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

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26 This chapter provides case examples of three race-neutral measures currently being used by state DOTs. These strategies were selected because they were ranked highly by survey respondents. Case Examples #1 and #2 are strategies that have been used by fewer states but rated highly effective by those that do use them, whereas Case Example #3 describes how one state has been successful in implementing a more common measure that was also rated highly effective. This section is based on survey responses and detail pro- vided in follow-up interviews. During these interviews, the DOT staff emphasized what made these strategies successful and provided suggestions to other state DOTs that are inter- ested in implementing these measures in their own agencies. This chapter includes: Case Example #1: Florida Department of Transportation: Reserving Small Contracts for Small Businesses Case Example #2: Rhode Island Department of Transporta- tion: Loan Program for Underutilized Disadvantaged Business Enterprise Firms Case Example #3: Colorado Department of Transportation: One-on-one Assessments and Customized Training CASE EXAMPLE #1: FLORIDA DEPARTMENT OF TRANSPORTATION: RESERVING SMALL CONTRACTS FOR SMALL BUSINESSES FDOT has had success with a program that can be challenging for states to obtain authority to implement: a Business Devel- opment Initiative that reserves some small contracts (under $500,000 each) solely for small businesses. The program began in 2006, when Florida along with other states had been experiencing a decline in bidding on its con- tracts, and contract costs that were steadily rising. FDOT was looking for ways to increase competition among construction firms and to foster the growth of smaller businesses, and this program was one solution: Give smaller firms working in the private sector the opportunity to learn the ropes of working on government projects and increase their ability to bid on FDOT projects in the future. The department implemented the Business Development Initiative through statutory authority that already existed for innovative contracting. The innovative contracting authority, which is also used for various other project innovations, has set a maximum amount not to exceed $120 million in con- struction contracts annually. That program is authorized by the state legislature, and that statutory authority is key. What Works, What Does Not Staff at FDOT’s district offices decides which contracts to reserve as part of the Business Development Initiative. They make sure there are DBEs available to bid on the projects, and they have not yet had a project in the program that received no bids. A key challenge in administering the program is in finding opportunities to unbundle larger contracts into smaller pieces. In addition, staff must weigh the benefits of breaking con- tracts apart against the benefits of bundling smaller contracts together, which allows engineering and procurement staff to optimize the use of their own limited resources on one larger contract instead of several smaller ones. Another challenge is finding contracts in highway con- struction that are appropriate for the program; in general, road- building contracts exceed the program’s $500,000 cap. Instead, projects in the Business Development Initiative tend to be along the lines of drainage improvements, sidewalk pro- jects, and landscaping. The department hopes that some DBE firms will expand their businesses into these areas to take advantage of the reserved contracts. FDOT encountered some procedural challenges in estab- lishing its Business Development Initiative. Because Florida was at the forefront nationally of exploring this type of initia- tive, it took years to get approval from the FHWA to use the procedure on federally funded contracts. Also, the department had to move away from including preference points for profes- sional services consulting contracts in the program. Profes- sional services contracts are now reserved for small businesses on state-funded contracts, but are limited by the FHWA to $100,000 on federally funded contracts. Effectiveness The Business Development Initiative is designed to benefit all small businesses and it has been successful in doing that while helping FDOT achieve its DBE participation goal. The firms winning contracts under the program have been a good mix of CHAPTER FIVE CASE EXAMPLES

