Minority Report

Minority Report

Update on whether or not certified small and disadvantaged businesses are getting their fair share of stimulus package funds

By her own admission, master electrician Betsy Delozier, owner of Cumberland, Md.-based residential and commercial contracting firm Big D Electric, is “disadvantaged.” Established in 2005, her company has been certified in Maryland and Virginia as a woman-owned business for the last two years and is also registered with the federal government as a woman-owned business and small business. “To keep my business going, certification was one way to better myself and the business — and give it an opportunity to grow,” she says.

But surprisingly, Delozier says neither designation has given her firm much of an advantage when it comes to job procurement. Delozier estimates that of the 25 to 30 jobs she has bid on that required a certain percentage of minority-owned or small businesses for labor or suppliers, she has been awarded three as a woman-owned business — and about the same number as a small business. “I'd always heard that minority status could give you a better opportunity to not only bid the job, but also be considered for the work,” she explains. “But I have found that the minority status is not always the opportunity of a lifetime that everyone makes it out to be. The only advantage I have is that they'll more than likely look at my numbers more and consider me because they need to meet a certain percentage goal for minorities.”

However, state and federal minority and small business percentage goals can be met in a variety of ways. Contractors on large, bundled jobs with numerous subcontracts can satisfy the requirement with any number of components, not just electrical. Minority suppliers count toward the goal and can sometimes eliminate a minority contractor from the bid process. “If they don't get the status from me, they can get it from other sources,” Delozier says.

Minority contractors also compete among themselves. “I'm in the same running as everyone else,” Delozier notes. “Unless the contractor has not been able to find anyone who can bid along with me, I would still have to be the low bidder. The bottom line is general contractors want the cheapest guy out there.”

If the prime contractor claims it is unable to find qualified minority or small businesses to satisfy the requirement, it can sometimes justify missing the goal to its regulatory agency. At the federal level, some agencies that fail to meet specific goals don't incur penalties or fines. Instead, they may submit a justification for its failure, along with a plan to meet the goal in the next fiscal year.

In addition, some underhanded contractors may find unscrupulous ways to avoid working toward meeting the percentage goals and, without any enforcement, succeed in brushing the rules aside. “Since becoming a certified minority business, I have found that most general contractors are against having to use a minority and will try to get out of using one,” explains Delozier, who has attended pre-bid meetings where it was understood that the minority percentage goal for the project would not be enforced. “People are reluctant to use you, because they feel like they're forced to use you,” she continues. “Then when they do, they take your numbers and not use you. The only thing they wanted you for is your status to submit the bid, and then they're out there bid shopping for someone to do it cheaper.”

The $30-billion loss

In fiscal year 2008, small and disadvantaged businesses secured $93.2 billion in federal prime contracts, according to the third annual Small Business Procurement Scorecard released by the U.S. Small Business Administration (SBA), the agency responsible for the management and oversight of the small business procurement process across the federal government. Of the $93.2 billion, small businesses owned and operated by socially and economically disadvantaged individuals won $29.3 billion, small businesses owned and controlled by women secured $14.7 billion, small businesses owned and controlled by service-disabled veterans (in 2004, an executive order signed by President George W. Bush designated certification for qualifying businesses) landed $6.4 billion, and qualified HUBZone small businesses (those operating in economically depressed areas) came away with $10.1 billion (see Size Matters).

Overall, this is good news for small business owners. The dollar amount in federal prime contracts for small business concerns spiked by almost $10 billion from fiscal year 2007 to fiscal year 2008, with a $4.4 billion jump for small disadvantaged businesses, a $1.7 billion increase for businesses owned or controlled by women, and a $2.6 billion boost for concerns owned or controlled by service-disabled veterans.

However, upon closer examination, the numbers aren't exactly a reason to celebrate. In addition to tracking the growth of small business concerns' federal contracting activity, the SBA's scorecard rates the performance of federal agencies in meeting an overall small business contracting goal, as well as goals in four subcategories: disadvantaged, woman-owned, HUBZone, and service-disabled veteran-owned small businesses. These goals are established annually through negotiation between SBA and the 24 federal agencies.

The individual percentages for each agency varies, but, in aggregate, the overall small business goal asked that 23% of all prime contracts be awarded to small businesses in 2008. Out of that 23%, subcategories were assigned their own goals: 5% for small disadvantaged businesses and woman-owned small businesses and 3% for HUBZone small businesses and service-disabled veteran-owned small businesses (see Contracting Opportunities).

