What does "Commercially Useful Function" mean and how can it affect my contracting business?
Published on 01/27/2009
When prime contractors attempt to procure disadvantaged business enterprises (DBEs), disabled veterans business enterprises (DVBEs) and small business enterprises (SBEs) as subcontractors to meet a contract's DBE/DVBE/SBE or other goals, they must ensure that the firms they hire perform "commercially useful functions" (CUF). However, the ambiguity of the phrase leaves ample room for interpretation if taken alone. Fortunately, the State of California provides a specific definition of this requirement.
What does "commercially useful function" mean?To perform a CUF, a subcontractor must meet four distinct requirements. First, the business must be responsible for the execution of a precise element of the work of the contract. Second, it must actually perform, manage, or supervise the work involved in the first requirement. Third, the work must be considered normal for the subcontractor's business, services, and function. Due to the DVBE and DBE certification processes, all contractors with those labels are also identified as firms that perform CUFs. Finally, the subcontractor will not further subcontract its portion of the work more than that expected to be subcontracted by normal industry practices. When a prime contractor is deciding how to subcontract a project, these four requirements should be used to help ensure that the subcontractors perform a CUF.
More explicitly, California law states that a DBE, DVBE or other contractor "will not be considered to perform a commercially useful function if the contractor's, subcontractor's, or supplier's role is limited to that of an extra participant in a transaction, contract, or project through which funds are passed in order to obtain the appearance of disabled veteran business enterprise participation." For example, a prime contractor cannot claim that it has achieved its DBE/DVBE contract goal by hiring a paving subcontractor to perform the perfunctory job of finding another subcontractor that will in reality do the paving work because the subcontractor acting as an intermediary is not fulfilling a CUF. Even more, the paving subcontractor is not performing, managing, or supervising the work.
On the other hand, if a prime contractor hires a subcontractor to perform paving work and requests that the subcontractor find another company to provide some necessary materials, the business is being used for a CUF. Even though the paving company is subcontracting out a portion of its work, it is a normal industry practice and, in the end, the business is performing the paving work itself. Thus, the prime contractor has met the contract's DBE/DVBE goal.
The CUF and the bidding process
During the bidding process, the state agencies will review the Bidder Declaration to verify that the prime contractor and subcontractors meet CUF standards. If the agency determines that the bidder itself is not CUF compliant, it will reject the bid. Additionally, for instance, if a prime contractor subcontracts all aspects of the contract and therefore is not performing any of the work, it is not performing a CUF.
However, if the bid documents indicate that a subcontractor is not performing a CUF the bidder may be given an opportunity to correct the problem. This may be solved by the prime contractor performing the work of the non-responsive subcontractor or by finding an alternate subcontractor that will fulfill CUF requirements.
Is the CUF requirement enforced?In some cases, contractors may attempt to obtain bids by asserting that a subcontractor is performing a CUF when, in fact, it is untrue. While this is a blatant violation of the CUF requirement, in the past businesses have falsified their claims to receive a five percent bid preference due when DBE or DVBE goals are met. In other words, some businesses misrepresent DBE/DVBE participation regarding CUF on contracts so they are more likely to win a bid. However, California's Department of General Services (DGS) has a number of mechanisms in place to ensure that prime contractors are utilizing DBE/DVBE subcontractors for CUF.
If a prime contractor is caught trying to circumvent the CUF requirement, then they may be subject to various sanctions resulting in temporary exclusion from doing business with the state, fines, or even imprisonment. According to the Public Contract Code (PCC), the violation is defined as "Knowingly and with intent to defraud, fraudulently represent participation of a DVBE in order to obtain or retain a bid preference on a state contract."
It should be noted that subcontractors may be as liable as prime contractors when it comes to performing a CUF. Bypassing CUF requirements may be an easy way for subcontractors to make a quick buck, however if they are discovered to be knowingly assisting a prime contractor that is attempting to misrepresent DBE/DVBE participation on a contract they too will face severe penalties. In addition to the penalties previously listed, a DBE or DVBE may have their certification revoked.
