Management of Disadvantaged Business Enterprise Issues in Construction Contracting (2005)

Below is the uncorrected machine-read text of this chapter, intended to provide our own search engines and external engines with highly rich, chapter-representative searchable text of each book. Because it is UNCORRECTED material, please consider the following text as a useful but insufficient proxy for the authoritative book pages.

5REGULATION OBJECTIVES The rule in force at the start of the study was the February 2, 1999, Final Rule with interim revisions. During the project a revised final rule was published on June 13, 2003, in the Fed- eral Register. Because this latest final rule is the most current regulation, it was integrated into the study and analysis ele- ments. Specific sections of the final rule are referenced peri- odically in this report. Appendix B contains the complete 49 CFR 26, 2003, Final Rule. The objectives stated for the DBE program are (49 CFR 26.1, 2003): a. To ensure nondiscrimination in the award and administration of DOT-assisted contracts in the Department’s highway, tran- sit, and airport financial assistance programs; b. To create a level playing field on which DBEs can compete fairly for DOT-assisted contracts; c. To ensure that the Department’s DBE program is narrowly tailored in accordance with applicable law; d. To ensure that only firms that fully meet this part’s eligibility standards are permitted to participate as DBEs; e. To help remove barriers to the participation of DBEs in DOT- assisted contracts; f. To assist the development of firms that can compete success- fully in the marketplace outside the DBE program; and g. To provide appropriate flexibility to recipients of Federal financial assistance in establishing and providing opportuni- ties for DBEs. MAJOR RULE CHANGES Some significant changes were implemented in the new rule. Many of these changes influence the overall DBE program administration as well as the portion detailing contract admin- istration. The focus here will be on those changes likely to affect contract administration processes. The U.S.DOT Office of Small and Disadvantaged Business Utilization (OSDBU) prepared a document, “What’s New in the New DBE Rule,” that provides a detailed analysis of the changes. This document is provided in Appendix C and available at http://osdbuweb. dot.gov/business/Dbe/Summary.html. The content is summa- rized as follows: • The rule explicitly prohibits the use of quotas. Set-aside programs are also prohibited, except in extreme cases to remedy severe problems. • The new rule views the national 10% goal as an aspira- tional goal, which does not require federal-aid recipients to set their goals at 10% or any other particular level. • Recipients are to set their goals to represent a “level playing field”—the amount of DBE participation they could realistically expect in the absence of discrimina- tion. Goals must be based on demonstrable evidence of the availability of ready, willing, and able DBE firms. • Recipients must obtain as much DBE participation as pos- sible through race-neutral means. Race-neutral measures include training, bonding assistance, mentor–protégé programs, and breaking contracts into smaller pieces. • Contract goals, or other race-conscious measures, must be used only to obtain the DBE participation needed to meet overall goals that cannot be attained under race- neutral measures. • When there is a contract goal, bidders must make a good faith effort to meet it. • If it is determined that DBE firms are overconcentrated in a certain type of work, appropriate measures to address overconcentration should be taken. • Waivers on program elements can be submitted to the U.S.DOT. • Recipients must collect data about bidders on their con- tracts and subcontracts for later use in calculating over- all goals. Many of these revisions have been incrementally intro- duced, and the STAs have had the opportunity to modify their processes and program elements to address the new require- ments. The revisions of particular interest to this study are changes that directly affect contract administration and data collection in the post-award administration activities. FHWA REVIEW OF DISADVANTAGED BUSINESS ENTERPRISE PLANS In 1999, the FHWA conducted a review of 52 DBE plans. A spreadsheet was generated on specific program elements (G. Yakowenko, personal communication, Nov. 6, 2002). In addition to collecting data on goals, the spreadsheet summa- rizes information on prompt payment and retainage payment, when signed DBE commitments were submitted, the method of compiling the bidders list, and the method for monitoring performance. GENERAL ACCOUNTING OFFICE REPORT SUMMARY TEA-21 was enacted on June 9, 1998, as Public Law 105- 178. TEA-21 authorized the federal surface transportation CHAPTER TWO BACKGROUND

