How Monitoring Can Support Small Business Growth
On March 15th, Baltimore City’s Board of Estimates terminated a $150 million dollar contract for upgrades to the city’s aging infrastructure and banned the contractor—Metra Industries—from doing business with the city for the next two years. The cause? Late payments to subcontractors.
Christopher Lundy, the board office chief, revealed that Metra consistently failed to pay subcontractors in a timely manner, in some cases taking up to a year to fulfill their obligations. The late payments impacted primarily the city’s minority and women-owned businesses, opening up the company and the city to legal repercussions.
"The board did not make this decision lightly, but I stand behind those recommendations 100%," said City Comptroller Bill Henry.
Monitoring Small and Disadvantaged Business Programs in Construction
Since the start of the COVID-19 pandemic, trillions of U.S. taxpayer dollars have been funneled into construction programs through legislation such as the American Rescue Plan Act (ARPA), the CHIPS and Science Act, the Infrastructure Investment and Jobs Act, and the Federal Inflation Reduction Act of 2023. These historic laws fund infrastructure, utilities, transportation, and small business revitalization. A notable provision of these laws—and of the Uniform Guidance, which governs all Federal awards—is the emphasis on contracting with minority and women-owned businesses. Programs aimed at addressing disparities in contracting are critical to promoting healthy business competition. They help small businesses build the operational capacity needed to thrive and compete in both the public and private sectors. They also strengthen local economies: small businesses account for two out of every three new jobs added to the economy in the past 25 years.
In addition to the Uniform Guidance, Federal awards are subject to other regulations and requirements. These awards must be monitored for compliance with these standards. However, how that monitoring is done is at the discretion of the compliance monitoring team. Monitors may pick and choose from different regulations to selectively sample compliance on any one of those standards.
We at the Vander Weele Group strongly recommend that monitors of construction programs choose Minority Business Enterprise (MBE), Women Business Enterprise (WBE) and other small business requirements as standards to be monitored. Key aspects of this type of monitoring would include ensuring that prime contractors have made every effort to contract with certified small businesses, that the promised work is taking place and is being performed by the small business, that there is no evidence of fraud, waste, or abuse, and that subcontractors are being paid in a timely manner.
Key Questions to Ask in Small Business Construction Monitoring
Keeping these concerns in mind, there are a number of questions that program officers and monitors should ask when attempting to determine whether or not an organization complies with Federal, state, and local regulations as well as contract provisions. These begin by confirming that the specified business possesses the appropriate certifications such as MBE, WBE, Veteran-Owned Business (VOB), or other certifications. It also includes ensuring the payments made to the subcontractors align with the promised percentages and that if the amount of work grows through change-orders, so does the amount of work provided to subcontractors.
Because the certifying agency focuses on ensuring that the business is legitimately owned by a minority, woman, veteran, or person with disabilities, Monitors should focus more on whether those firms are performing a “Commercially Useful Function.” Certified companies must provide a genuine business product or service and Prime Contractors must ensure the participation of certified companies is real. Said simply: are they doing the work? Key questions to determine whether a company is performing a commercially useful function are:
Does the MBE or WBE—whether a contractor or a subcontractor—have ownership, control, management responsibilities, risks, and profits?
Does the MBE or WBE make independent operational and managerial decisions?
Does the MBE or WBE perform, manage, or supervise the distinct element of the work designated to the firm (i.e. perform a commercially useful function)?
Does the MBE or WBE maintain a regular workforce, including assuming responsibility for hiring, firing, and labor and payroll compliance? Or are its employees “borrowed” from the prime contractor?
If they are a supplier, does the MBE or WBE regularly deal in the materials, supplies, or equipment it has been contracted to provide? Do they maintain a store, warehouse, or other establishment, and are the contracted goods stocked and sold from the location?
Does the MBE or WBE maintain comprehensive inventory lists, forecasts, and prior year sales and activity reports?
Does the MBE or WBE solicit quotes from multiple manufacturers and distributors, and do they maintain adequate purchase and payment records? Do records indicate that all payments are made timely?
While none of the factors listed above should, in and of themselves, be considered evidence of fraud, they’re important to consider in the aggregate. In order to maintain compliance with Federal regulations, contractors—including MBEs and WBEs—must perform a commercially useful function. When construction programs try to skirt these regulations, they’re not only defrauding the government, they’re also depriving disadvantaged businesses of meaningful opportunities to compete in the marketplace. Monitoring MBE/WBE programs is one way to ensure that recipients of Federal funds are compliant and, most importantly, are contributing to the good of the community.