By this measure, despite record growth in 2008 (from $83.2 billion to $93.2 billion), the umbrella small business contracting goal suffered a major setback, and all but one of the four subcategories came in well under their goals (click here to see Table). Awards to small businesses from the procuring federal agencies accounted for only 21.5% of all federal prime contract dollars — down from 22% in fiscal year 2007, resulting in the fifth year the 24 procuring agencies have not met this government-wide goal. Only one agency, the U.S. General Services Administration (GSA), met or surpassed its goals in all areas, and two agencies met none of the five goals.

This shortfall, according to Washington, D.C.-based National Association of Small Business Contractors (NASBC), represents a $30-billion loss to small businesses. Currently, the organization is calling on Congress to act on contracting reforms, such as transparency in contracting with monthly real-time status reports, penalties to federal agencies for failure to meet contracting requirements, stronger guidelines to end contract bundling and consolidation, and the enforcement of fines and legal consequences for large businesses misrepresenting their use of small business contractors and representing their status erroneously as small, woman-owned, or minority-owned.

Additionally, Washington, D.C.-based National Association of Small Business Federal Contractors (NASBFC), a non-profit, nonpartisan industry trade association of U.S. companies dedicated to protecting and promoting the growth of American small businesses in the government procurement marketplace, is urging the federal government to adopt “meaningful good faith standards for compliance with subcontracting plans, including best practices available across the government.”

The agency points to the regulations adopted by the U.S. Department of Transportation (USDOT), requiring large businesses to name their small business subcontractors in advance, to submit as part of bids or proposals small business subcontractors' names and performance commitments for specific work, to promptly pay small business subcontractors upon performance, and to obtain consent of contracting officers prior to removal or substitution of small business subcontractors. In addition, it would like the SBA regulations that allow large businesses to keep contracts reserved for small businesses to be revoked, if it takes the SBA longer than 10 days to rule on the case. In addition, the organization asks that small businesses not be made to pay their own legal fees after winning a size or status dispute brought before the SBA.

Recovery room

Recent reports investigating foul play with contracting dollars from the $787-billion American Recovery and Reinvestment Act (ARRA) of 2009 confirm that federal and state contracting reforms may be necessary. For example, Ohio State University's Kirwan Institute for the Study of Race and Ethnicity, Columbus, Ohio, revealed that of $25 billion in federal stimulus funds distributed directly to private firms (not through state agencies), only $1.6 billion went to black-, Hispanic-, or woman-owned businesses as of October 11.

The Transportation Equity Network (TEN), the St. Louis-based grassroots network of more than 300 community organizations in 22 states working to create an equity-based national transportation system, found that of the $163.8 million given from the USDOT to qualified contractors, only 5.9% ($9.7 million) of it went to woman-owned businesses and 10.3% ($16.8 million) went to minority-owned businesses.

Furthermore, Chicago Public Radio's (WBEZ) analysis of records from the Illinois Department of Transportation unveiled that despite prime contractors meeting individual project goals, less than 10% of stimulus funds awarded by the Illinois Department of Transportation went to businesses owned by minorities and women. The state set an umbrella goal of 22.7%, which could never be met because individual project goals were set too low. In addition, the investigation revealed that although the state's database of qualified businesses includes more than 1,400 disadvantaged business enterprises (DBEs), nearly 60% of the total contract dollars went to just 10 DBEs.

An investigation of the Missouri Department of Transportation (MoDOT) found it awarded just 1% of stimulus contracts to minority contractors and 8% to businesses owned by women, according to The Missouri chapter of the NAACP. Of the subcontracts MoDOT has approved, only 16 out of 183 have gone to minority-owned businesses. Lester Woods, external civil rights officer for MoDOT, said the percentages reported by the NAACP are probably “an accurate reflection of the tracking up to that point,” explaining that most of the stimulus projects contracted so far have been in rural areas, where there are fewer minority contractors than in larger cities.

Although the numbers representing the federal and state contracts not being awarded to small and disadvantaged construction companies are being bandied about, the truth is that the percentage of construction businesses in the United States owned by women or minorities is unknown. In the absence of required registration or a national register, individual states are responsible for voluntary certification.

Some discrepancies may be caused by self-certification rules and certification differences among individual states or certifying bodies, such as different categories in state databases or lack of registration requirements altogether. For more information on certification and certifying agencies, visit the Minority and Women Business Enterprises (MWBE) Web site at www.mwbe.com/cert/certification.htm.

