Disadvantaged Business Enterprise Compliance Primer
by Jeff Witt & Peder Jensen
If you’re a contractor who does work for the Department of Transportation (DOT), you’ve probably heard of the Disadvantaged Business Enterprise (DBE) requirements set out in 49 Code of Federal Regulations (CFR) Part 26. Since 1983, a statutory provision has required the DOT to dedicate at least 10% of funds authorized for highway and transit financial assistant programs to DBEs: certified small businesses owned and controlled by socially and economically disadvantaged individuals, including minority groups and women. Let’s take a look at the compliance risks associated with these requirements and consider the experiences of companies that were found to be noncompliant.
Introduction to 49 CFR Part 26
Part 26 explains the requirements primarily to fund recipients – generally state DOT organizations that award prime contracts to GCs. While most of the regulations don’t apply directly to construction companies, several sections do.
Section 26.107 addresses enforcement actions against companies that make false statements regarding their satisfaction of DBE goals; these actions include suspension, debarment, and criminal proceedings. Many of the enforcement actions that have taken place involve contractors that incorrectly claimed DBE goal fulfillment by using subcontractors that didn’t meet the requirements.
Section 26.109 addresses the cooperation expected from construction contractors. According to the regulations, contractors are required to cooperate “fully and promptly” when subject to a compliance review. What may not be clear from this language is what constitutes adequate documentation in support of DBE compliance efforts. After first discussing some recent cases of DBE noncompliance, we’ll focus on the decisions contractors must face regarding internal controls and related documentation to address risk of noncompliance.
Cases of DBE Noncompliance
If you are in the construction industry, then you’ve likely heard of the high-profile case involving California-based contractor Tutor Perini. Zohrab Marashlian, the former president of Perini’s civil group, was found guilty of fraud and conspiracy to launder money related to false representations of DBE compliance. Shortly after his conviction, Marashlian committed suicide. This and similar cases of blatant fraud have been well publicized.
But there have been many other cases – less widely known – and though they may not have resulted in fraud convictions, they nevertheless resulted in large sanctions against the contractors involved. For example, in 2011, Skanska USA Civil Northeast Inc. agreed to pay $19.6 million to settle a federal investigation into its DBE subcontracting practices. These cases often involve claiming DBE goal attainment using subcontractors that are later determined to not qualify as a DBE.
What Should DOT Contractors Do to Mitigate Risk?
Documentation of compliance efforts is critical in two key areas: “good faith efforts” and “commercially useful function.”
Good faith efforts: Throughout the life cycle of the contract, the contractor is expected to make good faith efforts to identify and solicit DBE subcontractors. In cases where a contractor was not able to meet its DBE goal, documentation of these efforts can make the difference in whether the contractor is assessed a large penalty.
Commercially useful function: A DBE performs a commercially useful function when it’s responsible for executing the work in the contract and is carrying out its responsibilities by actually performing, managing, and supervising the work involved. Prime contractors are responsible for determining that the subcontractors they’re using to claim DBE credit meet this requirement. Documentation in this area is especially critical: In cases where a subcontractor is later found to not meet this requirement, the contractor’s system of controls and related documentation can make the difference in whether a penalty is assessed or other actions are taken.
While it’s clear that documentation is required in these and other areas, some companies may be uncertain as to how much documentation is enough and what form it should take. For example: Is a monthly checklist sufficient? Or is additional documentation required to support that the checklist represented the results of concrete steps taken to verify compliance? Each contractor has to decide what it will require of its estimating personnel and PMs and provide training so that the policies are implemented consistently. What’s clear is that this is an important area for controls; it will require delicately balancing the risks of noncompliance and the costs of documentation efforts.
The ramifications for DBE noncompliance are serious, and the risk of related fraud is well documented. For that reason, it’s crucial that your company enlists the help of a qualified consultant who’s familiar with DBEs and the related compliance challenges to help you assess, develop, and implement effective internal controls.
Jeff Witt, CPA, CIA, MCSE, is a Senior Manager at Moss Adams LLP. He has more than 18 years of accounting experience. He has managed numerous construction contract compliance audits and construction performance audits, including transportation infrastructure projects. He focuses on those aspects of contract compliance that pose the greatest risk to clients. He can be reached at (503) 478-2282 or email@example.com.
Peder Jensen is a Senior Associate at Moss Adams LLP, where he focuses on construction audits and has experience in cost accounting, financial reporting, contract administration, and regulatory compliance. He has worked extensively with corporate assessment teams, regularly visiting project sites, evaluating internal controls, and assisting with large contract changes. He can be reached at (503) 478-2197 or firstname.lastname@example.org.