programs for highways, highway safety, and transit for the 6-year period (1998–2003) and it provided technical correc- tions to the original law (“TEA-21 . . .” 2001). The reautho- rization required that the General Accounting Office (GAO) conduct a review of the program throughout the United States (Disadvantaged Business Enterprises . . . 2001). GAO conducted a survey in October 2000, distributing copies to 52 transportation agencies (50 STAs, Puerto Rico, and the District of Columbia) and the 36 largest transit authorities. The following selected results, based on the 1999 regulation requirements, are significant to the scope of this study: • Approximately three-fourths of the states and transit authorities reported that the 1999 regulations have made it more difficult to administer the DBE program. Half indicated that the 1999 regulations made it more difficult for DBEs to apply to the program. • The GAO could not calculate the total number of certi- fied DBEs nationwide because of duplication in state and transit authority directories. • Using anecdotal information, a number of factors or barriers were identified that may limit DBE ability to participate, such as inadequate working capital and lim- ited access to bonding. • The report recommended that the U.S.DOT (1) enhance the collection of data so that more and better informa- tion will be available to evaluate the impact of the DBE program and (2) help states and transit authorities set DBE participation goals that reflect the availability of ready, willing, and able DBEs in the relevant market. Some specific results from the 2000 GAO survey identi- fied where STA implementation had progressed at that time on several key issues. • Ninety-two percent had not submitted a unified certifi- cation plan to the U.S.DOT. • Only 27% of the respondents had a bidders list fully developed and implemented. • Fifty-seven percent did not have a computer database to track and monitor information identified in the new regulation. AASHTO SURVEY In November 2001, the AASHTO Subcommittee on Con- struction, Contract Administration Task Force, conducted a survey on the effect of 1999 DBE regulations on retainage (“AASHTO . . .” 2001). The 1999 regulations require that prime contractors pay subcontractors in full on completion of the subcontractor’s work. Therefore, holding retainage until the project is accepted by the state was possible but not realistic. When these data were summarized, 19 of 47 respondents indicated that they were using a zero-retainage practice. Problems noted in the survey with respect to zero retainage included 6 • Contractors slow in providing close-out documentation, • Contractors losing interest in completing punchlist items, • Overpayment recovery being more difficult, and • Difficulty for prime contractors to get subcontractors back for repair or cleanup. Of the states with a zero-retainage policy in 2001, only 7 were zero retainage before the revision of the DBE regula- tion, and 12 had changed their regulations to comply. OTHER DISADVANTAGED BUSINESS ENTERPRISE REGULATION COMMENTARY A wide variety of publications have commented on the changes proposed in the 1999 regulation and how it would affect implementation of the program. A good summary of contract issues is represented by Parvin’s “Top Ten Issues on Certifica- tion for DBE Contractors” (1999) and provided here. 1. The USDOT has given the states broad discretion in estab- lishing their DBE programs, including the opportunity to request a “waiver” of the regulations on goal setting, good faith efforts, and counting. In essence, state DOTs could fashion their own program, with the help of the contracting industry. Quotas and set-asides are specifically excluded. The DBE goal of 10 percent is an aspirational goal. It does not require a state DOT or a contractor to have 10 percent DBE participation or any other percentage. 2. Guidance and interpretations of the regulations are binding only if over the signature of the Secretary of Transportation and only if there is included a statement that the USDOT General Counsel has reviewed the document and approved it as consistent with the language and intent of 49 CFR Part 26. 3. Section 26.29 establishes a prompt payment provision that could create problems both in subcontractor relations and cash flow. Under that section, state DOTs must establish a prime contract clause which requires prime contractors to pay subcontractors within a specified number of days from receipt of payment from the DOT. The clause must also require prime contractors to pay retainage within a specified number of days after the subcontractor’s work is satisfacto- rily completed. There is no requirement that the DOTs must release retainage for that work. The DOT may also require that subcontracts include an Alternative Dispute Resolution provision for disputes or may provide a clause in the prime contract that prime contractors will not be paid for work done by subcontractors unless and until the prime contractor insures that subcontractors are promptly paid. DBE credit may not be given until the prime contractor pays the DBE. 4. State DOTs will be required to address overconcentration of DBEs in specialty subcontracting fields. The measures may include the use of incentives, technical assistance, business development programs, and mentor/protégé pro- grams. Business development and mentor/protégé programs could become prevalent. 5. State DOTs must set DBE goals based on demonstrable evi- dence of the availability of “ready, willing, and able” DBE firms. Legitimate disparity studies can be used as one means of making such a determination. 6. State DOTs must meet the maximum feasible portion of their overall goal by using race-neutral means (without using DBE Contract goals). This is a new, important requirement. The balance of the goal can be done by DBE Contract goals. 7. Good Faith Efforts must be taken seriously by State DOTs. In other words, they can no longer state that contracts will be awarded on the basis of Good Faith Efforts and then

