DBE MBE & AIEBC Issues

1. Applicability of the programs

 a. Small business program
The small business Program applies to Federal government contracts (i.e., contracts awarded by the Federal government agency such as the Corps of Engineers, the General Services Administration, or the Department of Veterans Affairs). The small business program does NOT apply to contracts awarded by State   or local agencies that have received federal funding. The small      business Program is administered by the SBA.

b. DBE program
The DBE Program applies to federally – funded contracts (i.e., contracts awarded by a State or local agency-such as a State Department of Transportation-that are funded, in whole or in part by the federal government). The DBE program does NOT apply to federal government contracts.

2. PURPOSE OF THE PROGRAMS

 a. Small business program
It is the federal governments policy to provide maximum practicable opportunities for small businesses to compete for federal government prime contract and subcontract awards. The federal government enforces this policy through the use of set – asides and small business subcontracting goals.
Under the Federal SBA Program, a federal agency may set aside a procurement for small businesses. A procurement may be set aside for small businesses in general or for a specific type of small business (i.e., an 8a). when a procurement is set aside, large businesses are NOT eligible for the contract award.
The Federal government also requires prime contractors to subcontract specified percentages of the subcontract work to small businesses. With some limited exceptions, each construction procurement that exceeds 1 million and has subcontracting possibilities requires the contractor to submit an acceptable subcontracting plan whereby the contractor agrees to make a good faith efforts to meet specified small business subcontracting goals.

b. DBE Program
All Federal aid projects, regardless of the federal oversight agency, are subject to legislative and regulatory DBE requirements. The main objectives of the DBE program are to:
·      Ensure that DBEs can compete fairly for federally funded projects;
·      Ensure that only eligible firms participate as DBEs; and
·      Assist DBEs in competing for prime contracts and subcontracts outside the DBE program.

3. Qualifying as a small business enterprise or DBE

 a. Small business Program
The federal government has six main small business programs: (1) the SBA; (2) the small disadvantaged business (SDB) program, of which the 8a business development program is part; (3) the underutilized business zone (hub zone) small business program; (4) the service-disabled veteran owned small business program (SDVOSB); (5) the veteran owned small business program (VOSB); and (6) the women owned small business (WOSB) program. There are different qualification requirements for each program. A small business may qualify for more than one program.
Under the small business program, most small businesses can self certify their status. HOWEVER, this self-certification does NOT apply to hub zone small businesses and 8a’s. These two categories of small businesses must be certified by SBA. In addition, the Department of Veterans Affairs (VA) will verify the eligibility of SDVOSBs and VOSBs for VA procurements under the veterans first contracting program.

 1. Small Business
In order to qualify as a small business a company must be:
·      Small;
·      Independently owned and operated; and
·      Not dominant in its field
SBA has established size standards for numerous classes of businesses for the purpose of determining whether a company is small. The size standards are based on either number of employees or average annual receipts. The company must have fewer employees or less annual receipts than the stated size standard in order to qualify as a small business concern.

2. SDB/8a
In order to qualify as an SDB a company must be:
·      A small business
·      At least 51% owned and controlled by one or more socially and economically disadvantaged individuals. As part of the control requirement, the management and daily business operations of the company must be conducted by one or more disadvantaged individuals.
American Indians, Hispanic Americans, African Americans, Asian Pacific Americans, and sub continent Asian Americans are presumed to be socially disadvantaged if they show by a preponderance of the evidence (more likely than not) that they are socially disadvantaged.
One subset of the SDB program is the 8a business development program. SBA offers a number of programs, beyond federal government procurement benefits to companies involved in the 8a program. The SDB program on the other hand only has benefits related to federal procurement. While all 8a concerns are   SDB’s not all SDB’s are 8a’s.

3. HUBZone Small Businesses
In order to qualify as a HUBZone small business a company must be:
·      A small business
·      Owned and controlled by one or more U.S. citizens;
·      Have its principle office in a HUBZone; and
·      Have at least 35% of its employees reside in a HUBZone.

4. SDVOSB
In order to qualify as a SDVOB a company must be:
·      A small business
·      At least 51% owned by one or more service disabled veterans or eligible surviving spouses; and
·      Managed and run by one or more service disabled veterans, eligible surviving spouses or permanent caregivers (for veterans with permanent and severe disabilities).

 5. VOSB
In order to qualify as a VOSB a company must be:
·      A small business
·      At least 51% owned and controlled by one or more veterans

6. WOSB
In order to qualify as a WOSB a company must be
·      A small business; and
·      At least 51% owned and controlled by one or more women.

