DBEGoodfaith.com Newsletter 

January 2008  - Vol. 3, No. 1 -  California Edition  - http://www.dbegoodfaith.com/

An approved California DVBE Trade/Focus Publication and Referral Organization

Caltrans Looking to Implement New DVBE Bid Award Procedures

The Engineering and Utility Contractors Association (EUCA) has reported that there will be significant changes to California’s Department of Transportation DVBE bid award procedures. While DBE Goodfaith has not been able to verify the EUCA report with Caltrans, we believe that it is prudent to publish information with possible changes to the program.

According to the EUCA, the California Department of Transportation (Caltrans) has failed to meet the Disabled Veterans Business Enterprises (DVBE) program's statewide participation goal of 3 percent in state-funded contracts in the past three years. In an attempt to halt this trend, California's Department of General Services (DGS) has implemented new bid award procedures that compel bidders to meet the DVBE participation goals on individual contracts and authorizes Caltrans to exercise greater flexibility when deciding which bidder will be awarded the project.

Under the new system, Caltrans is required to review a project's three lowest bids and determine whether the DVBE utilization requirement for the project has been met. If the lowest bidder secured the participation of the needed percentage of DVBE subcontractors to achieve the contract's DVBE utilization goal, then they will be awarded the contract. However, in instances when the lowest bidder has not met the DVBE goal, Caltrans must immediately consider the second and third lowest bids. If one of these more costly bids meet the project's DVBE participation requirements and are within $50,000 of the lowest bid, they will be awarded the contract.

In line with standard procedure, a business is only identified as a DVBE if it is certified by the DGS's Office of Small Business & DVBE Certification (OSDC). Businesses can receive certification if they satisfy the following requirements: 1) They must be at least 51% owned by one or more disabled veterans, which are identified as a veteran of the United States military with California residency and a service-related disability of at least 10% or more; 2) Daily business operations must be managed and controlled by one or more disabled veterans; 3) The home office must be located in the United States.

These new procedures come in the wake of hearings held in the summer of 2007 that reviewed the existing DVBE incentives as laid out in California Senate Bill 115. In this forum, general contractors and organizations argued about merits of this proposal.  One thing appeared certain though, the state's implementation of the DVBE program required a thorough overhaul.  The state is looking to implement these new award procedures to address this shortfall in meeting DVBE participation goals.

To be exempted from the requirements of the DGS's modified bid award procedure, Caltrans must meet the state's DVBE goals for three consecutive years. However, if the regulations prove to be successful in the state meeting these DVBE goals, Caltrans may consider making these procedures permanent.

The new regulation supposedly came into effect January 1, 2008. However, DBE Goodfaith has found no corroborating evidence in the Special Provisions section of recent Caltrans contracts indicating that the department is implementing the new procedures. In our commitment to keeping contractors informed of the latest changes to the construction industry, we will continue our attempts to verify with Caltrans if and when any changes to the DVBE award procedures are implemented.

As a cautionary measure, DBE Goodfaith encourages contracting firms to check for any changes in California’s procurement process by visiting the DGS’s Small Businesses & DVBE Services webpage at http://www.pd.dgs.ca.gov/smbus/default.htm.

DBE Program Update: Reinstatement of Race-Conscious Program Goals in California Delayed By Federal Gov't

To receive federal-aid for federal highway transportation projects, the federal government requires the states to implement a Disadvantaged Business Enterprise (DBE) Program, which helps ensure that minority and women's businesses have opportunities to participate on highway construction projects. Every year, the State of California receives approximately $3 billion to maintain and expand its interstate transportation infrastructure. To continue receiving this sizeable amount of funding, the state is required to annually submit a proposal to the Federal Highway Administration (FHWA) documenting the manner in which California's DBE program is to be implemented in the following year for compliance verification with federal DBE program standards.

In the summer of 2005, a ruling by the Ninth Circuit Court of Appeals forced all states under its jurisdiction, which includes California, to suspend the implementation of race-conscious goals in their DBE programs until studies could justify the goals' continued use. Adhering to the requirements set forth by the federal court, California's Department of Transportation (Caltrans) commissioned an Availability and Disparity Study while implementing a race-neutral DBE program in the meantime. The study discovered the existence of continued discrimination towards certain minority groups in the state's highway construction project market; consequently, Caltrans decided to reinstate race-conscious goals in effort to help increase the opportunities for participation by underutilized minority businesses.

In light of the Availability and Disparity Study's findings, the Caltrans proposal describes in detail its intensions to employ race-conscious and race-neutral measures equally to achieve a statewide DBE participation goal of 13.5%. The race-conscious component will apply only to those businesses that have been identified as owned and operated by underutilized minority groups, which includes African Americans, Native Americans, Asian/Pacific Americans, and women of any race or ethnicity. To achieve the 6.75% goal of DBE participation through race-conscious measures, Caltrans proposes three approaches: 1) Setting individual contract goals mandating the inclusion of DBEs; 2) Requiring prime bidders to document their good faith efforts to include DBE certified businesses when individual contract goals are not met; and 3) Encouraging (not requiring) prime bidders to utilize DBEs in contracts they are bidding when there is no required participation goal on the contract.  These are basically the same methods used before the DBE program was essentially put on hold by the suspension of race-conscious goals.

