it could have come close based upon past fuel usage and perhaps expert testimony.

Second, outside of that calculation Fence Connection could still have come away with the contract if it demonstrated it used “good-faith efforts” to meet the stated DBE 15% goal and the DBE fuel supplier was all was the only reasonable candidate for subcontracting.  In order to do that, Fence Connection would need to have documented aggressive efforts to find DBE subcontractors to perform 15% of the work.  If it did so, Fence Connection should have been awarded the contract even if its DBE goal came in below 15%.  In other words, it could have argued that because it demonstrated good-faith efforts it is irrelevant if it met the 15% goal because under DBE regulations its bid cannot be rejected solely for failing to meet the goal.

Yet Another False Claims Act Case Involving the DOT’s DBE Program

Readers of this blog know that I have been warning that actions brought under the False Claims Act against contractors violating DBE programs have been increasing.  Last week, I wrote about a False Claims Act case brought by a project manager, employed by a third party subcontractor, that resulted in a $2 million award to him and over $10 million award to the government.

On the heels of that case, is news out of the Southern District of New York of a False Claims Act case brought by the U.S. Attorney for the Southern District of New York, against Moretrench American Corporation, who allegedly used a “pass through” entity to meet its DBE subcontracting goals on the World Trade Center Project.  (Readers of this blog also know that the Southern District of New York is a hot bed of DBE fraud prosecutions, including several high profile cases in the last few years.)

According to the complaint, Moretrench made the common mistake of hiring a certified DBE that performed no commercially useful function.  Instead, Moretrench placed is employees on the DBE’s payroll and had those employees perform work using Moretrench equipment.  Moretrench then submitted payment applications certifying that the DBE performed work for Moretrench.  The complaint seeks only money damages and raises claims under the civil portion of the False Claims Act.  Therefore, Moretrench and its executives are lucky that they are not facing criminal mail and wire fraud charges, which the DOJ could have easily brought given the facts alleged.  (However, the DOJ can always bring additional charges later and we will see what happens.)

Whistleblowing Project Manger Awarded $2 Million in DBE Fraud Case

While criminal prosecutions involving construction company executives violating federal, state, and local disadvantaged business enterprise programs (DBE) rightfully receive most of the attention, of equal or greater concern to contractors should be whistleblower lawsuits brought under the False Claims Act for violations of DBE regulations.  As I talked about in my recent DBE compliance webinar (available for free by clicking HERE) the False Claims Act makes bounty hunters out of disgruntled former employees because the Act entitles the whistleblower to up to 30% of the amount recovered on behalf of the government.

On May 1, 2014, the FBI announced a $12 million settlement against Chicago based McHugh Construction for violations of the DOT DBE program and similar Illinois and Chicago DBE programs.  What is important about the case, is that it was filed under the False Claims Act by a project manager of a subcontractor to McHugh.  The case was then picked up — as is often the case under the False Claims Act – by the Department of Justice.  For his effort in making the initial filing the project manager will receive in excess of $2 million.  Not a bad pay day for the little work that he did in filing the lawsuit.

Now more than ever, contractors cannot ignore their DBE compliance duties.  Like with any other criminal activity, the Department of Justice cannot prosecute every case either because they lack the resources or they decline prosecution because of the size of the matter.  However, under the False Claims Act, the hundreds of people working on a construction project have incentive to sue contractors for violations of DBE rules.

Plaintiff’s attorney are aggressively pursuing whistleblower claims against contractors that violate the DBE regulations.  Moreover, many terminated and disgruntled employees contact an attorney about potentially suing their former employer.  Usually that inquiry involves whether they have a claims for some form of discrimination.  Many are disappointed to learn they do not, however, you can be sure that the attorney they speak with will ask the potential client about any potential False Claims Act claims.  Even when you win a whistleblower action you lose because you are forced to spend significant money defending the action, which is typically not covered by insurance.

Whistleblower actions, yet another reason to make sure your firm is complying with DBE regulations.

Did a DBE Compliance Program Prevent Jail Time?

Another week and another case of DBE fraud resulting in significant fines.  This one involves Connecticut construction firm that agree to pay $2.4 million in fines to settle the fraud allegations.  The story follows an all to familiar “pass through” fact pattern:  a construction company obtains transportation contracts, commits to performing work using certain DBE firms, and then those firms perform no commercially useful function and act as merely a pass through.

What is notable is what the firm did when it discovered the fraud.  According to the firm’s settlement agreement, when the firm first learned of the alleged fraud, it self instituted  a strong DBE compliance program.  Because of the compliance program, the firm and its employees avoided prosecution.  As I have blogged about before and discussed in my DBE compliance webinar,  a strong DBE compliance program can be a mitigating factor if your firm is accused of DBE fraud.

While the $2.4 million fine is no doubt significant, it still beats jail time for the company executives.

No Transportation Work, No Need to Worry About DBE Fraud? Think Again

On March 13, 2014, the Department of Justice announced that a the owner of a Chicago based utility contract was sentenced to 17 months in federal prison and ordered to pay over $500,000 in restitution for DBE fraud scheme used to obtain over $5 million in contracts from the City of Chicago.

What is important about this case is that it involved only City of Chicago contracts, not projects partial or wholly funded by the Department of Transportation.  In my recent webinar on complying with DBE programs (free download here), I underscored that contractors and their executives that operate under a State, County, or Municipal DBE program need to be just as vigilant in complying with those programs as they do the federal DOT program

When fraud is committed using a DBE program, the underlying crime is usually mail or wire fraud.  The federal mail and wire fraud statutes apply equally to the DOT’s DBE program and state and local DBE programs.  That is because whenever you submit a payment application or other certification that falsely states that a DBE performed a certain percentage of work, you have likely committed wire or mail fraud.  In fact, wire fraud is what the contractor in the Chicago pleaded guilty to.

DBE Compliance Webinar Download

Concerned about complying with the DOT’s DBE regulations?  Download my free DBE compliance webinar here.

The Hidden Dangers of Failing to Follow DBE Rules (Part 2): The False Claims Act

• False Claims Act suits hitting an all-time high of 753 in 2013, and

• Government enforcement concerning disadvantaged business status is a particular focus of the Department of Justice.