National Academies Press: OpenBook

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

Chapter: Chapter Four - State Disadvantaged Business Enterprise Program Challenges and Solutions

« Previous: Chapter Three - State Strategies for Implementing Race-Neutral Measures
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Suggested Citation:"Chapter Four - State Disadvantaged Business Enterprise Program Challenges and Solutions." National Academies of Sciences, Engineering, and Medicine. 2011. Implementing Race-Neutral Measures in State Disadvantaged Business Enterprise Programs. Washington, DC: The National Academies Press. doi: 10.17226/14505.
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Suggested Citation:"Chapter Four - State Disadvantaged Business Enterprise Program Challenges and Solutions." National Academies of Sciences, Engineering, and Medicine. 2011. Implementing Race-Neutral Measures in State Disadvantaged Business Enterprise Programs. Washington, DC: The National Academies Press. doi: 10.17226/14505.
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Suggested Citation:"Chapter Four - State Disadvantaged Business Enterprise Program Challenges and Solutions." National Academies of Sciences, Engineering, and Medicine. 2011. Implementing Race-Neutral Measures in State Disadvantaged Business Enterprise Programs. Washington, DC: The National Academies Press. doi: 10.17226/14505.
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23 This chapter discusses the challenges that survey respondents identified in meeting their goals for DBE participation and pairs them with solutions—both race-neutral strategies that states have found to be effective and additional solutions that respondents described in their open-ended comments. This chapter provides insight into how states have used race-neutral measures to address common challenges. The survey asked respondents to rate the severity of 19 challenges in terms of their impact on meeting goals for DBE participation in highway contracting. These included chal- lenges related to working with DBE firms and non-DBE prime contractors, and challenges related to external factors. Solu- tions that states have used to mitigate 11 of these challenges were identified, and these 11 challenges are described in this chapter. Details of respondents’ numerical ratings of the 11 challenges’ impacts on DBE participation accompany these summaries to provide additional perspective. Respondents’ ratings of the impacts of the other 8 chal- lenges are shown in Figure 4 (see chapter two), and detailed ratings of all 19 challenges are available in Appendix B. The full text of all open-ended survey responses is also available in Appendix B. FINANCIAL CHALLENGES Survey respondents viewed financial obstacles as the greatest challenge to states in meeting their goals for DBE participa- tion. Lack of access to capital and cash flow issues was viewed as the most severe problem, with 60% of those responding rat- ing it a significant or severe problem (a 4 or 5 on a five-point scale). External factors such as the economy and rising fuel costs were also a significant concern, with 89% of those responding identifying these issues as a problem. Challenge #1: Challenges related to external factors, such as economic conditions or rising fuel costs A higher percentage of respondents viewed this issue as a problem than any other challenge, with 46% viewing it as a significant or severe problem. One respondent noted that in difficult economic times contractors are keeping their work- forces employed by performing tasks themselves that they might once have subcontracted to DBE firms. Another respon- dent mentioned that economic difficulties have led to a rise in contractor payment issues, noting that prompt payment claims in this state have doubled. None of the respondents proposed a direct solution to this problem; however, the solutions mentioned in the next two sections are designed to address financial challenges in general. Challenge #2: DBE firms’ lack of access to capital and/or cash flow issues Respondents viewed this as a significant challenge; 87% of respondents identified this issue as a problem, with 60% viewing it as a significant or severe problem. One strategy that some DOTs have used to improve DBEs’ access to cap- ital is to participate in loan mobilization programs (assisting banks in providing loans to DBEs). Just 28% of states had used this strategy, but of those that had, 62% found it to be very or extremely effective (rating it a 4 or 5). (For more detail on this strategy see Case Example #2 in chapter five.) Another respondent suggested elimination of up-front cost retainage on prime contractors and subcontractors to allow firms to use this money for other purposes. Challenge #3: DBEs’ inability to obtain bonding Most respondents believed this issue was a challenge, with 74% of respondents identifying it as a problem and 37% view- ing it as a significant or severe problem. “Bonding is a sig- nificant barrier,” one respondent noted. In addition, all of the states that use 100% race-neutral measures identified this issue as a problem. Sixty percent of states had used measures to assist DBEs with bonding and financing; of those, 57% found this strategy to be effective, with 25% rating it a 4 or 5 (very or extremely effective). In addition, 60% of the states that use entirely race- neutral measures rated this strategy a 4 or 5. Respondents described two types of bonding assistance—a bond guarantee program and a bonding fee reimbursement program. Another respondent mentioned a third strategy that relieves financial pressure on both prime contractors and DBEs—elimination of up-front cost retainage. CHAPTER FOUR STATE DISADVANTAGED BUSINESS ENTERPRISE PROGRAM CHALLENGES AND SOLUTIONS

