Implementing Race-Neutral Measures in State Disadvantaged Business Enterprise Programs (2011)

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As state departments of transportation (DOTs) carry out their highway construction programs, they are required by the U.S.DOT to direct a portion of their federal-aid fund expenditures toward small businesses called Disadvantaged Business Enterprises (DBEs). A DBE is defined as a small, for-profit business concern that is at least 51% owned and controlled by one or more socially and economically disadvantaged individuals. States are required to meet the maximum feasible portion of their DBE participation goals using race-neutral means designed to remove barriers and enhance opportunities for all small businesses, not just DBEs. (The term “race-neutral” is understood to include gender-neutrality as well.) States’ responses to the survey conducted for this project revealed differences in their interpretations of which strategies constitute race-neutral measures, and a measure viewed as race-neutral by one state may not be considered race-neutral in another. (For example, some states may provide advantages to prime contractors that frequently and proactively use DBE subcontractors, whereas other states do not view this practice as race-neutral.) The objective of this synthesis is to identify race-neutral strategies being used effectively by state DOTs across the country, with a goal of assisting DBE program managers and others in selecting and implementing race-neutral measures in their own agencies. State DOTs can use this synthesis report to explore strategies they may not have previously used, and to learn from other states’ experiences to tailor the implementation of the strategies that they use to be as effective as possible. Race-neutral measures vary from state to state, and the same measure may be implemented differently at different agencies. This synthesis reports on state DOTs’ assessments of which measures are most effective and what details make the difference in a successful implementa- tion. This report also reviews and synthesizes problems faced by state DOTs in the administra- tion of their DBE programs and identifies race-neutral remedies used to overcome these challenges. Finally, three case examples provide an in-depth look at how a state DOT has imple- mented a race-neutral strategy that has been effective in helping the department meet its DBE participation goals. To gather information for this synthesis, an online survey was sent to the membership of the AASHTO Subcommittee on Civil Rights. The survey achieved a 94% response rate, with participation from 47 of the 50 states; most respondents were from state DOT offices of Civil Rights or Equal Opportunity. Follow-up interviews were conducted with three states as case examples. Respondents were asked to rate the effectiveness of 22 race-neutral measures in four cate- gories: supportive services and training, administrative support, marketing and outreach, and financial assistance. Supportive services refers to training, assistance, and other services provided by states to DBE firms using federal funding “to further the development of DBEs, . . . assisting them to move into non-traditional areas of work and/or compete in the marketplace outside the DBE program.” SUMMARY IMPLEMENTING RACE-NEUTRAL MEASURES IN STATE DISADVANTAGED BUSINESS ENTERPRISE PROGRAMS

