The Losers in Overzealous DBE Enforcement
During the past year, district attorneys have sought to stem abuses by contractors who use illegitimate disadvantaged business enterprises (DBEs) on U.S. Dept. of Transportation-funded projects. These enforcement actions are aimed at identifying and weeding out pass-throughs and fronts looking to make a quick buck without performing the work or service for which they are certified.
Indictments have been handed down. Stiff penalties have been imposed.
New York state has taken the lead in eliminating illegitimate DBEs, but in response to the risk associated with such scrutiny contractors have been imposing overzealous and arguably incorrect interpretations.
Some interpretations are inconsistent with the wording and intent of the rules. And these overly restrictive interpretations carry potentially onerous consequences for the contractor.
The losers on both ends are the contractor and the DBE.
In some instances, these actions are bordering on discrimination against a legitimate class of suppliers known as “regular dealers,” an approved designation in DOT regulations on DBEs. A regular dealer is defined as a certified DBE company that provides a commercially useful function in the transaction.
In response to the pressure from governmental oversight agencies, some contractors are unilaterally eliminating the entire class of regular dealers as a means to avoid governmental scrutiny.
One rash interpretation was made involving our firm, JMD Building Products, which supplies heavy construction, highway and building materials. A contractor unilaterally decided that because JMD purchased and resold the materials to the customer, we were not providing a commercially useful function, even though we fulfilled all the requirements.
The contractor’s reasoning was that this more stringent interpretation would garner less scrutiny from oversight agencies than to apply it as written. The contractor went on to inform JMD that it was designating all suppliers as brokers – a highly unfavorable status for a supplier. With margins razor thin in construction, designating all suppliers as brokers eliminates the contractor’s incentive to purchase from a broker—the contractor is virtually eliminating the entire class of compliant regular dealers. Ironically, this puts contractors at risk for class discrimination and the very oversight they wish to avoid.
While it is true that DBE policy can be vague and contradictory, contractors have complicated the issue by arbitrarily taking bits and pieces of DBE regulation out of context and not interpreting the regulations in totality.
Here’s how it played out in one instance for JMD.
A contractor told us that we are required to own or have entered into a long-term lease for a costly hydraulic crane truck in order to qualify for delivery of structural steel products.
However, a more reasonable interpretation of DBE regulations permits the DBE regular dealer to have two options.
One is to have a warehouse where steel beams can be delivered into inventory and then delivered to the contractor by a third party trucking company of JMD’s choosing.
The other is, in lieu of a warehouse, to own or lease a hydraulic crane truck and have an employee pick up steel beams directly from the steel manufacturer or fabricator and deliver directly to the contractor.
The contractor’s interpretation that required JMD to have both a warehouse and a hydraulic crane truck for its structural steel products is, in JMD’s perspective, incorrect and adds enormous costs to a DBE supplier who is already carrying significant overhead requirements for a stocked warehouse, delivery vehicles, drivers and insurance coverage.
Besides being unreasonable and illogical, the costs associated with this interpretation can be so high as to make the DBE supplier ineligible for the DBE program based on personal net worth limitations.
It becomes a Catch-22 for the DBE supplier and, certainly, does not support the intended objective of the policy.
To be fair, contractors have been handed the difficult task of interpreting some ambiguous and contradictory DBE regulations. It is one thing for the US Dept. of Transportation policy maker to decide how the policy should be written, but it is a whole other thing to attempt to implement it as a contractor or DBE supplier.
Both contractors and compliant DBE regular dealers are in a unique position to provide insight and recommendations to the DOT policymakers to help clarify and resolve these issues.
The remedies are not rocket science. There are simple, straight-forward, definable, implementable and enforceable solutions.
The goal of all parties involved should be to support legitimate DBE suppliers to participate in government-funded opportunities. When that happens, contractors have greater opportunities to reach small business goals set by federal contract owners. And when that is the focus, everyone wins.
Julie D’Agostino is president of JMD Building Products, a certified disadvantaged business enterprise based in New York City. She has 24 years of experience as a business executive and holds an MBA from The Wharton School of the University of Pennsylvania. Kathryn Wachsman is vice president of JMD and a practicing attorney. They can be reached at 212-256-1830.