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1 State and local governments must implement the federal Disadvantaged Business Enterprise (DBE) program to assist socially and economically disadvantaged businesses in obtaining work involved in U.S. DOT-funded contracts. This assistance includes encour- aging participation of DBEs as subcontractors and prime contracts in construction, pro- fessional services, and other contracts. To be certified as a DBE, the firm and its owner must not exceed ceilings pertaining to gross revenue and personal wealth. Eligibility requirements anticipate that some firms will develop to where they no longer need the program. When that occurs, firms âgraduateâ from the program. Most state departments of transportation (DOTs) provide supportive services to DBEs to assist in their development. Budgets for those services are limited, and state DOTs seek a mix of assistance that has the greatest benefit to DBEs. More than 40 state DOTs also set DBE contract goals in their implementation of the program. The U.S. DOT and state DOTs need additional information about successful DBEs, the extent to which DBEs have âgraduatedâ from the federal DBE program, and how state DOTs and their partners can improve efforts to assist the most successful firms. In addition, trade associations and other providers of assistance to firms in the transportation contracting industry would benefit from evidence-based direction on ways to help DBEs. This research, conducted under NCHRP Project 20-95A, provides the first national examination of DBEs that have been successful working with state DOTs, including pro- gram graduates. Following identification of successful DBEs in nearly every state, the research team compared their characteristics to a random sample of all DBEs. The research team then conducted an online survey and in-depth interviews with successful firms. The research team used similar methods to gather information from state DOTs and trade associations. Key Results and Recommendations Number of Successful DBEs and Graduates and Implications for State DOTs About 750 successful DBEs were identified by state DOTs, including graduated firms, based on the different criteria for âsuccessâ developed for this research. S U M M A R Y Compendium of Successful Practices, Strategies, and Resources in the U.S. DOT Disadvantaged Business Enterprise Program
2 Compendium of Successful Practices, Strategies, and Resources in the U.S. DOT Disadvantaged Business Enterprise Program The federal DBE program has helped successful DBEs achieve that success, according to those companies. Although they are older companies, many owners of DBEs say they have recently used training and other technical assistance offered by state DOTs and will continue to do so. DBEs identified by state DOTs as successful represent a small share of total certified DBEs in the nation (about 41,000). Being certified as a DBE does not guarantee a companyâs success in state DOT work. DBEs working with state DOTs do, if rarely, graduate from the federal DBE program. State DOTs identified about 100 companies that had graduated, but as many as one-third of those firms have already re-entered the program as owner net worth or business revenue changed to the point that they were again eligible. There are disincentives to graduation for a DBE, which the U.S. DOT and state DOTs might need to address. Also, the federal DBE program does not create a sizeable number of âlargeâ companies involved with state DOT work that are DBEs or graduates. Annual revenue for successful DBEs is typically $10 million or less, far below most of the small business size limits that apply to the program. State DOTs identified a small number of DBEs that might be on a path toward gradu- ation. Because few individual state DOTs reported that they were now helping firms pre- pare for graduation, there is an opportunity for state DOTs to combine their efforts across multiple states to assist potential graduates as they grow and sustain their businesses. Profile of Successful DBEs About one-half of successful DBEs are firms owned by white women, which is more than what one would expect given the relative number of all DBEs owned by white women. More research is warranted about why certain minority groups are underrepresented among firms that state DOTs have identified as successful. Although most DBEs identified as successful by state DOTs are construction or pro- fessional services firms, they cut across many different specializations within those two industries. Many successful DBEs have diversified the types of work they perform. State DOTs need to plan technical assistance accordingly. Results from this research demonstrate that, overall, state DOT operation of the federal DBE program does not lead to over- concentration of DBEs in a certain type of work. Most DBEs are older firms that have been certified for many years. About 90% of suc- cessful DBEs have been in business for at least 8 years, and often much longer, which differs from the profile of all DBEs. It appears to take many years for a firm to be successful in work- ing with state DOTs. The path for success that worked for some of the older DBEs might be harder, or not practical, for newer DBEs. A prime contractor may be reluctant to use a newer DBE when the prime has been working with an older DBE for many years. Many successful DBEs still report difficulties competing for prime contracts, even though most perform some work as a prime contractor or consultant. Very few state DOTs have unbundled contracts or made other substantial efforts to open prime contract opportunities in the construction and professional services to small businesses. Successful DBEs appear to go through the same stages of development as any other firm, but with better results. Nine factors appear to be mandatory to the success of DBEs. Three additional strategies are also important to the success of some firms. The nine mandatory factors are 1. Experience and relationships prior to start-up; 2. Being in a field with demand for services;