DISADVANTAGED BUSINESS ENTERPRISES’ LACK OF EXPERIENCE OR EQUIPMENT Challenge #4: DBE firms’ lack of experience/skill at managing a business Many respondents believed this issue was a challenge, with 73% of respondents identifying it as a problem and 42% view- ing it as a significant or severe problem. One respondent noted that less sophisticated DBEs may assume that getting certified is all that is required to get DOT work. Providing firms with business development assistance is one method states have used to mitigate this challenge. Ninety- four percent of states had used this strategy, and of those states 77% found it to be effective, with 48% rating it a 4 or 5 (very or extremely effective). Some states also use the related strat- egy of establishing business development programs. States were not asked to rate this strategy’s effectiveness, but many respondents wrote positive comments on these programs. In addition, the mentor firms participating in mentor/protégé programs provide business development assistance to develop- ing firms. Forty-three percent of the states had used this strat- egy and of those 60% found it to be effective, with 30% rating it a 4 or 5 (very or extremely effective). Challenge #5: Uncertainty among DBEs in how to expand their businesses Many respondents believed this issue was a challenge, with 72% of respondents identifying it as a problem and 30% view- ing it as a significant or severe problem. One respondent reported that DBE program staff work closely with DBE firms to help them expand their capacity and their areas of expertise and to become prequalified to bid as prime contractors. It was noted that bonding is a significant barrier for DBE firms, but that this state’s business development program has been help- ful, and that working one-on-one with DBEs over time has produced positive outcomes. Challenge #6: Lack of DBEs certified or experienced in certain work areas (such as Intelligent Transportation Systems or the full spectrum of construction work) Many respondents believed this issue was a challenge, with 68% of respondents identifying it as a problem and 34% view- ing it as a significant or severe problem. States’ experiences with this problem included: • Overconcentration of DBEs in areas such as trucking, where prime contractors hire truck brokers who in turn charge DBE truckers unreasonable hourly broker fees. • Difficulty moving firms into new areas such as landscap- ing, guardrails, pavement marking, and lighting because of the cost of entering these work areas. 24 Respondents were asked directly about their efforts to address this challenge. All but one state responded, and of those states 54% had made specific efforts and 46% had not. States’ strategies for addressing this problem included: • Unbundling large highway construction contracts to encourage smaller firms to bid as prime contractors. • Working with organizations that target small businesses; outreach to these firms through workshops and exposi- tions to educate them about transportation opportunities. • Conducting one-on-one assessments of selected DBE firms and tailoring technical assistance to their needs. • Focusing supportive services on areas with no certified DBEs. Challenge #7: DBE firms’ lack of equipment necessary to meet contract/subcontract requirements About half of respondents (48%) believed this issue was a challenge, but only 18% viewed it as a significant or severe problem. To help DBE firms expand the types of equipment they own, RIDOT has had success with providing low-interest loans to DBE firms for the purchase of trucks and other heavy equipment needed to participate in DOT contracts. See Case Example #2 in chapter five for more details. ISSUES WITH PRIME CONTRACTORS Challenge #8: Prime contractors not willing to work with new DBE firms (for example, because prime contractors have existing relationships with certain DBE firms or because of uncertainty about new firms’ skills) Seventy-seven percent of respondents believed this issue was a challenge, and 55% viewed it as a significant or severe prob- lem. Although respondents did not address this specific issue in their open-ended comments, this challenge relates to rela- tionship building in general. The strategies that relate to estab- lishing new relationships between prime contractors and DBEs may have some application toward this issue, including hosting networking events and meet-and-greets, and holding pre-bid or pre-letting meetings. Challenge #9: Lack of commitment, cooperation, or follow-through on the part of prime contractors in using DBE subcontractors Forty-seven percent of respondents believed this issue was a challenge, but only 21% viewed it as a significant or severe problem. Examples of states’ efforts to address this issue included: • Issuing an anonymous survey about which prime con- tractors provide a meaningful work and training experi- ence for the DBE firm and which contractors meet the

25 minimum requirements and release the DBE once the goal is met. Prime contractors that are identified as prob- lematic are brought before the DOT’s Prequalification Committee, which has the authority to decrease or elim- inate a firm’s ability to work with the DOT. • If contractors fall behind on their DBE utilization, the DOT’s compliance review officers identify these short- falls and work proactively to assist the contractor with bringing more DBEs to the project. Other relationship-building strategies may be useful in addressing this problem as well, especially those designed to foster communication and maintain successful partnerships between existing partners. These include proactive project monitoring by DOT staff and early intervention when issues arise, and co-locating DBE subcontractors and prime contrac- tors on large construction sites. One survey respondent raised an additional challenge: deal- ing with union contracts that require prime contractors to refuse to hire non-union DBE subcontractors. The state has responded by encouraging these contractors to negotiate project-specific labor agreements for non-union DBEs. CHALLENGES RELATED TO DISADVANTAGED BUSINESS ENTERPRISE DEVELOPMENT Challenge #10: Lack of DBE firms that work as prime contractors Seventy-two percent of respondents believed this issue was a challenge and 50% viewed it as a significant or severe prob- lem. In general, any supportive services initiative that helps DBE firms grow and develop may indirectly address this issue, because larger, more established firms are more likely to win contracts as prime contractors. Challenge #11: Larger, more established DBEs overshadow newly emerging DBEs, making it difficult for new firms to grow Fifty-nine percent of respondents believed this issue was a challenge and 26% viewed it as a significant or severe prob- lem. Programs targeted at underutilized and emerging DBEs can help level the playing field for these smaller firms. For example, RIDOT offers low-interest loans to underutilized DBE firms, which helps them bid competitively against larger firms. See Case Example #2 in chapter five for details.

Next: Chapter Five - Case Examples »
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TRB’s National Cooperative Highway Research Program (NCHRP) Synthesis 416: Implementing Race-Neutral Measures in State Disadvantaged Business Enterprise Programs explores race-neutral strategies being used effectively by state departments of transportation (DOTs) to meet their Disadvantaged Business Enterprises (DBE) participation goals. It also reviews and synthesizes problems faced by state DOTs in the administration of their DBE programs and identifies race-neutral remedies used to overcome these challenges.

As state DOT's carry out their highway construction programs, they are required to direct a portion of their federal-aid fund expenditures toward small businesses called 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.

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