DBE Program - Final Report Analysis
Published on 08/16/2007
The recently released California Department of Transportation (Caltrans) Availability and Disparity Study will have wide ranging consequences for firms participating in federally funded contracts within the state for years to come. Prior to May 2006, the federally-funded Disadvantaged Business Enterprise (DBE) program included race-conscious contract goals, ensuring that certified minority and women owned businesses had the opportunity to procure portions of federal contracts. However, the race-conscious contract goals were suspended as a result of the 9th Circuit Court’s 2005 decision in Western States Paving v. Washington Department of Transportation, which asserted that evidence of discrimination in local transportation industries must be identified before states can implement race-conscious remedies. As a result, the court ordered that in May 2006 all states under its jurisdiction suspend their race-conscious programs while they determine if sufficient evidence exists to justify the continuation of the programs. In the meantime, states pursued race-neutral measures. The evidence documented in the Availability and Disparity Study will help Caltrans determine whether the department should reinstate race-conscious measures that were suspended as a result of Western States Paving v. Washington or continue to pursue a race-neutral program.
The report examines the success of the DBE program before and after the programs were suspended, in addition to analyzing California’s own race-neutral program for state-funded contracts. Also, the utilization of DBE certified firms on state and federally funded contracts are compared to the utilization of all minority and women owned businesses (M/WBEs) in said contracts. Even further, the study calculates a disparity index to determine each minority group’s utilization on public contracts based on their relative availability. In other words, a disparity index of 30 means that M/WBE utilization on certain contracts achieved only 30 percent of what would be expected based on relative M/WBE availability for these contracts. Past court cases have determined that any disparity index below 80 indicates “substantial disparity;” to achieve parity a group must meet a disparity index of 100. Hence, the disparity index is vital to interpreting the report and determining the future policies of California’s DBE program.
The FactsIn order for California to receive federal funding for construction projects, they must set overall DBE goals. Currently, the goal is set at 10.5 percent, but the study concludes that based on the availability of DBEs for contracts the goal should be increased to 13.5 percent. Whether or not Caltrans plans to pursue a race-neutral or race-conscious program, the DBE program as a whole must aspire to achieve its statewide goal. But, the question still remains: Which path will Caltrans take, race-neutral or race-conscious?
After evaluating the DBE program between 2002 and April 2006, the study determined that California’s race-conscious program had failed in “fully addressing the disparities between the utilization and availability of M/WBEs on federal contracts.” During this time period, women-owned, Subcontinent Asian American, Hispanic American, and Native American businesses achieved what would be deemed acceptable disparity – a disparity index over 80 – as prime contractors and subcontractors on federally funded contracts. Subcontinent Asian Americans and WBEs actually exceeded their expectation of procurement based on their relative availability with disparity indices of 166 and 104, respectively. Despite these successes, African American and Asian-Pacific Americans still suffered severe disparity. Overall, the M/WBE disparity index was 83, acceptable disparity under most court standards but by no means indicating that they on the verge of achieving parity. Standing alone, these figures do no reveal much. The acceptable disparity can be attributed to the DBE goals set on individual federal projects or demonstrate a trend that would support a decision to discontinue race-conscious measures. Examining M/WBE utilization of M/WBEs in California’s state-funded race-neutral transportation projects during the same time period will aid in interpreting these statistics.
On state-funded race-neutral transportation projects as prime contractors and subcontractors, every socially and economically disadvantaged group witnessed a marked decrease in their disparity indices, with marked declines ranging from 10 to 56 points. The overall disparity index for M/WBEs was a dismal 59. Comparing the race-conscious federal program against the race-neutral state-funded contracts, it can be concluded that without race-conscious individual contract goals many prime contractors will not make an effort to include M/WBEs in the construction process. Instead, as noted in the report, prime contractors will work with subcontracting firms with which they have previously established relationships, leaving few contracting opportunities for new and less-well known businesses to procure. Unfortunately, many socially and economically disadvantaged businesses fit this characterization, with approximately 60 percent of WBEs and 70 percent of MBEs earning gross revenues less than $1 million.