Summary 3 3. Access to capital; 4. Business acumen; 5. Quality of work and reputation; 6. Relationships with customers; 7. Ability to hire, train, and retain a quality workforce; 8. Operational efficiency and competitive pricing; and 9. Succession planning. Weakness in any one of the first eight factors can lead to failure of the company, even if it has strong capabilities in the others. The ninth factorâsuccession planningâappears to be discussed very little among DBEs and state DOTs. However, for firms owned by individuals who are older, effective succession planning will not just determine whether a company continues to be a DBE, but whether it remains in business at all. Three strategies that some DBEs have used to be successful are 1. Diversification or vertical integration; 2. Serving a geographically large market area; and 3. Bidding or proposing as a prime contractor or consultant. State DOTs and other groups can design training and other assistance to build capa- bilities in each of these areas. Communicating these factors to new business owners and those thinking about starting a business can help them plan for the challenges in becoming a successful firm. State DOT Efforts to Assist DBEs State DOTs help DBEs through many avenues. DBE programs that include contract goals appear to be very important to the success of DBEs. Training and technical assistance also appear to help DBEs achieve success. Forms of state DOT assistance can be grouped into the following 11 categories: 1. DBE recruitment and effective DBE certification; 2. Relationship building; 3. Information about contract opportunities; 4. Enforcement of prompt payment requirements; 5. General training; 6. Individualized training and assistance; 7. Individualized assistance tailored to successful DBEs; 8. Providing access to capital; 9. Contract goals; 10. Unbundling contracts and selection of prime contractors and consultants that is friendly to small businesses; and 11. Sheltered market bidding for small contracts. Most state DOTs provide the first six types of assistance in addition to setting DBE contract goals. As a whole, state DOTs appear to be lacking individualized assistance spe- cifically tailored to successful DBEs, and only some state DOTs provide access to capital, unbundle contracts, and remove barriers for small businesses competing for prime con- tracts. It appears that nearly every state DOT could improve its efforts in these areas. A few state DOTs provide little if any training and technical assistance to DBEs. Some are struggling with shrinking or non-existent supportive services budgets. These state DOTs might benefit from better priorities for the assistance they provide and more effi- cient delivery methods, including web-based, on-demand assistance. They also might
4 Compendium of Successful Practices, Strategies, and Resources in the U.S. DOT Disadvantaged Business Enterprise Program need to add sufficient funding for program operations to meet all the requirements under the federal DBE program. Good Practices That Can Be Employed by State DOTs and Others There are many good practices available for state DOTs and their partners to help create successful DBEs. â¢ Successfully deliver basic services. These services include DBE recruitment and effec- tive DBE certification as well as properly setting DBE contract goals and monitoring achievement if the state DOT operates a race-conscious program. DBE contract goals, if employed, should encompass construction and professional services contracts funded by U.S. DOT, as appropriate. State DOTs must also monitor DBE participation on non-goals contracts to determine whether total DBE achievement has met their overall annual DBE goals for contracts funded by U.S. DOT. â¢ Emphasize training specific to the transportation industry and state DOT, including for non-construction firms. State DOTs might consider whether they should discontinue classes readily available through other means and focus on training specific to companies involved in work related to state DOTs. This should include professional services firms, which are left out of such programs for some state DOTs. â¢ Provide individualized training and assistance, including for successful DBEs, using the most appropriate delivery models. â¢ Address access to capital and bonding beyond only having classes. For example, some state DOTs participate in loan assistance programs for DBEs. â¢ Open more prime contract opportunities to small businesses including DBEs. Only a few states have made it a priority to unbundle contracts, reconsider prequalifica- tion requirements, or create sheltered bidding programs to encourage participation of small businesses. State DOT leadership would need to support these initiatives, some of which may require state legislation. â¢ Track successful DBEs, share information across states, and develop multi-state efforts to provide specialized assistance to firms on a graduation path. â¢ Encourage successful DBEs to assist emerging DBEs. â¢ Ease the transition from being a DBE-certified firm to a program graduate. Ideally, gradu- ation from the federal DBE program would result in a âsoft landingâ for those firms. â¢ Explore whether graduation might be made more permanent for firms that exceed per- sonal net worth limits or have shown the ability to accumulate substantial wealth. â¢ Celebrate graduations and track them as a metric of program success. â¢ Track utilization of all minority- and women-owned firms (including graduated DBEs) to provide measures of program success in addition to DBE Uniform Reports. â¢ Internally plan for graduation of some DBEs, including when setting overall DBE goals.