Compliance: A Problem That Isn’t Going Away

By Joe Dirik

Dirik writes that every prime contractor who performs federal-aid work should develop and maintain a DBE compliance manual.

In my last column I wrote about risks associated with false claims. This month I discuss Disadvantaged Business Enterprise program requirements. The U.S. Department of Transportation continues to crack down on fraud, false claims and contracting abuse associated with DBE programs.

Recent cases Last year two Michigan construction firms agreed to pay the United States $11.75 million to resolve claims they knowingly violated DBE contracting requirements for federally funded projects. The government alleged that the prime contractors performed virtually all the work under the concrete-supply DBE’s subcontract.

Dirik is a member of the litigation and construction law practice groups at the Dallas office of Fulbright & Jaworski LLP. Contact him at jdirik@fulbright.com.

Earlier this year, a former vice president of a contracting firm pled guilty in U.S. District Court in Harrisburg, Pa., to one count of conspiracy to defraud the DBE program and one count of filing a false federal tax return. The government alleged that he participated in a fraudulent DBE pass-through scheme involving more than 300 federally funded DBE subcontracts valued at $121 million. The fraud involved contracting with certified DBEs with the intention of having employees from other companies perform, manage, control and supervise the work.

What is a DBE? DBEs are small, independent businesses owned by one or more socially or economically disadvantaged individuals who own at least 51%. At least one owner must control the company’s management and daily operations. All federal-aid projects are subject to the legislative and regulatory DBE requirements. The Federal Highway Administration must approve state DBE programs and annual goals. Departments of transportation can only count the value of work actually performed by certified DBEs toward the state’s DBE goals.

Fraud and abuse often result when: 1) an ineligible firm is certified, or 2) a legitimate DBE firm fails to perform a commercially useful function. A central authority, such as the North Central Texas Regional Certification Agency, usually certifies DBEs. Fraudulent conduct in certification often involves inaccurate representations.

The greater risk for prime contractors and others participating in DBE programs involves the actual work performed by the DBE during the project. A DBE generally performs a commercially useful function when it is responsible for executing the work of the contract and carries out its responsibilities by managing, supervising and performing the work.

Avoid crossing the line The cases mentioned involve intentional fraudulent activity.

Prime contractors can inadvertently impact a DBE’s commercially useful function. DBE programs encourage prime contractors to help DBE subcontractors. Sometimes well-intentioned help crosses the line. The U.S. DOT says: “If it appears that, absent its ties to a prime contractor, a DBE firm is not viable, it should not be regarded as independent.”

A firm must be independent to maintain its certification status and for its work to satisfy the commercially useful function requirement.

The U.S. DOT provides guidance involving crane usage on projects. Prime contractors often provide a crane to be used on a project by the prime contractor and subcontractors, including DBEs. The DOT recognizes it is not practical or economically feasible for each contractor to have its own crane. The DOT says “as long as such arrangements are consistent with normal industry practice in a given jurisdiction, the joint use of a prime contractor’s crane by a DBE should not cause the DBE to be regarded as failing to meet independence requirements for certification.”

The DOT explains that cost of equipment purchased or leased by a DBE from a prime contractor does not count for DBE credit.

Prime contractors should choose ways of assisting DBE subs that do not create independence issues. The assistance should be transparent and arms-length. Maintaining proper records and reporting the accurate value of DBE services is essential to such efforts.

I advise every prime contractor who performs federal-aid work to develop and maintain a DBE compliance manual.

Editor’s note: The information in this article is not intended as legal advice but to provide a general understanding of the law.