Qualifying for Set-Aside Work is No Easy Task

Some time ago I stopped counting the number of telephone calls I had gotten from contractors who wanted to find a way to qualify as a Minority Business Enterprise (MBE), a Women Business Enterprise (WBE), a Disadvantaged Business Enterprise (DBE) or any of the other terms coined to describe contractors for whom some projects are either set-aside or who got a “preference” or other special consideration.

Contractors hungry for work would look at these projects and wonder if there wasn't some way to get in on the action — by selling part of their business to someone who would qualify or setting up a joint venture or LLC with a firm that already qualified, etc. Seldom does it work out for these would-be participants.

The most important question to ask yourself is, “Why do I want this status?” The answer to this question then will determine the path that you take.

Some larger purchasers of construction are private firms who have a commitment to diversity but no legal obligation to hire any disadvantaged business. These firms tend to have the most flexible rules and are the easiest to qualify for.

Some private companies get large government contracts (in the aerospace industry, for example), and a requirement of their contracts is that in all of their purchasing (including construction), they must include such participation. Often, however, it is not necessary to meet the same stringent standards as a true “government contractor.”

The U.S. government has a very complete set of regulations — in fact, many different sets of regulations because various federal agencies have their own regulations. These are generally on Websites that are pretty well maintained and easy to navigate. The penalties for violating federal regulations are draconian (Google a past column on the False Claims Act).

Many state and local governments and agencies have their own programs with their own rules, some of which require minimal paperwork and are easy to meet, while others make the U.S. government look like pre-school playtime.

While all of these programs have their own rules, which differ widely, a few general principals seem to be found in most of them, which illustrate the problems associated with MBE/WBE work.

First, nearly every program requires that the set-aside contractor own more than 50% of the entity and actually control it. This makes it impossible for a minority shareholder (in the less-than-50% ownership definition of “minority shareholder”) to protect its investment. Many business owners have suggested setting their wives or daughters up in business - I guess on the theory that blood is thicker than water and this is a person they can trust. When reminded that a daughter, or a widow, can marry a Vegas show boy and give away the family inheritance, many of these business owners think twice about the whole idea.

Second, the person or persons who are the minority or female members who run the company have to show that they actually have a background in the area of construction of the company. A woman who was a hairdresser until the company was formed, or a minority who was a doctor until asked to be president of a paving operation (and I have seen both situations), may have a hard time even completing the qualification forms, let alone get through an interview.

Third, the person who is the “top qualifier” and ostensibly running the operation has to have a salary and benefits commensurate with that level of corporate position — making more money than the estimators, project managers, etc.

Fourth, the set-aside contractor has to have financial control. Progress payments need to go to the set-aside contractor's account, and the set-aside contractor has to have complete control over the checkbook. If a non-set-aside contractor is concerned about what his or her partner is doing with funds, there is not much he or she can do to stop it.

Generally, a set-aside contractor only needs a non-set-aside contractor as a partner, with whom he has to share profits because he can't finance or perform the work on his own. Where the work is public work, and the contractor has to give a surety bond, this often translates into the non-set-aside contractor guaranteeing the surety bonds for the set-aside contractor or joint venture. Usually, the government agency involved knows this — that the “small, disadvantaged business” can't come up with a $10 million bond — but that doesn't mean that it will permit the non-set-aside partner who is backing the bonds to protect its interests. The lack of financial control can create serious risk in this situation.

Just as there is no free lunch, there is no trick, backdoor, risk-free way to participate in set-aside work. Anyone thinking of going into such a venture — particularly on public work — needs to ask many questions and get satisfactory answers in advance. This is one area where due diligence is absolutely essential.

Susan McGreevy is a partner at Stinson, Morrision, Hecker LLP, Kansas City, Mo., 816/842-4800, e-mail to [email protected].