DBE Participation and Labor & Employment Issues for Contractors

DBE Participation and Labor & Employment
Issues for Contractors | CFMA Philadelphia
January 18, 2018
Presented by:
Brian P. Sanvidge, CIG, CFE
Jeffrey D. Wild

Introduction
Baker Tilly Virchow Krause, LLP
> Founded: 1931
> Top 15 accounting and advisory services firm
> 2,700+ employees
> Headquarters: Chicago, IL

Agenda
> Understanding NAICS Codes
> Commercially Useful Function Testing
> BT Forensic Review of a Large Municipality’s DBE Program
> Keys to Success in Utilizing DBE Firms
> Case Studies: Strict Penalties
> Takeaways

3 Forensic, Litigation & Valuation Services
Understanding NAICS Codes

NAICS Codes
> North American Classification System (NAICS)
• Used by businesses and governments
• Classify and measure economic activity
• Array the economy into 20 sectors
> Primary NAICS code
• Identified by highest revenue generator
> Indicate what a contractor is certified as an Eligible Business Entity
(EBE)

How to Read a NAICS Code
Sector 11
Subsector 111
Industry Group 1113
Industry 11133
U.S. Industry 111331
Agriculture, Forestry, Fishing, Hunting
Crop Production
Fruit and Tree Nut Farming
Non-citrus Fruit and Tree Nut Farming
Apple Orchards
NAICS Code 111331: “This U.S. industry comprises establishments
primarily engaged in growing apples.”

NAICS Code Definition Directory
https://www.census.gov/cgi-bin/sssd/naics/naicsrch

Importance of NAICS Code
Knowledge
> Verify firms are certified in the correct NAICS codes before
executing a subcontract
• Being DBE certified they do not possess the proper NAICS
code
> Confirm with the subcontractor they do not anticipate a lapse in the
certification or suspension of a NAICS code

Relative Experience – Example #1
NAICS REVIEW – LARGE MUNICIPALITY
ISSUE: Backlog in certification applications and contractor audits necessary
SCOPE: MBE, WBE, and DBE application review
APPLICATION VOLUME: Approximately 1,600 applications
CONTRACTOR AUDIT: Approximately 250 additional contractors

> Each application included:
• Company financial statements
• Personal financial statements
> Supporting documentation outlining ability to provide services
applied for
> Baker Tilly conducted file reviews and on-site interviews for
applicants
> MBE, WBE, and/or DBE eligibility were determined and awards
were recommended when appropriate

Commercially Useful Function Testing

Commercially Useful Function
Defined
Commercially Useful Function (CUF)
> “Responsible for execution of the work of the contract or a distinct
element of the work…by actually performing, managing, and
supervising the work involved.”
• 49 CFR §26.55
> Contractors will only receive credit for a DBE’s participation if a
CUF is demonstrated

CUF Testing – FHWA Activity
Testing
REVIEW – review
agreements between
DBE and contractor
INSPECT – perform
site visits and review
staffing, equipment, etc.
Verify – review
compliance documents to
verify workforce, invoices,
etc.

CUF Testing – Services
To receive credit, the DBE supplier must be
responsible for the performance, management,
and supervision of a distinct element of work, in
accordance with normal industry practice
(except where such practices are inconsistent
with DBE regulations)

CUF Testing – Materials/Supplies
To receive credit, the DBE supplier must:
Negotiate
Price
Determine
Quality and
Quantity
Pay for the
Invoice
Order the
Materials

CUF Testing – Red Flags
> Work is being done in conjunction with a DBE
> Work is being done outside the DBE’s known experience and/or
capacity
> Any portion of worked subcontracted to a DBE is being completed
by the prime contractor or another subcontractor
> Work is being completed without an approved subcontract
> A DBE only works with one prime contractor

Background
> In December 2014, a contractor entered an agreement with Federal
Highway Administration (FHWA)
> The contractor had previously abused DBE goals by utilizing pass-
through entities
> BT retained to monitor compliance with federally funded projects
performed in Kentucky, Indiana, Illinois, Georgia, and New York

Procedures
1. Receive and review all executed subcontracts
2. Verify DBE subcontractors are certified in the state where the project is
occurring
3. Examine the scope of work performed by each DBE and verify it is within their
scope of services for which they are certified
4. Collect and review all compliance documentation including certified payroll
reports, payment tracker, and cancelled checks
5. Issue quarterly reports outlining compliance to the contractor and FHWA

Results
> Baker Tilly issued a final report summarizing the contractor’s
compliance and actions for the life of the engagement
> The contractor followed all regulations implemented by FHWA
> For projects completed under these sanctions, the contractor was
excused from shortfalls

BT Forensic Review of a Large
Municipality’s DBE Program

The Compliance Audit
> In June 2014, BT was engaged to conduct an analysis and assessment of the accuracy of a
large municipality construction project’s workforce and business development goals
> Purpose of the compliance audit was to
• Highlight and remediate any control weaknesses
• Produce a more complete set of records
• Promote efficiency in the compliance process
• Provide recommendations for improving the program or ICO’s processes
> Audit revealed numerous material weaknesses which impacted the accuracy of monthly
reporting including:
• Missing and incomplete documentation
• Assignment of Eligible Business Enterprise (EBE) contract credits for work performed by non-certified EBE
contractors
• Inaccurately calculated value of participation for suppliers and brokers
• Inaccurate or unconfirmed information provided in compliance forms reported in the ICO’s monthly reports
• Evidence that not all compliance forms were reviewed by the ICO