B. DBE Program
A DBE is defined as a for-profit small business concern:
·      That is at least 51% owned by one or more individuals who are both socially and economically disadvantaged or in the case of a corporation, in which 51% of the stock is owned by one or more such individuals; and
·      Whose management and daily business are controlled by one or more of the socially and economically disadvantaged individuals who own the DBE.
American Indians, Hispanic Americans, African Americans, Asian Pacific Americans, and sub continent Asian Americans are presumed to be socially disadvantaged. Other individuals can also qualify as a socially and economically disadvantaged on a case-by-case basis.
To participate in the DBE program, a small business owned and controlled by socially and economically disadvantaged individuals must receive DBE certification from the relevant state agency, which is often the state Department of Transportation. If the DBE performs work in more than one State it MUST be certified by the certifying entity in each State. It is NOT sufficient that the company qualifies under one or more of the small business program categories.

4.  Subcontracting Participation Goals

a. Small Business Program
Any contractor receiving a construction contract for more than the simplified acquisition threshold ($100,000) must agree in the contract that the small business SDB’s/8A’s, HUBZone small businesses, SDVOSB’s, VOSBs, and WOSBs will have the maximum practicable opportunity to participate in contract   performance consistent with its performance.
If the contractor receives a construction contract in excess of 1 million and has subcontracting possibilities the contractor must submit an acceptable subcontracting plan to the agency whereby the contractor agrees to make good faith efforts to meet specified small business subcontracting goals.

Annually each federal agency sets its own small business subcontracting goals. Generally speaking the minimum goals are as follows:
·      Small Business 24%
·      SDB/8A 5%
·      WOSB 5%
·      HUBZone 3%
·      SDVOSB 3%

There is no minimum goal for VOSBs each solicitation will identify the specific small business subcontracting goals applicable to that procurement.
In determining whether the Prime Contractor has met the small business subcontracting goals, only 1^st tier subcontract awards are considered by the federal government. The prim contractor cannot count lower tier subcontract awards.

B. DBE Program
Each State sets its own DBE Goals annually so goals vary State by State, each solicitation will identify specific DBE subcontracting goals applicable to that procurement.
In determining of the goal has been met only the work performed by a DBE subcontractor counts. If a DBE subcontractor subs a part of the work ONLY the work performed by an actual certified DBE will count, it will not count if it goes to a NON DBE.
Prime Contractors may count toward the assigned DBE goal only payments to DBEs that perform a commercially useful function (CUF) generally speaking, a DBE performs a CUF when it is responsible for the execution of the work and is carrying out its responsibility by actually performing, managing, and supervising the work. A DBE does not perform a CUF if its role is limited to that of an extra participant in a transaction, contract or project through which funds are passed in order to give the “appearance” of DBE participation.
The regulations that apply to projects with the U.S. Dept. of Transportation oversight set forth specific criteria for determining that a DBE will perform a CUF. Other federal agencies generally apply the same criteria. No single criterion is determinative.

The following items are considered in determining if a DBE performs a CUF.

·      Whether the DBE is managing the work, including:
Scheduling work operations
Receiving quotes and ordering equipment and materials
Preparing submitting certified payrolls
Hiring and Firing employees
Making all operational and managerial decisions; and
Supervising daily operations, either personally or with a full time, skilled and knowledgeable Superintendent who is under DBE owners direct supervision.

·      Whether the DBE is utilizing its own workforce.
The DBE must keep a regular workforce.
The DBE cannot share employees with NON DBE contractors particularly the Prime Contractor.
DBE must control all employees: and
Direct or indirect payments by any other contractor are not permissible.

·      Whether DBE owns/rents and operates equipment.
DBE can rent if the lease is consistent with industry practice and it is at competitive rates
Written lease agreement is required and should be on a long term basis
DBE may lease from another contractor on an ad hoc basis excluding the prime or sub of the prime but you need approval of the agency.
Equipment leased and used by the DBE CANNOT be deducted from the primes   payments
Operation of equipment must be in complete control of the DBE: and
DBE is expected to provide the operator for the equipment and is responsible for all payroll and labor compliance.

·      Whether DBE is utilizing its own materials and is responsible for:
Negotiating cost of materials
Arranging delivery
Taking ownership for materials and supplies
Determining and ensuring quality of material

a. Small business program
The most prevalent form of fraud and abuse that occurs in the Small Business Program is an INELIGIBLE firm that SELF-CERTIFIES that it is eligible for one of the Small Business categories or submits incorrect or false information to SBA in order to be certified as a HUBZone, 8A or Minority owned business. In many cases a small business is affiliated with a large business but still claims small business status.
The Federal government is very concerned about fraud in the Small Business Program. Over the last several years the Government Accountability Office (GAO) has issued a series of reports on fraud in various small business program categories.

 b. DBE Program
The two most prevalent forms of fraud and abuse that occur in the DBE Program are: (1) an ineligible firm is certified as a DBE; and (2) a legitimate DBE firm fails to perform a CUF. Common DBE fraud includes:
·      Front Companies. DBE falsely represents its ownership and control and is only DBE owned on paper only. The disadvantaged person is usually paid money to allow this scheme to be used.
·      Conduit Companies. DBE does not complete and of the contracted work itself. The DBE sells its status to another company who does the work. The DBE usually allows the use of his name on invoices, trucks and equipment.
·      False Eligibility. DBE does not belong to one of the recognized socially or economically disadvantaged groups. The DBE provides false information concerning its size, financial status or minority status, which almost always occurs in the American Indian community due to the lack of clarity in what constitutes    “relevant community recognition”.
The federal government is concerned about fraud in the DBE program. Federal and State investigations into DBE fraud have increased significantly in the last ten years. States in many cases drag its heals because they are a certifying agency and in most cases of fraud the State has not complied or done a thorough enough investigation in the first place.

