Experience has taught me that when discussing the subject of minority participation with the owners of public projects and contractors who construct these public projects the common answer from both the owners and the contractors is usually “we select minority firms based on the NAISC Code certified by various agencies around the state that is listed in the TUCP Directory and/or with many other certifying agencies directories.” We must always remember that the true owner of the public project is the taxpayer and that the various governmental agencies only represent the owners. Contractors who are awarded contracts on these massive public projects for whatever reason think that the funding of these projects are not regulated. It does not matter if it is a grant and/or a low interest loan the funding in most public projects are tax paying dollars. Having said that, if you include one penny of a tax payer dollar in a project you are subject to the federal standard on how a minority owned firm participates in the deal. So, let’s discuss minority owned firms or MWDBE’s.
If you claim that you are a minority owned firm and just because your firm name is listed in the various different directory does not mean that your firm can perform a commercially useful function and that your firm can be used to help meet a goal. Hold on NOT SO FAST!! One size does not fit all.
49 CFR part 26 disputes that claim. In fact, the rule clearly states that it is the responsibility of the owners’ representatives to vet the minority owned firm verifying that the minority firm can perform a “Commercially Useful Function” (CUF). The tax paying public relies on those who are charged with counting the funds to make sure that the funds are properly disbursed. Plain and simple, it is not happening. Either our government officials lack the knowledge to know better or there is another interest, the bottom line remains the process is systematically broken and need to be overhauled immediately.
Let me make it as clear as I possibly can. For too long the State of Texas as well as many cities and counties in the State of Texas have for whatever reason not followed the rule when it comes down to splitting the pie in a fair and equitable manner with funds that come in some form or fashion from the taxpaying public. I am sure it is happening in more states than just Texas. In fact, if you do just a little research on your own you will find many cases mostly in the eastern part of the country you will see where many contractors have run a foul with the law. In some cases, civil actions were brought on and in others criminal penalty were levied. That’s right, people have been imprisoned.
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Just because you can be qualified as a minority owned firm does not mean that you can perform a commercially useful function for much more than a broker or a pass through. For those who do not understand the math when it comes down to calculating goal credits, grab a pencil and a pad and let me give you a quick lesson on how to correctly calculate the goal credits based on the percentage specified in the contractual agreement with the tax payer dollars. I’ll wait until you get the pencil and pad, Ok are you ready???
There are so many different formulas so I will use one that the owner of the project and the contractor should use when dealing with a minority firm who has a certification and a qualification to perform as CUF as a supplier. Let’s assume that the minority owned firm meets all of the criteria to be certified and qualified as a firm that supplies materials.
1. First is the minority firm certified as a manufacturer, dealer or distributor and/or a broker?
2. Before we move on to number #3, did the owner and/or contractor vet the minority firm to qualify that firm for which of the three functions that the minority firm can perform CUF?
3. After the minority firm has been truly vetted, which one of the three categories can the minority firm perform a CUF?
For the sake of argument, let’s just assume that the minority firm is a broker. I purposely used the category of broker because the facts will show that by and large most certified minority firms are only qualified as brokers or a pass through.
Let me set the record straight, it is perfectly okay to use a broker. So long as when you submit your participation plan the documentation states that you are using a specific minority firm as a broker and not as a dealer/distributor and/or manufacturer. This is where more times than not that the contractor cross the line and the owner representatives (governmental agencies) does nothing to prevent this fraudulent practice.
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4. The rule clearly states that if a minority firm manufacturers a product then, the contractor can use 100% of the dollar amount spent toward the over-all goal.
5. If the contractor use a certified and qualified dealer/distributor the 60% of the dollars spent from that contract can be used toward the overall goal.
6. If the contractor uses a broker to supply material then only the commission paid to the broker can be used toward the goal.
This brings us to the lesson that needs to be learned by all who violate the governmental agencies for allowing the practice to happen. The contractor who uses companies that are brokers and submit documentation that is clearly fraudulent. The manufacturing companies who know that these companies are clearly pass through and does not perform a commercially useful function.
There is absolutely nothing wrong with using brokers, so long as the participation plan confirms that the minority firm is a broker.
Having said that, the calculations of the goal credits change drastically. So, let’s take a look at an example of how much the goal credits changes.
Let say that a $10 million dollar contract is awarded. A portion of the funds used for the contract comes from a government source. Of that $10 million, 10% ($1 million) is to be allocated to the minority community. Now you do the math in accordance with 49 CFR part 26.55
7. If the contractor contracts a $1 million to a certified and qualified minority owned manufacturer then that whole $1 million can be counted toward the goal.
If #7 is true then the contractor has fulfilled the entire goal as specified by the owner
8. If the contractor contracts $1 million to a certified and qualified dealer/distributor then only 60% of that $1 million can counted toward the goal.
If #8 is true then the contractor can only receive a goal credit for only $600K which leaves the contractor $400K short of the goal.
9. If the contractor uses a broker, then only the commission paid to the broker can be applied to the goal.
For the sake of the argument, lets say the broker received a 2% commission that means that the broker received a $20K commission. According to 49 CFR Part 26.55 the contractor can only apply the $20K toward the goal. The contractor is $980K short of the goal.
Go figure! On the vast majority of participation plans submitted to the State of Texas and many cities and counties in the State of Texas #9 is the standard.
Research has shown that over the last 30 years in the State of Texas very few has been sanctioned, fined, or prosecuted. Can somebody tell me why?
The finger can be pointed at many. You can blame the owner representatives (governmental entities), contractors, manufacturer and I will not leave out the many certified minority owned who participate along with the shenanigans. People, the MWDBE programs around this country will never work as intended until the perpetrators are prosecuted to the full extent of the law.
If you are a believer, then the word teaches “that we perish for the lack of knowledge”. Life lessons teaches us “if we knew better we would do better”.
I will pause a the cause, but I will not stop fighting for the cause until this blatant use of taxpayer’s money is better distributed to all. Especially to those who need it the most! If this newsletter brings awareness to you, then good. Let us hear your comments good or bad.
Sincerely,
MWDBE News