7ignore such efforts. Additional cost is not in itself reason for rejecting a DBE’s subcontract quote. However, prime con- tractors need not accept excessive or unreasonable DBE quotes. There is no definition of excessive or unreasonable. Prime contractors must still use Good Faith Efforts to replace a DBE whose contract is terminated. 8. The counting rules have changed, particularly in the area of trucking. When a DBE subcontracts any portion of the work to a non-DBE, that portion does not count toward the Con- tract DBE goal. Materials and supplies obtained by the DBE do count toward the DBE goal, but the DBE MUST negoti- ate the price, determine quantity and quality, order the mate- rials, install the materials, and pay for them. A DBE trucker must own and operate at least one fully licensed, insured, and operational truck used on the contract. DBE credit is given for trucks owned, insured, and operated by the DBE using drivers it employs. When a DBE leases trucks from a non- DBE, credit is only given for the amount of the fee or com- mission kept by the DBE. The DBE must have exclusive use and control of such trucks and the leased trucks must display the name and identification number of the DBE. 9. If a DBE firm is decertified after entering into a subcontract, the prime contractor may still count the firm’s participation towards the DBE goal. If the firm is decertified before exe- cution of a subcontract, then the prime contractor will be required to replace the firm. 10. Prime contractors may be subject to debarment and/or crim- inal prosecution for using or attempting to use on the basis of false, fraudulent, or deceitful statements a firm that does not meet the DBE requirements. While this section in the new regulations does not expressly cover commercially useful function, most of the problems faced by prime contractors since inception of the DBE program have resulted from the federal government coming in after the fact and challenging DBE participation. Prime contractors would be well served by having DBE Compliance Manuals for their managers. Parvin (2003) also commented on the 2003 regulation retainage provision, identifying three possible approaches for STAs with respect to retainage. These are summarized as follows: 1. An STA could eliminate retainage entirely, neither retaining funds from prime contractors nor permitting prime contractors to hold retainage from subcontractors. 2. An STA could decide not to retain funds from prime contractors, but give prime contractors discretion to hold retainage from subcontractors (the STA would require prime contractors to pay subcontractors in full after satisfactory completion of the subcontrac- tor’s work) 3. An STA could hold retainage on prime contractors, but make incremental inspections and approvals of the prime contractor’s work at various stages of the project and pay the prime contractor the portion of the retain- age based on these approvals and require the prime to promptly pay all retainage owed to the subcontractor for satisfactory completion of the approved work. DATA MANAGEMENT SYSTEMS To manage the data generated for certification lists, bidder’s lists, and other reporting requirements of the regulation, com- puter-aided tracking systems have been developed internally by STAs or as proprietary software. From the Washington and Rice LLC website (“Solving the Equal Opportunity Puzzle” www.washingtonrice.com), the STAs were identified as hav- ing implemented (Massachusetts, Nevada, New Mexico, New York, and Rhode Island) or in process of implementing (Ala- bama, California, and Missouri) Champ, a software system for managing contract compliance. Reference to any such proprietary item is done only for informational purposes in demonstrating the available technology. The Champ agency module has seven function areas. 1. Vendor (contractor) management, 2. Contract information management, 3. Champ–CM/Champ–SM interface, 4. Bid/quote disparate impact analysis, 5. OJT marketplace analysis, 6. Procurement disparity analysis, and 7. Query builder. The agency module assists in procurement analysis for subcontracting, prime contracting, quoting (bidding module), and negotiated contracts. In addition to the agency module, Champ has a contractor module that handles workforce uti- lization, on-the-job training, DBE monitoring, and report- ing elements. The subcontractor module, Champ–SM, has reporting and employee data systems. Each module has data exchange capability, reducing the need for multiple entries of the same data. There are other systems developed for or by SHAs that also support the data management. WEBSITES FOR DISADVANTAGED BUSINESS ENTERPRISE PROGRAM ADMINISTRATION Two websites were identified that contain information relevant to the administration of DBE programs. The first is published through the U.S.DOT OSDBU (http://osdbuweb.dot.gov). This is a primary source for regulatory changes in the DBE program and other information and links to DBE regulatory activities. The second is published by the FHWA for the pur- pose of collaboration among DBE program administrators. The website states that This site allows people with common interests, goals, or expertise to share their experiences and knowledge, collaborate on work, identify and exchange best practices, and advance the state-of-the- art in their field. Our goal is a transfer of knowledge within and throughout our organization to promote better decision-making, spark innovation, and improve the quality of service to our cus- tomers and partners (http://knowledge.fhwa.dot.gov/cops/dbex. nsf/home). Essentially, it is a discussion board site allowing DBE pro- gram personnel to inquire about practices in other states. A wide variety of subjects are maintained as active discussion threads.

BACKGROUND SUMMARY The GAO 2000 report was the most comprehensive publica- tion that relied on data collected from transportation organi- zations to form a basis for its conclusions. The AASHTO sur- vey was very narrowly focused but informative; however, the data collected by the FHWA was not previously pub- lished. The articles in trade magazines and journals were pre- dominately the opinion of a single author and additional commentary can be found published with the Final Rule. 8 Champ was the only comprehensive software system identi- fied in the background search that was specific to DBE reporting and data collection. The websites represent current information and sources for subject matter content, but they do not represent traditional archival documents. They con- tain contemporary information. Traditional research studies and detailed journal articles covering issues or topics in the DBE program relevant to the current regulation were not found. No surveys, studies, or reports on FTA or FAA DBE programs were identified in the background investigation.