5. RED FLAGS

a. Small Business Program
Red Flags that may indicate that a small business does not qualify as a small business under the small business program:

·      OWNERSHIP. 
The small business is owned by a person (which includes an individual, company or other entity) or group of persons with an identity of interest such as family members, for example, say the small business is owned by a son or daughter of a person who owns or controls a large business in the same line of work;   and the minority owner has the ability to exert negative control over the small business for routine matters.

·      CONTROL (applicable to SDBs/8a, SDVOSBs, VOSBs, and WOSBs)
The small business is not actually controlled by a socially and economically disadvantaged individual, veteran or veteran’s spouse or woman;
The owner has little or no experience in the industry;
Owner provides little or no supervision;
Owner has Fulltime job doing something else or is otherwise absent from the job.

·      Affiliation    
One or more officers, directors, managing members or partners who control the board of directors and or management of the small business also control the board of directors, management of one or more companies.
The small business shares common office space and or employees and or other facilities with another company.
Was started and is owned and controlled by the former officers, directors, principle stock holders, managing members or key employees of another company in the same or related industry and other company is furnishing the small business with subcontracts, financial or technical assistance, indemnification on bid or performance bonds and or facilities whether for a fee or    otherwise.

·      Affiliation    
Is owned by an individual or firm that has identical or substantially identical business or economic interests (such as family members, individuals or firms with common investments or firms that are economically dependent through contractual or other relationships) with another firm in the same line of work.
The small business is joint venturing with another company in order to perform work.
The small business is duly reliant on a subcontractor (usually a large business) to obtain and perform work. Generally a small business may be unduly reliant on a subcontractor when the sub is responsible for contract management, performs primary and vital requirements of the contract, has the technical     responsibilities and performs a significant percentage of the work.

b. DBE PROGRAM
The Federal Government has identified the following red flags” indicating potential DBE fraud:

·      Management 
DBE only performs administrative duties
DBE provides little to no supervision of work
DBE superintendent is not a regular employee
Personnel associated with the Prime or another company performs supervision of DBE work.
DBE is not aware of the status of the work or the performance of the business; and
The Prime responds to State or Federal government inquiries.

·      Workforce
Movement of employees between contractors (i.e., workers alternate back and forth between non DBE and DBE payrolls).
Non DBE Company transfers its employees to the DBE
Employees are paid by the DBE and the Prime
Employees rotate shifts between the Prime and the DBE
Employees are not sure whom they work for when asked
The Superintendent or foreman does not work for the DBE
Ghost employees or certified payroll irregularities.

·      Equipment
The equipment used by the DBE belongs to the Prime or another company with no formal lease.
The DBE and non-DBE share office space and equipment
The DBE has no office space and little equipment
Equipment signs and markings cover another owners ID, usually using magnetic signs.
DBE using Prime trucks

·      Materials
Materials for DBE are ordered or payed for by the Prime.
Prime orders or another company arranges to buy material and has the DBE put the order on his letterhead.
Two party checks from the Prime to the DBE and supplier or manufacturer of the materials.
Invoices do not indicate that the DBE is the customer
Employee of the Prime is listed as the contract person on the invoices.
Materials come from the Primes stockpile.
Materials or supplies necessary for the DBE’s performance are delivered to, billed to or paid by the Prime or another company; and
DBE Prime contractor only purchases materials while performing little or no work.

·      Performance of the work
DBE and another company jointly perform work.
Work is outside DBE’s known experience or capability (DBE has no history, license or equipment)
DBE is working without a written subcontract
DBE Prime contractor subs more than is customary or standard industry practice.
Agreement between the Prime and the DBE artificially inflates the DBE      participation.
Subcontractor erodes the ownership, control or independence of the DBE Sub.
DBE works with only one Prime or a large portion of the DBEs contracts are with one company.
Volume of work is beyond the capacity of the DBE.

·      Other Red flags
The owner of the DBE has a fulltime job doing something else or is otherwise absent from the job.
The owner of the DBE is a former employee of the Prime.
The owner of the DBE is a relative of the Prime (i.e., wife, daughter, sister, etc.)
The prime has a large ownership interest in the DBE
Financial agreements between the prime and the DBE
The Prime always using the same DBE
Little or no supervision of the DBE by the Prime.