Lately, competition for public works projects is fierce, and bidders, using every possible advantage to obtain contracting opportunities, seem resigned to combing through a low bid to determine if “all I’s are dotted and T’s are crossed.” As part of this process, the Disadvantaged Business Enterprise (“DBE”) compliance requirements have turned out to be a fertile ground for bid protests, particularly on federally funded state highway projects. The DBE program provides a vehicle for woman and minority-owned, small businesses to participate in public projects. As part of this program, contractors on federal public contracts are required to meet certain DBE subcontracting goals (for example, 12% of the total bid amount must be subcontracted to certified woman or minority-owned firms). The requirements for demonstrating DBE participation, however, can be complicated and fraught with pitfalls for both DBEs and contractors alike. Failure to comply with the DBE bidding requirements to the letter is a common basis for finding a bid non-responsive, and, thus, provides numerous bidders with a basis to protest, including (i) questioning a prime contractor’s achievement of the project’s DBE goal or good faith efforts to meet that goal, (ii) the legitimacy or certification of a listed DBE entity, or (iii) a DBE’s ability to perform a Commercially Useful Function on a project.
For example, a general contractor who submitted a bid which came in “second,” may challenge award of the project to the apparent low bidder on the basis that the DBE firm that the low bidder proposes to use is either not properly certified to perform the work proposed or is not a legitimate DBE firm. Such protests provide a lucrative opportunity for the second low bidder who may ultimately be awarded the project. The following information explains some of the fundamentals to consider when assessing compliance with DBE bidding requirements:
Commercially Useful Function: When a DBE participates in a contract, only the portion of the work that serves a “commercially useful function” on the contract may be counted towards the contractor’s DBE goal. 49 C.F.R. §26.55(c). A “commercially useful function” is defined in the Special Provisions of the Project Specifications as:
The execution of the work of the Contract by a DBE carrying out its responsibilities by actually performing, managing, and supervising the work involved using its own employees and equipment. The DBE shall be responsible, with respect to materials and supplies used on the Contract, for negotiating price, determining quality and quantity, ordering the material, and installing (where applicable) and paying for the material itself.
See also 49 C.F.R. §26.55(c)(1). The federal regulations further explain:
A DBE does not perform or exercise a commercially useful function 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 obtain the appearance of DBE participation.
49 C.F.R. §26.55(c)(3) (emphasis added); See also General Elec. Co. v. County of Cook, 2001 WL 417321 (N.D. Illinois, 2001) (asserting a pass-through role does not serve a commercially useful function). Most commonly, protests that involve a lack of a commercially useful function revolve around whether a DBE is simply purchasing materials for the project for which it is not responsible.
For example, often in large federal projects, the government will require the purchase of a certain item or certain materials from a single supplier. With respect to obtaining materials, however, to obtain DBE credit for the purchase, the DBE must perform all four functions identified in CFR section 26.55(c)(1): (1) negotiate price; (2) determine quality and quantity; (3) order the material; and (4) pay for the material itself. If the DBE does not perform all four of these functions, it has not performed a commercially useful function with respect to obtaining the materials, and the cost of the materials ccould not be counted toward DBE goals. Thus, in the case of sole source items or “furnish and install” contracts, often if the DBE has no say in price or the quantity/quality of the materials or item, for this purchase, these materials are simply being “passed through” the DBE and the DBE will not receive any credit which can be counted towards the overall goal. Accordingly, if a bidder improperly counts the purchase price towards its DBE goal, other bidders have a basis to protest award to that bidder.
Appropriate NACIS Codes: Another protest basis is if the DBE listed by the general contractor is not properly “classified” to perform the intended scope of work. Under the DBE regulations, DBEs are classified according to the North American Industry Classification (NAICS) code. In turn, a general contractor can only count a DBE’s performance towards its overall goal if the DBE has been assigned the proper NAICS code to perform the type of work in question. For example, if a DBE is certified to perform only landscaping and site preparation, although it can perform other types of work (e.g., installation of road signs), the general contractor will only receive DBE credit for the landscaping and site preparation portion of that DBE subcontract. Despite this fact, given the often last minute bid preparation, occasionally a general contractor will list a DBE as receiving credit (i.e., its basis for meeting the DBE goal) for work it is not certified (i.e., lacks the proper NAICS code) to perform. In Washington, given the strict requirements set forth by the Washington State Department of Transportation (“WSDOT”) and WSDOT’s new “DBE Written Confirmation Document,” this, unfortunately, has become an all too frequent basis for bid protests and rejection of otherwise valid bids. We detailed the relatively new WSDOT requirements in a previous blog posting and recommend both DBEs and general contractors become well-versed in these requirements so that a protest on this basis can be avoided.
