Disadvantaged Business Enterprise Program (DBE) Fraud & Abuse

1. Disadvantaged Business Enterprise Program (DBE) Fraud & Abuse 2004 AASHTO DBE Fraud Conference Presented By: Charles Klemstine Federal Highway Administration Office of Civil Rights Washington, DC

2. Counting DBE Participation • Count only the value of the work actually performed by the DBE • Preamble adds: Actually being performed by DBEs themselves • Count entire amount that is performed by the DBE’s own forces • One exception: Supplies bought by and equipment leased from a prime contractor

3. Commercially Useful Function • A DBE Firm Must Be Responsible for Execution of a Contract or a Distinct Element of the Work by Actually Performing, Managing, and Supervising the Work Involved.

4. Commercially Useful Function • DBE Performs a CUF Only When in the Execution of the Work of the Contract its uses its own workforce, equipment and material • DBE Must Be Responsible for Negotiating Price, Determining Quality & Quantity, Paying for & Ordering Material

5. Commercially Useful Function • DBE Does Not Perform a CUF If Role Is Limited to That of an Extra Participant in a Transaction Through Which Funds Are Passed in Order to Obtain the Appearance of DBE Participation

6. Commercially Useful Function • Count expenditures to a DBE contractor toward the goal only if DBE performs a commercially useful function (CUF) on that contract • To determine whether a DBE is performing a CUF, you must evaluate the amount of work subcontracted, industry practices, amount to be paid is commensurate with work it is actually performing and to be credited towards the goal

7. Commercially Useful Function • A DBE is presumed not to be performing a CUF if the DBE does not perform at least 30% of the total cost with its own forces or subcontracts a greater portion of the work than expected on the basis of normal industry practice • Preamble clearly states: If such work goes to another firm, it counts only if the other firm is a DBE

8. Commercially Useful Function • DBE trucker to be certified is only required to have one fully licensed, insured and operational truck. That truck must be used in the contract using drivers it employs • DBE may lease from another DBE firm for full credit • DBE may use owner operators for credit if certified DBEs

9. Commercially Useful Function • DBE must be responsible for the management and supervision of the entire trucking operation • DBE may lease from an established equipment leasing business open to the general public and receive full credit but only if DBE has use of and control over the truck

10. Commercially Useful Function • DBE leasing and hiring truckers that are non-DBEs receive only fee and commission • Is this consistent with standard industry practice? • Only allows leasing under controlled conditions with varying consequences for crediting

11. Commercially Useful Function • DBE regular dealers in materials and supplies • Owns, operates or maintains a store, warehouse, or other establishment in which materials and supplies are bought, kept in stock and regularly sold or leased to the public in the usual course of business • An established, regular business that engages, as its principal business and under its own name, in the purchase and sale of the product in question

12. Commercially Useful Function • In bulk items such as petroleum products, steel, cement, gravel, stone, or asphalt the DBE does not need to maintain a place of business as noted in the first bullet if it owns and operates distribution equipment • If need to supplement equipment, long term lease is required not on an ad hoc basis • Regulations allow a DBE to present evidence to rebut this presumption that it failed to perform a CUF. This evidence can rebut this presumption given the type of work involved and normal industry practice

13. Industry Practices: Probability Indicators • DBEs working in high volume dollar contract items: Structural steel • Non-DBE minority owner of the DBE firm involved in other industry related business: Equipment rental • Husband/wife, non-DBE/DBE business in the same line of work: Trucking

14. Industry Practices: Probability Indicators • Exclusive use of one DBE by a prime contractor • DBE performing partial bid items: reinforcing Steel • Reliance on another source for essential equipment needs: Cranes

15. Industry Practices: Probability Indicators • Joint checks and its application to the DBE Program • This practice has become very prevalent in one State • 1999 rule preamble does not object to practice if commonly recognized way of doing business and if non-DBE acts as guarantor if funds come from DBE

16. Question • How does this discussion relate to allegations of fraud and abuse? • It is the heart of the non-DBE program culture that all that is being done is not against the rule but just the way the industry operates • Industry practice is a consideration which cannot be ignored but when in conflict the DBE program requirements; e.g., independence and CUF; prevail