In addition, a subcontractor may be certified as a DBE in one state but still perform work in others. Although Delozier is certified in only two states, her firm works in Maryland, Pennsylvania, West Virginia, and Virginia. To earn her two certifications, she went through a grueling process. Both states required the firm to be in business at least three years before Delozier could even begin the application process.

Once qualified to apply, she had to fill out hundreds of pages of paperwork and travel to interviews (a panel of 25 people conducted the one in Virginia). “You have to prove who you are and that you actually are running the business,” she explains. The state of Maryland even sent a representative from Baltimore to visit a job site and interview her four employees.

However, some contractors purposely try to scam the system. In August, David Martin of Kansas City, Mo.-based The Pitch reported that J.E. Dunn Construction Co., Kansas City, Mo., settled with the city and agreed to award $1.1 million in contracts to businesses owned by women and minorities as a penalty for not entering into a subcontracting arrangement in good faith, or, in other words, after being caught red-handed using a front company to make it seem as though the contractor was meeting city-mandated minority targets on a project funded with tax-increment funding. “It's hard to fight these people,” Delozier says. “They slip through however they can.”

Affirmative action

Prompted by increasing reports of failure to meet minority business goals, the Obama administration is urging the nation's governors to work harder to ensure disadvantaged businesses participate fully in state transportation projects that receive federal funding. As of December 11, $17.9 billion in contract dollars has been awarded through ARRA. Of those dollars, $4.9 billion has been awarded to small businesses, according to the SBA, which accounts for 27.3% of the total. Of that percentage, small disadvantaged businesses have received 3.9% ($0.7 billion).

In addition, U.S. Secretary of Transportation Ray LaHood recently sent a letter to governors, urging them to spread the contracting wealth. In the letter, LaHood requested state officials to break up large individual contracts into more palatable pieces so smaller companies can better compete for them. LaHood would also like states to set goals for awarding more transportation contracts to DBEs. Furthermore, he asked large contractors to consider joint ventures with minority- and women-owned concerns.

“I believe it is vital that we work together to provide small disadvantaged businesses, and female and minority workers a fair chance to participate in transportation projects,” LaHood wrote. “Existing programs may not be sufficient to ensure the broadest possible participation in Recovery Act projects, but I encourage you, along with your state and local leaders, to consider innovative approaches to these challenges.”

Sidebar: Size Matters

By statute, the U.S. Small Business Administration (SBA) is the sole agency responsible for determining size for purposes of any federal assistance. Depending on the industry, size standard eligibility is based on the average number of employees for the preceding 12 months or on sales volume averaged over a 3-yr period.

“Regardless of the socioeconomic group — women, service-disabled veterans — the size requirement holds for all the groups,” explains Tiffani Clements, spokesperson for SBA. “However, if a business can prove it is socially and economically disadvantaged — and it is a small business — it could also qualify as a disadvantaged business. This designation consists of businesses that can prove they have experienced some type of discrimination, or if they've had economic hardships. So a small business is any business that meets the size requirements for its industry. But the small disadvantaged business designation includes minorities and businesses that meet the size requirements and are presumed to be socially economically disadvantaged.”

The limit for electrical contractors and other wiring installation contractors is $14 million. This is the largest size that a business of this type (including its subsidiaries and affiliates) may be to remain classified as a small business concern. These size standards apply to SBA's financial assistance and its other programs as well as to federal government procurement programs when there is a benefit available for qualifying as a small business concern.

For the last five years, federal prime contracting goals were not met for a majority of small business categories.

Sidebar: California Split

With approximately $7 billion for state infrastructure projects at stake, California's small and minority contractors want to get noticed. This summer, a new coalition was formed to try and help these businesses participate in the upcoming projects funded by the American Reinvestment and Recovery Act (ARRA) of 2009. Led by Los Angeles-based Latin Business Association, the California Construction Task Force includes members from the California Small Business Association, the California Black Chamber of Commerce, Asian Business Association of Los Angeles, American Indian Chamber of Commerce of California, and the National Federation of Independent Business. The different minority business councils hope they will be able to gain leverage by working together and focusing on cooperation with large engineering firms, which they accuse of ignoring small businesses. One of the first acts of the coalition will be to provide these firms with lists of qualified small businesses.

However, despite the coalition's perceptions, small businesses are winning slightly more than the 25% of work they win on average for projects statewide, according to the California Department of Transportation (Caltrans). In addition, a recent report by San Francisco's Human Rights Commission reveals subcontracting goals for small and minority-owned businesses were met or exceeded by the airport, department of public works, port, and public utilities commission between January and June 2009.