As a group, supportive services and training measures ranked among the most effective in the survey. The strategy ranking the very highest, however, was an administrative support strategy—“limiting certain small contracts to proposals by small firms only,” which was rated effective by 91% of those who had used it. Of the 22 strategies discussed in the survey, no strategy was rated negatively (receiving rat- ings of 1 or 2—not at all effective or somewhat effective) by more than half of those who had used it. The strategy rated least effective, assisting DBEs with bonding and financing, was rated a 1 or 2 by 43% of those who had used it. (States that use 100% race-neutral measures ranked this strategy more highly, however—60% of race-neutral states rated it very or extremely effective.) Respondents had more experience with some of the strategies named in the survey than others. Supportive services and training measures were widely used among respondents, as were several of the marketing and outreach strategies. Fewer respondents had used the strate- gies related to financial assistance or administrative support. The strategy “branding, market- ing, and publicizing the state’s DBE programs” was used by 100% of respondents, whereas at the other end of the spectrum only 24% of respondents had used the strategy “limiting certain small contracts to proposals by small firms only.” In addition to the 22 strategies listed in the survey, states identified several other race-neutral strategies in their answers to open-ended survey questions. The challenges states identified as the most significant obstacles to meeting their DBE goals for highway contracting spanned multiple areas. Financial challenges were significant, includ- ing external factors (the economy, fuel costs), DBEs’ cash flow issues and lack of access to cap- ital, and DBEs’ inability to obtain bonding. Challenges relating to DBEs’ lack of experience or equipment were cited as problems as well. The survey responses from a subset of 14 states that use or have used 100% race-neutral measures in meeting their DBE participation goals were also analyzed separately. These 14 included the 9 states under the jurisdiction of the Ninth Circuit Court of Appeals, which have all used 100% race-neutral measures as mandated by a 2005 court decision, plus 5 additional states that reported using 100% race-neutral measures for other reasons, often voluntarily. These states have a unique perspective on the use of race-neutral measures that other states may be able to learn from. States using 100% race-neutral measures were similar to states overall in their assessment of which challenges are most significant and which race-neutral strategies are the most and least effective. The 100% race-neutral states were somewhat more likely to identify the issue of DBEs obtaining bonding as a problem than other states; in addition, in rating the effectiveness of the strategy “assisting DBEs with bonding and financing”; 60% of race-neutral states rated this strategy as very or extremely effective, whereas just 17% of other states did. Based on quantitative analysis of the survey data on the most significant challenges and the most effective race-neutral strategies, three strategies were selected as the subjects of case examples: (1) a Florida DOT program that reserves small contracts for small businesses, (2) a Rhode Island DOT loan program for underutilized DBEs, and (3) the Colorado DOT’s practice of providing one-on-one assessments to selected firms and tailoring training to their needs. The results of this synthesis project point to several key findings. The strategies that were rated most effective by survey respondents were not always the most commonly used, and states that are less familiar with these highly rated strategies may wish to evaluate their poten- tial for success. Two of these strategies—reserving small contracts for small businesses and using loan mobilization programs—can have high payoffs, but are challenging to implement. 2

They may require a state DOT to seek enabling legislation or approval from the FHWA or to identify funding sources or umbrella programs (e.g., finding a place for contracting innova- tions within an agency’s alternative contracting program). Survey respondents wrote more comments about communication and networking than about any other topic. Facilitating and improving communication between DBEs and prime contrac- tors is seen as critical in establishing new relationships, in helping DBEs effectively solicit work, and in maintaining successful partnerships between contractors and subcontractors on existing projects. States have helped facilitate communication using strategies such as holding networking events, helping prime contractors identify DBE subcontractors in specific lines of work, and proactively monitoring projects as they progress. States have mitigated the challenges they face with measures that help individual DBEs in a direct, immediately tangible way, such as by assisting a limited number of DBEs in obtaining loans, bonding, or insurance, and with longer-term measures that help a larger group of DBEs grow, such as networking opportunities and training classes. States that use targeted measures stressed the importance of selecting the right firms to receive these benefits. Some states have found that evaluating the ways in which different DBE firms make use of the measures that ben- efit all firms can help them assess which firms are good candidates for those measures that need to be divided among fewer recipients. The literature review conducted as part of this project concluded that there is little to no pub- lished peer-reviewed research on this topic. Four potential avenues for further research in this area were identified. First, this synthesis considered the effectiveness of race-neutral measures from the perspective of state DOTs. A follow-up project that examines the perspective of DBE firms on similar issues would provide valuable insight for state DOTs on which measures DBEs see as most helpful. Feedback from Supportive Services staff would provide a useful perspective as well. Second, follow-up research that identifies trends in states’ use of race-neutral measures according to regional differences, agency size, or state and federal funding levels would allow states to further tailor their implementation of these measures to those that are best suited to their circumstances and resources. In addition, more research into how states implement race-neutral programs such as reserv- ing contracts for small businesses would be valuable. Because programs such as these require more levels of approval than some other strategies, compiling templates for legislation and suc- cessful practices for implementation would allow more agencies to explore these programs. Finally, data on the extent to which states have met the race-neutral portion of their annual DBE participation goals would be beneficial in assessing the effectiveness of implementing race-neutral measures as a group. 3