27 DBEs and non-DBEs. The following are statistics on the pro- gram through July 2009: • Sixty-seven contracts had been funded, totaling $51 million – Forty-five contracts were prime contracts, and 23 went to DBEs. – On 22 contracts, preference points were awarded to professional services firms that subcontracted to small businesses; 58 small businesses were used as subcon- tractors and 43 firms, or 74%, were DBEs. • Fifty-six different firms were awarded one or more of these 67 contracts – Nineteen of these different firms, or 34%, were DBEs. – Six firms were first-time contractors with the department. • All contracts were graded upon completion, and the aver- age grade was a 90 out of 98 possible points (not includ- ing bonus points). (Contracts are graded in nine areas, including timely completion, mitigating cost and time overruns, minimizing impacts to the traveling public, and environmental compliance.) The department has received informal feedback from DBEs that they appreciate the program and would like to see it expanded, with more contracts reserved. Looking Ahead States initiating a program such as the Business Development Initiative today would not face the hurdles in obtaining federal approval that FDOT did when the practice was newer; indeed, the FHWA now encourages other states to explore this type of program. More information on FDOT’s Business Development Ini- tiative is available at: http://www.dot.state.fl.us/equaloppor tunityoffice/GeneralBDI.shtm. CASE EXAMPLE #2: RHODE ISLAND DEPARTMENT OF TRANSPORTATION: LOAN PROGRAM FOR UNDERUTILIZED DISADVANTAGED BUSINESS ENTERPRISE FIRMS RIDOT’s low-interest loan program for underutilized DBE firms grew out of RIDOT’s efforts to level the playing field for DBE firms headed by minorities. In Rhode Island, the use of DBEs on highway contracts has traditionally been skewed toward firms owned by Caucasian women, according to RIDOT’s Office of Business and Community Resources. Those firms tend to have greater access to capital, which allows them advantages such as the ability to pay for supplies up front rather than paying higher prices to finance them. This in turn allows them to consistently underbid DBE firms with less capital and to win more RIDOT contracts. RIDOT’s loan program gives underutilized DBE firms— which in Rhode Island typically have African–American, Hispanic, Native American, or Asian owners—the advantage that they need to bid competitively. RIDOT applied for and received a waiver from the FHWA that allows the department to target underutilized DBEs from certain groups with its loan program rather than making loans available to all DBEs. The program is administered as part of RIDOT’s supportive ser- vices offerings. The program offers two types of loans: those for equipment purchases and contract financing that is tied to a specific RIDOT project. Equipment loans are most often used to pur- chase construction equipment such as heavy trucks, whereas contract financing helps firms pay for insurance, supplies, and other expenses associated with a specific RIDOT contract. Contract loans must be repaid as the project progresses and be paid off by the time the project finishes, but equipment loans may have longer terms, often about six or seven years for truck loans. All loans are low-interest, about 2% to 3%, and for many years the financing aspect was handled through an investment corporation that provided loans to small businesses, which has since closed. When RIDOT first began the program, the financing was handled in-house, with the department’s finance division processing the DBE firm’s loan payments. Staff quickly realized that the department was not set up to track and process multiple loans, and the department sent out a Request for Proposals seeking a bank or financial group to take over the program. RIDOT’s original loan fund had contained approximately $4 million, and on average the department has about $1.5 mil- lion in loans outstanding at any given time. There is no set cap on the amount of any individual loan; this is left up to staff judgment based on the size of the contract a DBE is working on. What Works, What Does Not Other states that wish to initiate a similar loan program are advised to select the firms they loan to judiciously, applying the same due diligence that a bank does in qualifying loan applicants. RIDOT puts less emphasis on a firm’s credit history or credit rating than a bank might, and the department under- stands that a DBE firm may not have a large quantity of assets to use as collateral. Instead, RIDOT places more emphasis on a firm’s back- ground and experience, and looks for firms to have commit- ment letters from prime contractors who pledge to subcontract with them, for example, or contracts on which they intend to use the equipment they plan to purchase. The character of the loan applicant is also important, whether the firm’s owner is hard-working and committed to wanting to do well.

