I recently spoke to a group of highway contractors about disadvantaged business enterprise (DBE) laws and regulations and some of the different policies among the state departments of transportation. Did you know that in FYI 2010, special agents with USDOT’s Office of Inspector General (DOT-OIG) were responsible for 92 indictments, 72 convictions and over $18 million in financial recoveries?
The DOT-OIG special agents are called upon to investigate criminal activity for violators of Federal transportation laws, including safety violations, Department policies, and fraud cases. Timothy Barry, Assistant Inspector General, identified his department’s mission as follows:
We focus on those matters that have the greatest direct impact on Department programs and operations and particularly those matters where regulatory enforcement action has been or would be ineffective. Our four investigative imperatives are transportation safety, grant and procurement fraud, employee integrity, and consumer and workforce fraud.
Since one of the DOT-OIG’s top target investigation areas involves workforce fraud, it is important to understand some of the basis rules. DBE fraud can involve a broad range of schemes, but the most misunderstood issue deals with identifying whether the DBE expenditures count toward the DBE goal. In other words, a contractor can meet certain DBE participation goals on a project by contracting and using properly classified DBE firms. Here’s the key: the DBE must be performing a "commercially useful function."
What is a commercially useful function? The DBE must carry out its contract responsibilities by actually performing, managing and supervising the work involved, and for negotiating, determining quality and quantity, ordering, installing and payment for material.
DBE Management. Management worked performed by a DBE may be counted toward the contract goal when the DBE:
- Schedules the work operations
- Receives quotes and orders equipment and materials
- Prepares and submits certified payrolls
- Hires and fires employees
- Makes all operational and managerial decisions
- Supervises daily operations, either personally or with a full time, skilled, and knowledgeable superintendent who is under the DBE owner’s direct supervision
The Red Flags. You may have seen this list before, but it is worth reviewing again. Following is a lost of selected "red flag" indicators of DBE fraud:
- DBE owner lacking the background, expertise or equipment to perform the subcontract work
- Employees shuttling back and forth between prime contractor and DBE-owned business payrolls
- Business names on equipment and vehicles covered with paint or magnetic signs
- Orders and payment for necessary supplies made by individuals not employed by DBE-owned business
- Prime contractor facilitated purchase of DBE-owned business
- DBE owner never present at job site
- Prime contractor always uses the same DBE
- Financial agreements between prime and DBE contractors
- Joint bank accounts with prime and DBE contractor
- Absence of any written contracts…everything done on a hand shake
Each state DOT has rules on these issues, whether you are talking about use of joint checks, renting equipment loaning employees, selling materials, advancing funds, or holding retainage. In a new post on Friday, I will review some of the differences among the states’ laws.
The real lessons learned are to make sure you are staying clear of the red flags and, if a question does arise, that you check whether you are properly complying with the regulations in your state.