Are EO programs right for your business?

Many public agencies — federal, state and local — have programs to assist various target groups to gain greater participation in construction contracting. Additionally, a significant number of private firms have made it part of their corporate policies to seek out such firms for inclusion in their purchasing programs. As a result, I frequently get calls from contractors, minority and non-minority, who either want to get certified themselves, joint venture with a qualified firm, have an ownership interest in a certified firm, or assist a friend or relative in setting up such a firm. This is not as easy as it looks, and if you know that someone else was able to “get away with it,” I can only suggest that you ask him, “Have you protected your assets?”

This is a powder keg of an issue with hot feelings on all sides. There has been and continues to be a tension between advocates for assistance to women and minority contractors and those promoting a “race- and gender-neutral” society, and the courts have gone back and forth on the issue of how far they will go in enforcing such programs.

With each new member of the Supreme Court, the balance of opinion on this specific issue can shift dramatically. Under the current law, such programs are generally enforced if they are finely tuned to stand up to “strict scrutiny” by a court, and you have to expect that someone, such as the person who didn't get the contract, will have an incentive to question whatever was done.

Most Minority Business Enterprise (MBE), Women-Owned Business Enterprise (WBE), Disadvantaged Business Enterprise (DBEs) and Small Disadvantaged Business (SDB) programs have a lot of rules that must be met to obtain certification.

If the business has to be “small” it not only could have a dollar volume or asset limitation, but it could also be restricted in the net worth of shareholders. If it has to be “disadvantaged” the principal owners may have to demonstrate that they have been victims of past discrimination. If it is seeking “minority” or “women-owned” status, there will be limitations on the involvement of non-minorities or males, not only in ownership, but in control of the business. In some communities, an MBE or WBE certification is not tied to disadvantage and stays with the company no matter how successful it becomes.

When considering certification, you need to figure out who you want to work for because the standards to be met, who does the certifying, and what the risk is if all the requirements have not been complied with will all vary significantly.

Private corporations who are motivated solely by a sense of public interest can set whatever standards they want, and the worst risk you run is probably never getting work from them again. Many public owners, including some federal agencies, have done away with their programs or limited them in ways that make participation unattractive. For contractors working for some public owners, the sanctions for violating the rules for these programs include liquidated damages that can be assessed for every day that a contractor has not actually been in compliance with MBE/WBE requirements, which can be substantial. Some public agencies have their own certification programs and some do not, deferring to certification by SBA or another state agency. So, you could end up spinning you wheels if you don't find out what the requirements of your target customer are.

You also need to decide what you want out of certification. Some contractors are just looking for potential subcontractor sources or to be a passive investor in a new business. In these cases, the laws may permit this. Because this new entity, the MBE/WBE, will generally have to be controlled by the minority or woman, the non-minority cannot protect its investment by controlling the board of directors or the bank accounts. Everyone has to certify that there has been no collusion, that the MBE/WBE truly controls and operates the business, and that there is no silent partner propping him or her up. When a male client comes to me and says that he wants to set his daughter up as a WBE, and that he will provide her with capital and prospects, I ask him, “How well do you like her boyfriend?” I ask this because those assets will be hers to dispose of as she likes or as a court might order in a divorce. You need to decide how much time and money you are willing to invest to get certified. Again, every agency is different. If a corporation or entity accepts third-party certification, a substantial fee might be required to get the certifier to review your forms and fly out to interview you. If a government certification is required (you know, as well as I, how long that might take), you will have to be patient and persistent, and should not expect certification in time to bid a job next month.

Everyone is looking for marketing niches — a way to stand out from the crowd — and certification certainly can be one, but make sure that you go into the process well informed as to what is involved and what you stand to gain from it.

Susan McGreevy is a partner at Stinson, Morrison, Hecker LLP, Kansas City, Mo. She was a trial attorney at the U.S. Department of Justice, Civil Division, before going into private practice. Contact her at 816/842-4800 or [email protected].