However, the evidence available between May and December 2006 – when the federal program went race-neutral – may contradict this analysis. The study asserts that overall Minority and Women Owned Business (M/WBE) utilization on federally funded projects was “relatively unchanged” after the cessation of race-conscious measures. While the overall M/WBE disparity index increased marginally to 87, WBE and Native American businesses saw their utilization decline substantially to unacceptable levels of disparity. African Americans only made a subtle gain and still suffer severe disparity under the race-neutral program. On the other hand, Asian-Pacific Americans moved substantially closer to parity while Hispanic American utilization exceeded expectation based on their relative availability. Also, the disparity index for Subcontinent Asian Americans declined, but their utilization remained above what would expected based on their availability.
The limited amount of time provided to conduct a review of the race-neutral federal DBE program raises some concerns. It is plausible that the figures between May and December 2006 do not represent the future utilization of M/WBE firms; the study itself cautions against assuming that these statistics will remain stable. In fact, the overall disparity index of 87 may decline to the mediocre indices seen on state-funded contracts. Furthermore, the label M/WBE includes all minority and women owned firms – even those not eligible to become certified DBEs. Therefore, these statistics include large businesses whose hefty receipts exclude them from being eligible for DBE certification and other firms that have become well-known in the construction business. By focusing on all M/WBEs, these statistics misrepresent the utilization of DBEs and DBE eligible firms. Because of the possible discrepancies that may arise by comparing M/WBEs before and after the suspension of individual contract goals, another mode of analysis must be taken. Instead, comparisons between DBE utilization before and after the suspension of the race-conscious DBE program may be more indicative of the utilization of DBEs and DBE eligible businesses.
Before May 2006, DBEs received 10.1 percent of all federally funded contracts administered by Caltrans, just short of the overall DBE goal set by Caltrans. Conversely, between May and December 2006, DBEs procured only 4.6 percent of all federally funded contracts administered by Caltrans. Considering these statistics against the overall DBE goal of 13.5 percent recommended by the study, they both come up short. The significant decrease in the utilization of DBEs statewide provides strong evidence that substantiates the continued use of race-conscious contract goals in the future in order for the state to realize its overall DBE goal. While the overall DBE goal was not being met with race-conscious individual contract goals, evidence confirms that the absence of contract goals will not facilitate greater utilization of DBE and DBE eligible firms.
RemediesAs the noted earlier, the study comes to the conclusion that race-conscious measures do not fully address the problems posed by M/WBE procurement disparity. As a result, the report recommended that race-neutral measures be taken in order to facilitate greater parity. Still, the study remains silent on the reinstatement of race-conscious contract goals. Thus, when examining the recommendations presented in the report one must not enter a false dilemma and remain aware that a “third way” is available to rectify the federal DBE program’s shortcomings. The choice is not just between race-conscious and race-neutral; the two can function effectively simultaneously.
After reviewing the interview responses of thousands of M/WBE owners, the study team concluded that race-neutral policies intended to aid M/WBEs in achieving parity could be implemented under the following five categories: 1) Business outreach and communication; 2) Technical assistance; 3) Access to capital; 4) Contracting practice improvements; and 5) Data collection, tracking and reporting. Examples of measures that could be taken under these categories include improving the current methods through which bidding opportunities are advertised, tiered assistance based on a firm’s business development, new technology training, implementing a statewide mentor-protégé program, providing assistance in obtaining insurance and bonding, segmenting contracts so that smaller firms have the opportunity to bid, and developing a comprehensive bidders list. All of these reforms would make it easier for M/WBEs to gain experience in the construction industry, which is essential to the future procurement of state and federal contracts.