In line with federal requirements, Caltrans submitted the proposal for the reinstatement of race-conscious goals to the Federal Highway Administration (FHWA) in August of 2007. As of January 2008, California is still awaiting a response from the federal agency. Until then, the most visible component of these measures: to require race-conscious goals on state contracts, and to require good faith efforts when these goals are not met, has not yet been implemented for the DBE program. These measures will not be implemented until the FHWA has the final say. Caltrans will likely make an announcement with these results on its website when that occurs.

To learn more about California's Availability and Disparity Study, DBE Goodfaith provides a comprehensive summary and analysis at: http://www.dbegoodfaith.com/news/news_releases_details.aspx?ID=38
 

To obtain a copy of California's Availability and Disparity Study, visit: http://www.dot.ca.gov/hq/bep/documents/disparity/Interim_Report.pdf

The Caltrans webpage for the California DBE/MBE/WBE program is at their Civil Rights Program page at: http://www.dot.ca.gov/hq/bep/documents/disparity/Interim_Report.pdf

What does "Commercially Useful Function" Mean and How Can it Affect My Contracting Business?

When prime contractors attempt to procure disadvantaged business enterprises (DBEs), disabled veterans business enterprises (DVBEs) and small business enterprises (SBEs) as subcontractors to meet a contract's DBE/DVBE/SBE or other goals, they must ensure that the firms they hire perform "commercially useful functions" (CUF). However, the ambiguity of the phrase leaves ample room for interpretation if taken alone. Fortunately, the State of California provides a specific definition of this requirement.

What does "commercially useful function" mean?
To perform a CUF, a subcontractor must meet four distinct requirements. First, the business must be responsible for the execution of a precise element of the work of the contract. Second, it must actually perform, manage, or supervise the work involved in the first requirement. Third, the work must be considered normal for the subcontractor's business, services, and function. Due to the DVBE and DBE certification processes, all contractors with those labels are also identified as firms that perform CUFs. Finally, the subcontractor will not further subcontract its portion of the work more than that expected to be subcontracted by normal industry practices. When a prime contractor is deciding how to subcontract a project, these four requirements should be used to help ensure that the subcontractors perform a CUF.

More explicitly, California law states that a DBE, DVBE or other contractor "will not be considered to perform a commercially useful function if the contractor's, subcontractor's, or supplier's role is limited to that of an extra participant in a transaction, contract, or project through which funds are passed in order to obtain the appearance of disabled veteran business enterprise participation." For example, a prime contractor cannot claim that it has achieved its DBE/DVBE contract goal by hiring a paving subcontractor to perform the perfunctory job of finding another subcontractor that will in reality do the paving work because the subcontractor acting as an intermediary is not fulfilling a CUF. Even more, the paving subcontractor is not performing, managing, or supervising the work.

On the other hand, if a prime contractor hires a subcontractor to perform paving work and requests that the subcontractor find another company to provide some necessary materials, the business is being used for a CUF. Even though the paving company is subcontracting out a portion of its work, it is a normal industry practice and, in the end, the business is performing the paving work itself. Thus, the prime contractor has met the contract's DBE/DVBE goal.

The CUF and the bidding process
During the bidding process, the state agencies will review the Bidder Declaration to verify that the prime contractor and subcontractors meet CUF standards. If the agency determines that the bidder itself is not CUF compliant, it will reject the bid. Additionally, for instance, if a prime contractor subcontracts all aspects of the contract and therefore is not performing any of the work, it is not performing a CUF.

However, if the bid documents indicate that a subcontractor is not performing a CUF the bidder may be given an opportunity to correct the problem. This may be solved by the prime contractor performing the work of the non-responsive subcontractor or by finding an alternate subcontractor that will fulfill CUF requirements.

Is the CUF requirement enforced?
In some cases, contractors may attempt to obtain bids by asserting that a subcontractor is performing a CUF when, in fact, it is untrue. While this is a blatant violation of the CUF requirement, in the past businesses have falsified their claims to receive a five percent bid preference due when DBE or DVBE goals are met. In other words, some businesses misrepresent DBE/DVBE participation regarding CUF on contracts so they are more likely to win a bid. However, California's Department of General Services (DGS) has a number of mechanisms in place to ensure that prime contractors are utilizing DBE/DVBE subcontractors for CUF.

If a prime contractor is caught trying to circumvent the CUF requirement, then they may be subject to various sanctions resulting in temporary exclusion from doing business with the state, fines, or even imprisonment. According to the Public Contract Code (PCC), the violation is defined as "Knowingly and with intent to defraud, fraudulently represent participation of a DVBE in order to obtain or retain a bid preference on a state contract."

It should be noted that subcontractors may be as liable as prime contractors when it comes to performing a CUF. Bypassing CUF requirements may be an easy way for subcontractors to make a quick buck, however if they are discovered to be knowingly assisting a prime contractor that is attempting to misrepresent DBE/DVBE participation on a contract they too will face severe penalties. In addition to the penalties previously listed, a DBE or DVBE may have their certification revoked.

See the CUF FAQ page on the Dept of General Services website at: http://www.pd.dgs.ca.gov/smbus/cufsbdvbeTEMP.htm 

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