17. Red Flags • Management • Equipment • Workforce • Materials • Performance

18. Management • The DBE Must Manage the Work • Management Includes, but Is Not Limited To: • Scheduling Work Operations • Receive Quotes & Order Equipment and Materials • Preparing and Submitting Certified Payrolls • Hiring and Firing Employees • Make All Operational and Managerial Decisions • Supervise Daily Operations, Either Personally or With a Full Time, Skilled, and Knowledgeable Superintendent Who Is Under the DBE Owner’s Direct Supervision • Mere Performance of Administrative Duties Is Not Supervision of Daily Operations

19. Management Red Flags • Supervision of DBE Employees by Other Contractor • DBE Provides Little or No Supervision of Work • DBE’s Superintendent Is Not a Regular Employee • Supervision Is Performed by Personnel Associated With the Prime Contractor or Any Other Firm or Business • DBE Firm's Owner Is Not Aware of the Status of the Work or the Performance of the Business • Inquiries by Recipient Are Answered by the Prime Contractor

20. Equipment • DBE Firm May Lease Equipment If Consistent With Industry Practices and at Competitive Rates • A Lease Agreement Is Required and Should Be on Long Term Basis • A DBE Firm May Lease Equipment on an Ad Hoc Basis From Another Contractor, Excluding the Prime Contractor or Affiliate, With Approval of the State • Equipment Leased and Used by the DBE Firm With Payment Deducted From the Prime Contractor's Payment (s) to the DBE Is Not Allowed

21. Equipment • Operation of the Equipment Must Be Subject to the Full Control of the DBE • DBE Is Expected to Provide the Operator for Equipment and Responsible for All Payroll and Labor Compliance Requirements • An Operator May Be Provided If the Equipment Is Specialized, Part of the Lease and Subject to Approval by State

22. Equipment Red Flags • Equipment Used by DBE Firm Belongs to the Prime Contractor or Another Contractor With No Formal Lease Agreement • Equipment Signs and Markings Cover Another Owner's Identity, Usually Through the Use of Magnetic Signs • A DBE Trucking Business Utilizes Trucks Owned by the Prime Contractor

23. Workforce • DBE Firms Must Keep a Regular Workforce • DBE Firms Cannot "Share" Employees With Non-DBE Contractors, Particularly the Prime Contractor or Subsidiary • DBE Firm Responsible for All Payroll and Labor Compliance Requirements for All Employees Within the Control of the Company • Direct or Indirect Payments by Any Other Contractor Will Not Be Allowed

24. Workforce Red Flags • Movement of Employees Between Contractors • Employee Paid by DBE and Prime • Employee Working for Prime in Morning and DBE in Afternoon

25. Materials • The DBE Must Negotiate the Price, Arrange Delivery, Take Ownership and Pay for the Materials and Supplies for the Project • The DBE Must Prepare the Estimate, Quantity of Material, and Be Responsible for the Quality of Materials

26. Materials Red Flags • Materials for the DBE Ordered, or Paid For, by the Prime Contractor • 2 Party Checks From Prime to DBE Subcontractor and Supplier or Manufacturer, With State Approved Exceptions • Materials or Supplies Necessary for the DBE Firm's Performance Are Delivered To, Billed to or Paid by Another Business • A DBE Prime Contractor Only Purchases Materials While Performing Little or No Work

27. Performance The DBE Must Be Responsible for the Performance, Management and Supervision of a Distinct Element of the Work, in Accordance With Normal Industry Practice. Exception – When Practices Inconsistent With DBE Regulations • At Least 30% of the Work Must Be Performed by the DBE With Its Own Workforce

28. Performance Red Flags • Agreement Between the Prime and DBE Artificially Inflates the DBE Participation • Agreement That Erodes the Ownership, Control or Independence of the DBE Subcontractor

29. Performance Red Flags • DBE Works for Only One Prime Contractor or a Large Portion of the Firm’s Contracts Are With One Contractor • The Volume of Work Is Beyond the Capacity of the DBE Firm