In fact, some minority-owned businesses are already hard at work on the $1-billion Doyle Drive construction project, which includes $100 million in federal stimulus cash. Minority-owned companies are winning about 7% of the work on the project so far, twice the statewide average on Caltrans jobs. Yet, disabled veteran-run businesses are being awarded about 3% of the Doyle Drive work, almost 2% below the statewide average, although Caltrans expects this to improve. Three of the eight contracts for the construction on the 73-year-old viaduct that links San Francisco to the Golden Gate Bridge have been awarded. Bids for the fourth contract were due in December.

Sidebar: Contracting Opportunities

Contracting for projects funded by the American Recovery and Reinvestment Act (ARRA) of 2009 will be conducted in the same manner as other government contracting opportunities, according to the Minority Business Development Agency (MBDA), a division of the U.S. Department of Commerce. Therefore, this could be an opportunity for small minority- and service-disabled veteran-owned businesses to target the federal agencies in need of improving their standing on the Small Business Administration's (SBA) Small Business Procurement Scorecard. Firms that qualify as 8(a)s through the U.S. General Services Administration (GSA) schedule, woman-owned businesses, historically black colleges and universities (HBCUs), tribal colleges and universities (TCUs), service disabled veteran-owned businesses, native tribes, and businesses in the SBA HUBZone Empowerment Contracting Program that are state-certified and can provide evidence of a strong record of past performance may have a competitive advantage for “shovel-ready” projects. The following tips outline several steps businesses wanting to take part in ARRA stimulus projects should follow:

  • Register your firm at the Central Contracting Registry (CCR) at www.ccr.gov. CCR has aligned its classification standard with the official classification from SBA. If your company is already registered, make sure its profile contains up-to-date contact information, capabilities, bonding, and — most important — past performance records.

  • Register with MBDA's Phoenix Opportunity Matching System at www.mbda.gov/index.cfm?fuseaction=login.main&returnAddress=fuseaction%3Dpx2.phx_main and also visit your local MBDA business center. A map of centers can be found at www.mbda.gov/?section_id=10&bucket_id=151&well=entire_page#bucket_151.

  • Visit the SBA's Subcontracting Network at web.sba.gov/subnet/search/index.cfm and its Subcontracting Opportunities Directory at www.sba.gov/aboutsba/sbaprograms/gc/contacts/gc_subcontracts_opportunities.html.

  • Respond to solicitations for sources sought and requests for information (RFI). If you are contacted for information, respond as soon as possible.

  • Don't rule out large projects. These may be smaller projects bundled into one. All federal government contracting opportunities over $25,000 will be posted to FedBizOpps at fbo.gov. However, don't overextend your firm. Dallas-based Minority and Women Business Enterprises (MWBE) offers a teleclass on this subject. For more information, visit mwbe.com/

  • Form partnerships. Strategic partnerships may allow your firm to compete for projects traditionally out of its reach. Small businesses can identify prime contractors for subcontracting opportunities through the SBA Subcontracting Network (SubNet) at web.sba.gov/subnet/search/index.cfm.

  • Seek help. The SBA and its resource partners, including Small Business Development Centers, SCORE, Women's Business Centers, and Veteran Outreach Centers can provide technical, financial, and contracting assistance to small businesses. For more information on these organizations, visit www.sba.gov. Procurement Technical Assistance Centers (PTAC), funded by the Department of Defense, are also good sources of procurement assistance. Find a listing of PTAC organization locations at www.dla.mil/db/procurem.htm.

  • Small businesses seeking contract opportunities can also contact the Office of Small Disadvantaged Business Utilization (OSDBU) in any of the procuring federal agencies. These offices assist small businesses with obtaining contracts and subcontracts with federal agencies and prime contractors. For a list of OSDBUs in the procuring federal agencies and their contact information, visit www.osdbu.gov/offices.html.

  • Find opportunities other than projects — such as loans and grants — that may help your firm become more competitive. Information on these programs is available on government sites, such as recovery.gov, fedbizopps.gov, and grants.gov. For small businesses, ARRA temporarily eliminates SBA guaranteed 7(a) and 504 loan fees and offers tax benefits. For lenders, it temporarily eliminates 504 loan fees. The fee eliminations are retroactive to February 17, 2009, the day the Recovery Act was signed. Also under ARRA, small businesses that need surety bonds to compete for construction and service contracts can qualify for SBA-backed surety bonds of up to $5 million (and, in some cases, $10 million) — more than double the previous $2 million maximum. Visit www.sba.gov/recovery for more information on small business and ARRA.

Sources: Minority Business Development Agency and Small Business Administration

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