Effectiveness RIDOT began its loan program in 2003 with a single equip- ment loan, and in the years since then the program has taken off. The department now has about a dozen loans outstanding at any given time. Although Rhode Island’s traditionally underutilized DBE firms are not yet at parity with the more established DBE firms, the loan program has made a difference. The program has also been successful in recruiting new firms in areas where Rhode Island traditionally has not had any DBE firms certi- fied, such as catch basin cleaning. RIDOT has been able to assist DBE firms in purchasing the equipment needed for new types of work. CASE EXAMPLE #3: COLORADO DEPARTMENT OF TRANSPORTATION: ONE-ON-ONE ASSESSMENTS AND CUSTOMIZED TRAINING The Colorado DOT (CDOT) began using this strategy as part of the Business Opportunity and Workforce Development (BOWD) program, which started in the state in 2007. Col- orado was chosen by the FHWA as one of several states to pilot the BOWD program, which combined workforce devel- opment and business management assistance. The key to the BOWD program was that CDOT targeted just a few of the state’s 300 DBE firms, with resources tai- lored to their needs rather than providing classroom train- ing that may be more useful for some DBEs than others. CDOT initially selected 20 DBE firms to participate in the BOWD program, and added companies in the program’s second year. Once the BOWD program was no longer federally funded, CDOT decided to continue those aspects of the program that staff believed was particularly valuable. Effectiveness CDOT points to successes with individual clients in gauging the effectiveness of this program. One participant in the pro- gram came to CDOT as a very small concrete company that had had small successes and was looking to move to the next level. Through the BOWD program, CDOT consultants per- formed an in-depth assessment of the company’s strengths and the areas where the owners could benefit from training, and then tailored assistance to meet those needs. CDOT encouraged the company owners to take advan- tage of resources available through the Hispanic Contractors Association and the Colorado Contractors Association, and encouraged them to create partnerships with other firms. At 28 first the company began quoting as a subcontractor on smaller contracts. With CDOT’s help, the company grew from quoting on $50,000 jobs to quoting on $200,000 con- tracts, and recently competitively won a $2 million concrete project as a prime contractor. What Works, What Does Not Selecting which firms receive the assessment and targeted assistance is key to the program’s success. The BOWD program had an application process, and DBE firms had to meet requirements such as having been in business for a certain number of years and actively bidding on CDOT projects. CDOT’s current program relies more on the judgment of staff members. It was noted that business-savvy owners are more likely to be successful in the program; some firms selected in the past where the owners lacked that quality were not successful. Today, CDOT staff reaches out to DBE firms with this type of assistance at several different points. Staff works with newly certified firms that are enthusiastic about bidding and have strong applications, helping these emerging firms under- stand the bidding process and ensuring that, for example, the firms are building profit into their bids. In addition, they help DBE firms that have been successful as small contractors move to the next level. CDOT staff also monitor bids on current construction proj- ects and reach out to firms at critical points, such as when a firm wins a bid as a subcontractor for the first time, wins a larger bid than usual, wins a bid after struggling on a previous project, or when a firm has bid repeatedly but has not won a contract. At these points, CDOT may decide to initiate an assessment if a firm has not yet had one. DBE firms also con- tact CDOT for assistance if they encounter difficulties once a project has begun. To provide the technical assistance these firms need, CDOT contracts with several consulting firms that have expertise in areas such as business management, bidding/ estimating and proposal writing, financial and bonding issues, and marketing. Each consulting firm is qualified to perform the assessments and CDOT oversees these firms closely. A key part of this technical assistance is getting DBE firms acclimated to the elements involved in a CDOT project, such as the paperwork required for a federal-aid highway project. Although there are other small business resources that may be able to help a firm with business development in general, it was pointed out that the ability to help firms succeed on CDOT proj- ects specifically is a service unique to the department itself—

29 and therefore a valuable way for the department to spend its supportive services dollars. It was noted that the current assessment process is less for- mal than the one used under the BOWD program, which was a very detailed written assessment that could take a full day or more. The current assessment process allows CDOT to get to the root of a firm’s needs quickly and then mobilize the state’s resources to address them. Looking Ahead CDOT staff is pleased with the program’s results. In the future they may explore tracking the program’s successes more quantitatively, such as by analyzing the achievements of firms that have been through the program and noting increases in how often they bid, how many contracts they win, and the size of those contracts.