The Growing Prosecutorial Interest in DBE Fraud

Yesterday, I “attended” an American Bar Association webinar on “Minority Contracting Programs: A Growing Criminal Risk to Corporations.”   The message was clear – federal prosecutions of DBE fraud are on the rise. Indeed, federal prosecution of DBE fraud has occurred in recent years in the following states:  Florida, Illinois, Kansas, Massachusetts, Minnesota, New York, Ohio, Oklahoma, Pennsylvania, and West Virginia.   Moreover, the consequences of running afoul of DBE requirements are dire running the gamut from prison time, multimillion dollar fines, forfeiture of all (not just profits) proceeds from a contract, and debarment or suspension.

Here is a summary of some key points made by the panel:

1.  Personal Liability.  Contractors that engage in DBE fraud can be fined, disbarred, or suspended.  However, individuals within a firm are potentially personal liable for the DBE violation and can be sent to jail.  In fact, one need only look at the Department of Transportation, Office of Inspector General,webpage to see the long list of individuals who were found personally liable for DBE fraud   While violating DBE requirements itself is not a federal crime (yet, may result in administrative suspension or debarment), the acts committed while violating the program’s requirements, such as mail fraud or wire fraud, are.  Under federal mail and wire fraud laws, anyone with knowledge and intent who engages in a scheme to commit mail or wire fraud is potentially liable, not just the contract’s signatory.

2.  Its Not Just the Little Guys.  Think prosecutions are limited to sham or pass through DBE’s or unscrupulous general contractors?  Think again.  Skanska, Schiavone, Bovis Lend Lease, and Perini are a few of the names that have found themselves on the other end of federal DBE investigations resulting in large fines and even jail time for principals engaged in the fraud.

3.  Certified DBE’s Do Not Equal Compliance.   The panel emphasized that the single biggest compliance mistake contractors make is assuming that using certified a DBE equates to compliance.  Simply using certified DBE’s is not enough because virtual every prosecution has involved a certified DBE.  Instead, contractors must make sure they are complying with all of the contracting agency’s DBE program requirements.  In fact, most State and local agency DBE program’s require that a general contractor assume the duty of assuring compliance on its behalf and on behalf of its DBE subcontractors.  For example, here in Pennsylvania, PENNDOT’s DBE program requirements state “[f]ailure by a prime contractor and subcontractors to carry out the DBE requirements constitutes a breach of contract and may result in termination of the contract or action as appropriate.”

4.  If you suspect fraud, report it.  Even if you lack direct knowledge that one of your DBE subcontractors is a fraud, your firm could still wind up in a prosecutor’s cross hairs.  In addition to assuming responsibility for compliance, nearly all DBE programs require prime contractors to submit monthly certifications certifying under oath – and the threat of perjury – that DBE’s performed a portion of the work and/or have been fully paid.  Therefore, contractors need to take the suspicion of DBE fraud by one of their DBE subcontractors very seriously.  In fact, the panel stated that “no decision is more important” than a contractor’s decision to investigate whether its DBE subcontractor is engaging in DBE fraud because  if a contractor decides to look the other way the individuals looking the other way could be personally liable.  Or, at a minimum could find themselves answering serious questions from federal prosecutors.

5.  Low level individuals usually are the issue.  Many of the DBE cases imposing corporate liability on contractors have involved low level individuals (often in the field) within the firm.  In fact, in many cases the executives and principals of the prime contractor were unaware of the fraudulent activity.

6.  The Constitutionality of a DBE program is not a defense.  DBE programs are controversial and often subject to attacks on constitutional grounds.  However, even if a program is found to be constitutionally invalid, convictions for violating the now invalid DBE program will stand.

7.  Understand the Whole Program An RFP and contract may not set out the complete details of a State’s or agency’s DBE program. Rather, many contain only a boilerplate reference that the contractor agrees to abide by “all federal, state, and local laws,” which would include applicable DBE requirements.  Prosecutors often cite these provisions as evidence that a contractor or individual had knowledge of the specific requirements of the DBE rules.  Therefore, contractors and their employees must familiarize themselves with the individual requirements of each agency’s DBE program, which vary from agency to agency.

Obviously, the consequences of not maintaining a strong DBE compliance program are severe.  Contractors required to comply with a DBE program should make sure they are aware of the program’s specifics.  Moreover, if contractors suspect fraud they should take immediate action to ascertain whether their suspicion has merit.  Otherwise, your firm could wind up facing “bet the company” litigation or individual employees could be facing jail time.


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The New Highway Spending Bill and the Construction Manager Project Delivery Method

Most of the attention given to the  Moving Ahead for Progress in the 21st Century Act (“MAP-21”) highway spending bill that the Senate recently passed has been focused on the potential stimulating effect the bill with have on the construction industry in terms of dollars that will be allocated to certain projects.  Of interest to contractors working on Pennsylvania transportation project is the Bill’s potential effect on Pennsylvania’s competitive bid laws.

Section C of the bill is dedicated to “Acceleration of Project Delivery” and states that is “policy of the United States” that various recipients of Federal Transportation funds “accelerate project delivery and reduce costs.”  The Bill charges the Secretary of Transportation to develop best practices to achieve the goal of accelerating project delivery.

In order to achieve the goal, the Bill amends section 23 U.S.C. 112(b), which regulates bidding on Federal Highway projects, to allow for the use of the “Construction Manager/General Contractor” form of project delivery.  The Construction Manager / General Contractor (CM/GC) project delivery method allows an owner to engage a construction manager during the design process to provide constructibility input. The Construction Manager is generally selected on the basis of qualifications, past experience or a best-value basis. During the design phase, the construction manager provides input regarding scheduling, pricing, phasing and other input that helps the owner design a more constructible project. At approximately an average of 60% to 90% design completion, the owner and the construction manager negotiate a ‘guaranteed maximum price’ for the construction of the project based on the defined scope and schedule. If this price is acceptable to both parties, they execute a contract for construction services, and the construction manager becomes the general contractor. The CM/GC delivery method is also called the Construction Manager at-Risk (CMR) method in some states.

Because the CM/GC method of project delivery does not strictly comply with the lowest responsible bid requirements of Section 112, currently, the CM/GC project delivery method can only be used with the permission of the Federal Highway Administration under its “Special Experiment Project No. 14 – Innovative Contracting” program.”

Of note to contractors performing transportation work in Pennsylvania is the potential effect on how PENNDOT projects are bid.  Currently, the Pennsylvania Procurement Code requires PENNDOT to award a construction contract to the lowest responsible bidding in a competitive bid process.  See Pa.C.S.A. Section 512.   However, under the CM/GC delivery method, PENNDOT can negotiate a contract with the CM without utilizing the competitive bid process.  Moreover, the Highway Bill states that in selecting the CM PENNDOT can award the contract on the basis of (a) qualifications; (b) experience; (c) best value; or (d) any combination of these factors.

Therefore, under the Highway Bill, PENNDOT could theoretically solicit bids for construction management services and award the CM contract based upon a “best value” approach which Pennsylvania law does not currently allow.  Moreover, once the CM is engaged it can negotiate a construction contract with that CM with utilizing the Procurement Code’s competitive bid requirements at all.

Importantly, the new provisions of Section 112 do not create a carve out permitting state law to limit the use of the CM/GC project delivery method as it does with the design-build delivery method.   In light of the challenges to PENNDOT’s “Innovative Bidding” procedures in Brayman Construction Corp. v. PENNDOT, 13 A.3d 925 (Pa. 2011), it will be interesting to watch how this newly authorized project delivery method effect bidding on PENNDOT projects should the Highway Bill be signed into law.

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