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In November 2015, The CEO and staff members of a large highway contractor—as well as the owner of a Disadvantaged Business Enterprise (DBE) firm in North Carolina—received prison sentences and fines in federal court. The parties were sentenced and fined in relation to their participation in fraudulent activities related to the federal DBE Program. Over recent months the federal government has ramped up its pursuit and prosecution of companies participating in schemes to subvert the purpose and mission of the DBE Program, which is to provide business opportunities to Minority Business Enterprises (MBEs) and Women Business Enterprises (WBEs) seeking opportunities.

In this case, the prime contractor was responsible for utilizing certified DBE firms to perform a percentage of the work on transportation projects it had received from the North Carolina Department of Transportation and other transportation agencies. However, although the prime contractor did hire a DBE firm to complete the work, it actually performed the work on the contract itself or with non-DBE subcontractors. To make matters worse, the prime then paid the DBE firm for the work performed by others to create a paper trail giving the appearance that the DBE firm had done the work; but required the DBE to pay the money back to the prime contractor. Ultimately, the DBE received only a nominal fee for participating in this arrangement. These transactions clearly violated the DBE Program regulations, thus breaking the law.

While this example is a clear-cut case of fraudulent action, there are other activities that may not be as easy to identify when it comes to violating DBE Program regulations and breaking the law. However, there are three questions any business working on a contract governed by these requirements should ask; helping companies stay out of trouble and on the right side of the law.

  1. Is the D/W/MBE company performing a commercially useful function? Simply put, the D/W/MBE subcontractor must be contracted to provide a good or service that adds value to the contract other than solely for D/W/MBE participation credit. This prohibits activities such as paying a firm to provide construction materials, when in reality, all of the purchase terms have been negotiated by the prime contractor and the vendor selling the materials up-front. These types of arrangements are generally called “pass-through” agreements because money simply passes through the D/W/MBE firm to give the appearance of participation.
  2. Is the D/W/MBE actually performing the work with its own employees and equipment? This question ensures that the D/W/MBE subcontractor has its own employees and resources actually managing and performing the work on a project. This prevents simply moving workers from the prime contractor’s or another contractor’s payroll to the payroll of the D/W/MBE firm, or using a non-D/W/MBE firm to perform a large percentage of the contract without approval from the project owner.
  3. Are questionable situations or practices being referred to the project owner or D/W/MBE program administration for clarification or approval? There are a wide variety of subcontracting arrangements and issues that can arise on a project. The best way to handle these situations is to communicate with the project’s owner or the individual(s) responsible for D/W/MBE program compliance regarding any questionable situations regarding payments, subcontracting activities, and employees. Clear and open communication can help to identity problem areas and create workable solutions that keep both the prime contractor and the D/W/MBE firm in compliance with regulations.

The majority of contracting relationships between prime contractors and D/W/MBE firms fall squarely within the boundaries of the program regulations and achieve the purpose of creating opportunities for underutilized businesses. However, all firms should guard against situations and agreements that can undermine the intent of programs to assist D/W/MBE firms and create legal troubles for all parties involved. If you have any questions or concerns, The Institute’s Small Business Transportation Resource Center, Women’s Business Center, and Minority Business Development Center can help you navigate the government contracting arena and successfully find opportunities to grow your business. Visit and learn more online at www.TheInstituteNC.org. To read more about the court proceedings referenced in this blog, click here.