The implementation of the suggestions made in the study will afford M/WBEs with innumerable benefits, but without race-conscious contract goals there are no guarantees that prime contractors will seek out socially and economically underutilized businesses for subcontracting opportunities. Instead, prime contractors may rely on M/WBE firms that have provided work for them in the past, allowing a select few M/WBEs to grow. Consequently, such actions will relegate a number of M/WBEs to a permanent underclass in the construction industry. The most effective way to ensure that all M/WBEs achieve success and parity in California’s construction industry is to implement a hybrid DBE program that retains individual contract goals and institutionalizes the race-neutral recommendations put forth in the report.
How will the Caltrans Availability and Disparity Study affect you?
Based on the facts laid out in the study, Caltrans will decide how it will shape the future of its DBE program. The ramifications of these decisions will have profound effects on the way M/WBEs and non-minority owned businesses conduct business with the state in the future.
If Caltrans decides to resume the race-conscious program – without or without race-neutral measures – DBEs can be assured that they will continue to be contacted about potential bidding opportunities. Also, non-minority prime contractors will be obliged to undertake good faith efforts to include certified minority and women owned business on federal contracts. While these measures will be welcomed by M/WBEs, they will only been as a hassle by prime contractors. Nevertheless, in the long run a race-conscious program may benefit prime contractors. The program will allow new DBEs to build merit-based relationships with prime contractors that, in turn, will provide prime contractors with a supply of reliable subcontractors when it comes time to submit bids on projects. In all, the increased and guaranteed cooperation will allow a greater number of DBEs to see their businesses grow and will help prime contractors successfully bid on projects.
On the other hand, if Caltrans chooses to proceed with implementing a solely race-neutral DBE program, DBEs, and potentially all M/WBEs, will be provided with less subcontracting opportunities. Small M/WBEs will be bypassed in the construction process, as prime contractors will rely on previous formed relationships with subcontractors who may or may not be M/WBE businesses. Consequently, these select few subcontractors will grow and eventually be able to bid as prime contractors themselves. Hence, only a few new DBE firms would be eligible to enter the market for subcontracting opportunities as some subcontractors graduate to the role of prime contractors. In other words, Caltrans would provide DBEs with the financial and business planning assistance that they require to function successfully, but despite their improvement efforts there would be no assurance that DBEs would be able to utilize their newly acquired knowledge and skills. The final result of the race-neutral structure would be the creation of a static construction market that, as noted before, would put a number of M/WBE firms out of business. Large contractors would be able to avoid the responsibility of attempting to include M/WBEs on projects in good faith but, indirectly, this would keep them from having a larger pool of subcontractors from which to choose. This could result in prime contractors being unable to place the lowest bid for a federal contract.
Ultimately, the optimal plan for Caltrans to implement is a hybrid DBE program. The race-neutral measures will complement the guarantees that the race-conscious contract goals provide. The onus of contacting DBEs about subcontracting opportunities will still be placed on prime contracts, to their chagrin. But more DBEs will be financially and technically prepared to accept subcontracting opportunities. This will combat the belief held by some prime contractors that DBE is synonymous with unqualified. To reiterate a previous point, DBEs will increase their stock with large contractors – who will be eager to reutilize the DBEs on future projects. As a result, overall DBE utilization will witness considerable growth, allowing the state to attain, if not exceed, its overall DBE goal. Even if Caltrans does not implement its race-conscious program in full, by perhaps targeting contract goals to African American and Asian-Pacific American businesses rather than all of the minority groups, it will still be more successful than implementing a solely race-neutral program.
The decisions made by Caltrans regarding its DBE program in the coming months will resonate across the country. Regardless of the choice it makes, other state DOT offices will look into implementing the measures that will be employed in California. Hence, the importance that Caltrans come to a level and considered conclusion on the future of the program. Based on the available evidence, the best approach to the situation is the implementation of a hybrid race-conscious/race-neutral DBE program. If Caltrans chooses this course, it will be following in the footsteps of another big state – Texas, which has implemented a similar hybrid program for DBEs in that state.
