Governments Struggle to Root Out Fake Minority Contractors

States and cities want to support women- and minority-owned businesses. But they often don’t know who they’re really paying.
by | April 2016
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Margie Sollinger knew something wasn’t right about the companies doing business with Portland, Ore. As the city’s ombudsman, Sollinger had for some time been hearing from business owners about fraud in the city’s minority- and women-owned contracting program. But it wasn’t until she received a specific complaint in 2013 -- about a certified minority-owned construction firm doing work for Portland’s housing authority -- that she decided to take action. According to the complaint, the firm was merely acting as a pass-through, winning valuable city contracts and then subcontracting the work out to nonminority companies.

Like many cities and states, Portland has a program allowing it to give special consideration to women- and minority-owned companies when handing out government contracts. The goal, of course, is to help support traditionally disadvantaged companies by giving them a leg up. But as Sollinger began to discover, the city wasn’t necessarily helping the firms it thought it was.

When she first started looking into the housing contract complaint, she wasn’t sure where to turn. “As ombudsman, the most I can really do is make recommendations,” she says. “But even still, I reached a lot of dead ends.” According to state law, the city of Portland wasn’t allowed to take action against minority-owned firms it believed to be fraudulent; those complaints had to be referred to the state. But Sollinger says the state Office of Minority, Women and Emerging Small Businesses initially shrugged her off. So she referred the case to the Oregon Department of Justice, where the investigation continued for nearly two years. Ultimately, the contracting firm was forced to relinquish its minority certification and pay $15,000 to the state. State legislators took an interest in the issue, and last year passed legislation allowing all public agencies in the state to conduct their own investigations into future allegations of minority contract fraud.

The fact is, says Sollinger, it’s not hard to figure out who’s actually doing the work on contracts like these. Simple city inspections to make sure the awarded company is showing up to perform the job would have caught past violators. But cities and states across the country are struggling to provide sufficient oversight when it comes to minority- and women-owned firms, also known as disadvantaged business enterprises, or DBEs. As a result, much of the money that’s targeted to help these businesses doesn’t really go where governments want it to.

It’s a problem that’s shown up all over the place. In Louisville, Ky., the metro sewer district banned two minority businesses from receiving future contracts after it was discovered that they were subcontracting with nonminority-owned businesses. An audit in Pittsburgh found the city didn’t even have a way to track how much work was going to DBEs. The city of Denver has also been dealt a blow by contracting scandals in recent years. In 2014, the city proudly touted a new contract for mechanical work at Denver International Airport that had been awarded to a company owned by an African-American woman; at $39.6 million, it was the city’s largest-ever minority contract. But it later became clear that the company was subcontracting more than $23 million of the work to a different firm, one that didn’t qualify as a minority contractor. That December, a city audit declared that Denver’s minority contracting program was failing. “This program is broken, and the city is breaking its word to those it has promised to help,” City Auditor Dennis Gallagher said at the time. “It troubles me that stakeholders, including the public and firms in the construction and professional services industries, do not know whether this program is working.”

Nationwide data on DBE contracting programs is spotty. The National Association of State Procurement Officials doesn’t monitor them, and relies on state offices to track fraud and abuse. But states’ efforts vary widely. A report from the U.S. Government Accountability Office (GAO) in 2011 found that the Federal Highway Administration did not have the right tools to properly monitor states’ DBE programs for transportation construction. The GAO has published a smattering of reports over the past 25 years on women- and minority-owned contracting programs with two main conclusions: More information was needed, and the contracting world in general lacks women and minorities.

Boosting their ranks is an important goal for government, says Wendell Stemley, president of the board of the National Association of Minority Contractors. Cities and states owe it to their residents to help minority firms, he says, and that begins with tighter oversight. “The faces of these businesses should reflect how diverse the locality actually is,” Stemley says. “And if a state has lax compliance standards, then of course there are going to be firms willing and able to game the system.”

Ensuring that a minority contracting program is functioning properly takes a lot of work. Just ask Minnesota state Sen. Scott Dibble. As the chairman of the Transportation and Public Safety Committee, Dibble has been leading the charge to overhaul minority contracting ever since a 2013 internal audit by the Minnesota Department of Transportation found extensive problems with its DBE program, ranging from mismanagement and weak oversight to outright fraud. The audit had come at a time when the state was aggressively ramping up construction projects, thanks to rebounding post-recession revenues. Officials were trying to include more women- and minority-owned companies, but it wasn’t working. “We just weren’t seeing a lot of success, and we were even having protests outside the state Department of Transportation office,” says Dibble. The scathing audit highlighted millions of dollars that had been passed through to non-DBEs and a consistent failure to meet the state’s own DBE goals. But the key finding, says Dibble, was from the state Office of Civil Rights. “There were some serious concerns within that office that numbers were fudged,” he says. “Basically, our program was a mess.”