Failure to Meet the DBE Goal/Failure to Demonstrate Good Faith Efforts: The DBE goal on a Project is a “Condition of Award,” meaning that, to be awarded the Project, each bidder must either (1) meet the stated DBE percentage goal, or (2) if it failed to meet the goal, demonstrate it satisfied the “Good Faith Effort” requirement. Ultimately, “good faith efforts” require the bidder to demonstrate that it did not fail to meet the goal for lack of trying. The federal DBE regulations (49 CFR, Part 26, Appendix A) provide a series of factors to determine whether the bidder meets this requirement. These factors include:
(a) Soliciting through all reasonable and available means and with sufficient time for the DBEs to respond: The bidder cannot wait until the last minute to seek DBE bidders;
(b) Selecting portions of the work which are more likely to be performed by DBEs for DBE participation: A bidder cannot rely on the fact that it attempted to secure DBE participation when it only solicited DBE participation for the most complicated or obscure scopes of work and no DBE was qualified to perform that work; trucking, site preparation, traffic control are some of the scopes with the highest concentration of DBE subcontractors;
(c) Providing interested DBEs with adequate information about the plans, specifications, and requirements of the contract in a timely manner to assist them in responding to a solicitation: This factor prohibits a bidder from relying on form over substance. For example, simply providing the solicitation on its own without providing other pertinent information may be insufficient;
(d) Negotiating in good faith with interested DBEs. If only a few DBEs submit bids to perform work on the Project, the bidder cannot simply reject the bids without further inquiry and rely on “good faith efforts.” Rather, it is the bidder’s responsibility to attempt to reach an agreement or modification of the DBE bid to find mutually agreeable terms;
(e) Providing sound reason for rejecting DBEs as unqualified: A bidder is not forced to work with an unqualified DBE just so that the bidder can meet the DBE goal or the good faith effort requirement. A bidder, however, must demonstrate a legitimate basis to reject the DBE as unqualified;
(f) Making efforts to assist interested DBEs in obtaining resources or financing that may assist the DBE in performing the work: These factors are more time consuming, but will likely go a long way in demonstrating the bidder attempted to reach the goal in good faith;
(g) Utilizing local resources for assistance: Often local agencies (e.g., the Office of Minority and Women’s Business Enterprises) can assist general contractors in reaching out to or locating qualified DBEs.
49 CFR, Part 26, Appendix A. Although the above list is neither exhaustive nor a checklist, it demonstrates what steps agencies and owners will look to in determining if the bidder has made “good faith” efforts to meet the DBE goal. Another critical component of this analysis is whether other bidders were successful in reaching the DBE goal. If all other bidders met or exceeded the DBE goal, the low apparent bidder will face a larger obstacle in demonstrating it met its good faith efforts. Accordingly, it is key for general contractors to establish a DBE “game plan” or strategy to meet the DBE goal and document each step (failed or successful) so that, should the contractor fail to meet the goal, this information and, more important, documentation can be submitted with the bid.
Improperly Certified/DBE Eligibility: The most complicated basis for bid protests is whether or not a DBE is properly certified in the first place. Although in most cases it is not the public agency’s duty or role to decertify a DBE firm,[i] it does not stop public agencies from occasionally overstepping their authority and deeming bids non-responsive based on a “determination” that the DBE is not properly certified or has allegedly graduated from the program. For example, as discussed in a previous blog article, under the similar Service-Disabled Veteran-Owned Small Business Program (“SDVOSB”), the Department of Veterans Affairs (“VA”) received a protest on a federal project regarding whether the veteran-owner complied with the SDVOSB requirement that he own 51% of his company and, therefore, was ineligible for award of the Project. Whether or not the agency awarding the contract possesses the authority to make this decision is another story, but it does not change the fact that in the fast-paced nature of bid protests, public agencies might make determinations that can substantially impact a DBE or other minority program’s certification, all of which is at the expense of general contractor who has no control over that DBE.
The lessons from the above examples are twofold: First, if you are submitting a bid on a Project with a W/M/DBE project goal, review the goal and documentation requirements carefully and well in advance of the bid opening date. Regrettably, a simple or careless typo or failure to fully comply with these often complicated requirements can leave your bid vulnerable to protest and may ultimately result in your company losing a lucrative project. Many of these oversights could have been easily and quickly corrected prior to submitting the bid, but are fatal after-the fact. Second, if you have submitted a bid but are not the apparent low bidder, review the low bidder’s bid submissions carefully, but quickly to confirm they are compliant. If the low bid is not compliant, there may be an opportunity for a successful protest.
Finally, regardless of whether you think you have a basis to protest, or if you are the low bidder and someone has submitted a protest, timing is critical. Depending on the Project, the specifications or related regulations typically include strict time requirements to file a bid protest or a response (in some cases just a few days). Thus, as soon as there is even a rumor of a protest, it is best to review the notice requirements and get legal counsel involved to ensure that you do not inadvertently waive any rights you might have. This same advice goes to the DBE entities themselves. Often, there is a miscommunication regarding the DBE’s certification or scope of work, yet the DBE is the last to know. It is important for both the DBE and the general contractor to work together to try to overcome these protests or bid rejections as well as protect the DBE’s certification.
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[i] The Washington State Office of Minority and Women’s Business Enterprises (“OMWBE”) is the only entity in the state authorized to make decisions with regard to DBE certification status. RCW 39.19.120 (“[OMWBE] shall be the sole authority to perform certification of minority business enterprises, socially and economically disadvantaged business enterprises, and women’s business enterprises throughout the state of Washington.”).