Taken from the July 2014 issue of ASSOCIATION OF ELECTRICAL CONTRACTORS, INC: INDUSTRY UPDATE REPORTER
Criminal cases involving construction companies violating federal, state and local MWDBE regulations have received a lot of attention recently due, in part, to the significant prosecutions and fines being levied by the government. How do you stay out of the government’s cross hairs?
All construction contractors that do work on public or publicly funded projects are required to adhere to Minority, Women
and Disadvantaged Business Enterprise (“MWDBE”) program requirements. MWDBE programs typically require contractors to meet certain goals concerning the amount of work that must be subcontracted to contractors and suppliers owned by women, minorities and disadvantaged groups. Whether your company is hired directly by a government agency, a construction manager or a general contractor, you will be required to submit and follow a Minority, Women Business Enterprise (“MWBE”) or Disadvantaged Business Enterprise (“DBE”) plan. It is crucial that your plan is based on use of legitimate MWDBE subs and suppliers.
How do you know if the MWDBE you are using is legitimate? Although this may seem like an easy question to answer, that is not always the case. Some MWDBE companies may be legitimate, in that they have employees, a warehouse, equipment and other signs of legitimacy but may agree to act as a “pass through” on a particular job. For example, a legitimate WBE supplier may have a warehouse full of copper, conduit and wire. Therefore ordering those supplies and receiving credit for them would be allowable. However, if your company needed lighting and the WBE does not normally sell lighting, your company may not negotiate a lighting order with a lighting supplier and ask them to send the invoice to your WBE conduit and wire supplier and have her invoice you in order to receive WBE credit for the lighting. That is a pass through scenario. MWDBEs must perform a “commercially useful function” to be deemed legitimate by the government.
An MWDBE firm performs a “commercially useful function” when (i) the firm is responsible for performing a specific portion of the contract or purchase order; (ii) the firm carries out its obligations on the contract or purchase order by actually performing, managing and supervising the work involved; (iii) the firm performs work on a contract or purchase order that is normal for its business; (iv) the firm performs the work itself, rather than further subcontracting a portion of the work that is greater than would be expected by normal industry practices; and (v) the firm is adding value by performing the work themselves, rather than being an extra participant in a transaction, contract or project through which funds are passed in order to obtain the appearance of MWDBE participation. In other words, an MWDBE contractor is deemed to be performing a commercially useful function if the MWDBE is responsible for executing the work by actually performing, managing and supervising the work. In the case of suppliers, suppliers are deemed to be performing a commercially useful function when the order for supplies is placed with the MWDBE firm and the MWDBE firm has stock in their own warehouse and/or has a distribution agreement with the manufacturer, and orchestrates the shipping of the supplies. When an MWDBE acts merely as a “pass through” they are NOT performing a commercially useful function.
All companies should also have a corporate compliance policy in place to ensure that its employees are acting in a responsible manner. Having such a policy can even be a mitigating factor if your company is accused of MWDBE fraud. In fact, in April, a Connecticut construction company was assessed $2.4 million in fines to settle fraud allegations stemming from a “pass through” scenario. What was notable about that case is that when the company discovered the fraud, it corrected it and initiated a comprehensive compliance program. Due to the remedial measures taken by the firm, it received a non-prosecution agreement and none of the principles or employees were criminally prosecuted.
- Being proactive about compliance with local, state and federal MWDBE program regulations can save your company millions of dollars in fines and legal fees.
- Be sure that your MWDBE subcontractors and suppliers do the work you hire them to.
- Go to your MWDBEs’ place of business and verify their legitimacy before hiring them.
- Certification by government agencies is NOT enough to avoid prosecution. In fact, City agencies put the onus on the contractor to ensure that the certified MWDBE company is legitimate and performing a commercially useful function.
If you cannot meet your MWDBE goal on a particular job, request a waiver. Be sure any communication you have in connection with reducing your stated goal is in writing.
Navigating these rules and regulations can be tricky. Be sure that you have a clear understanding of what is required of you before committing to a goal and be sure you can fulfill that goal using legitimate MWDBEs. Violating government MWDBE programs can, at a minimum, be costly and in the worst case, subject your company to criminal prosecution.