Since then, the state has made several reforms to its contracting program. Leadership within the office has been cleared out. DBE mentoring programs -- in which a certified disadvantaged business enters a three-year partnership with an established company to help hone business practices to better compete in the marketplace -- have been put in place. This year a consortium of state agencies will be working together to develop more objective criteria for what really qualifies as a disadvantaged business. Perhaps most important, Dibble says, the effort has raised awareness among lawmakers of the need for intense oversight. “In order to remedy age-old injustices” against disadvantaged firms, he says, “it requires proactive action, not passive acceptance.”

The state has seen some successes. For 2015, the transportation department announced that 7.3 percent of its contracts were awarded to DBEs, a significant step toward its goal of 10.3 percent. “While we made some progress over the last half of the fiscal year, we are not pleased with this number,” Transportation Commissioner Charlie Zelle said when he announced the new figures. The state DOT has laid out specific goals that Zelle hopes will help it hit its goal for this year. Those benchmarks include finding businesses that qualify as DBEs and getting them certified, providing them with tools to help with bids, and ensuring consistent contracting practices. Statewide, the Minnesota purchasing office has begun more intensive outreach to identify and certify DBEs, which has resulted in a 13 percent increase in minority-owned businesses registered with the state.

Still, there’s an inherent challenge when a state endeavors to mix bureaucracy with “complicated social problems,” says Dibble. “It’s a problem, and I don’t really know how to solve it.”

Another place that’s taking on contract reform is New Orleans. The city has long had a minority contracting program in place, but when construction projects ramped up as the city rebuilt after Hurricane Katrina, it became clear the program had extensive problems. There was a two-year backlog of companies waiting to be certified as minority- or women-owned businesses, and the city had virtually no record-keeping or monitoring processes in place. The hurdles for disadvantaged businesses reflected larger socioeconomic realities, says Ashleigh Gardere, director of the Network for Economic Opportunity in the mayor’s office. “New Orleans is a city all about relationships, and it’s also a segregated one. Women and minorities who owned businesses just didn’t know the right people, so the opportunities weren’t there.” In 2010, there were 200 certified DBEs in New Orleans, but that’s an “insufficient number” considering the scope of the rebuilding work being done, Gardere says.

“New Orleans is a city all about relationships,” says Ashleigh Gardere. “Women and minorities who owned businesses just didn’t know the right people.”

In 2013, Mayor Mitch Landrieu introduced a set of proposals to raise the profile of the program. These reforms focused mostly on outreach and oversight of public contracts -- regulations that would hold the city accountable for making sure DBEs were earning city contracts. The certification process now takes 45 days, and the city wants to ultimately reduce that to 15 business days. Cutting down that wait time is crucial, says Gardere, because previously “people didn’t even want to become DBE-certified because it was just such a cumbersome effort.” The efforts have helped lead to a dramatic improvement in DBE participation. Minority- and women-owned firms made up 16 percent of city contracts in 2011. By 2014, that number jumped to 37 percent -- exceeding the city’s goal of 35 percent.

Last fall the city implemented a second wave of regulations, focused more on enforcement and compliance. Now, when fraudulent activity is discovered, the city can withhold payments and exclude that particular firm from future contracts. The city has also introduced new technology tools to monitor existing contracts and payments. (As a side benefit, the technology will allow subcontractors to see when a primary contractor gets paid, adding another level of transparency to the entire contracting process.)

In order to fully enforce these new changes, the city needed to invest in more people. When Landrieu took office in 2010, the Office of Supplier Diversity was made up of one person. But thanks to a local millage, the city was able to budget $700,000 to beef up staffing. Now there’s a staff of seven people, many of whom have a background in construction. There is also a dedicated staff focused on compliance, making sure companies that are awarded contracts are the ones showing up to do the job.

It’s too soon to know how effective the new technology and compliance measures will be; the city only began training employees on them in February. But it’s a testament to the importance of political leadership in prioritizing minority contract programs, says Gardere. “Get local government officials talking to your local NAACP, Urban League, your local inspector general. But as those conversations are happening,” she says, “start testing out solutions.”

Overhauls like the ones in New Orleans and Minnesota are cause for optimism, says the National Association of Minority Contractors’ Stemley. And while he says there’s plenty of room for improvement in DBE programs across the country, he believes the high-profile cases of fraud and noncompliance are the exception to the rule. Still, he says, the onus is on states and cities to step up their efforts to attract more minority- and women-owned businesses. “We need to be trying harder to make sure we have workforce diversity in the contracting community,” he says. “We can’t ignore these underserved communities that need jobs.”