Analysis of Findings – EBE
Contract Allocation/EBE Certs
> Our analysis of EBE contract allocations reported addressed four areas of concern:
• Whether the EBE sub included in the allocation were actually EBE certified
• Whether the EBE sub contributed a commercially useful function to the program, or if there is insufficient
evidence to support that the PC should be allowed credit for the transaction
• Whether the EBE sub was reflected in the December 2013 report using the correct credit reductions for
suppliers and brokers
• Whether the EBE sub was actually paid the amounts reported by the PC as of the latest DDP-3A which
would have been provided.
> All MBEs, WBEs and DBEs are required to be certified by New York State for their participation
to count for credit towards the respective goal. We reviewed each reported EBE in each category
to determine the reported EBE qualified as required by guidelines.

> We found approximately 60 cases where a PC was given credit for
a sub who was not actually certified as an EBE. As this involved the
same sub in more than one project, there were approximately 44
distinct subs who were not properly verified.
> We reviewed all MBE, WBE and DBE firms by contacting the
respective NYS certification groups.
> Based on our analysis, we believe that failure to identify non-
certified firms, EBE contract allocations were overstated by
$5,662,504.24. See table on next slide for break down of the
amounts over reported and adjustments made by BT.

> We have been able to increase the RSMP’s EBE allocation by approximately
$1,271,670 by reclassifying firms to EBE goals that they are in fact certified for.
Breakdown of Adjustments by EBE Status
Amount Incorrectly
Reflected on L&R’s
December 2013 Report
Adjustments to BT Compliance Reports
Decreases Increases Net Change
MBE $1,674,691 $(1,674,691) $863,303 $(811,388)
WBE 930,875 (930,875) 171,312 (759,563)
DBE 199,602 (199,602) 109,850 (89,752)
SBE 2,857,337 (3,112,497) 127,205 (2,985,292)
$5,662,505 $(5,917,645) $1,271,670 $(4,645,995)

Analysis of Findings – Non-
Qualifying Transactions
> We reviewed the role that various EBE subs served, to determine
whether the subs served a commercially useful function. We also
reviewed the program’s December 2013 Report to identify
instances where the PC received credit for these arrangements.
> Our analysis involved reviewing responses to confirmation letters
and discussing the transaction arrangement with the subs.
> In addition, we reviewed copies of payment applications and
invoices that were included in the documents provided to the
program

> We determined in 17 cases that, based available documentation, there
was an insufficient basis to conclude that EBE subs had served a
commercially useful function. In 12 of these cases, were determined that
the program had provided credit for the transaction on their December
2013 compliance report.
> The chart below summarize the total amount of adjustments performed to
BT’s compliance reports:
EBE Goal Total Amount of Adjustments
Amount overstated on
Landon & Rian
MBE $2,153,469 $1,158,697
WBE 2,295,599 1,824,708
DBE - -
SBE 499,642 495,571
$4,948,710 $3,478,976

> We noted that there were 48 instances where a sub acted as a supplier.
The diversity section of the RSMP permits 50% credit in these cases. We
note that in only 11 cases the program applied a 50% reduction to the
contract allocation. We did not identify instances where the EBE sub could
be classified as a broker to permit the PC to receive 25% credit.
> Below is the total amount which was overstated on program compliance
reports resulting from suppliers
EBE Goal
Total Amount of
Adjustments
Amount overstated on
the Landon & Rian
MBE $2,075,721 $1,044,962
WBE 103,502 60,336
DBE 359,589 303,561
SBE 331,242 311,586
$2,870,054 $1,720,445

Analysis of Findings – Payment
Confirmations
> We found that reported payments to EBE subs, on DDP-3A forms,
exceeded those payments BT was able to verify through the process
above
> BT reviewed the latest DDP-3A forms submitted by PC’s in order to
determine the amount reported as paid as of December 31, 2013 to
EBE subs. We determined that this amount was approximately
$32,409,633.
> The payments confirmed by EBE subs from the start of the project
through December 31, 2013 is approximately $31,148,707.
> This represents approximately 96.11% of the dollar amount reported
by the PCs noted above.
> The reported payments to EBE’s exceed verified payments by 3.89%.
> We have not credited EBE participation in any case where we were
unable to verify corresponding payment to the EBE by the PC.

BT’s Current ICO Procedures
> When a low bidder is determined on a new project, our staff examines the bid to ensure that all
required documentation is provided, and the PC is educated on the compliance obligations. This
includes:
• Ensure the documentation includes the EBE Utilization Plan (“DP-1”), EBE Assurance Statement, Promise of
Non-Discrimination Checklist and Good Faith Efforts Checklist.
• Verify if the EBE subs listed on the DP-1 have been contacted by the prime in regards to the proposed work
scope.
• Verify that the EBE subs are certified for both the work scope and respective EBE goal proposed by the
prime. We also ensure that if a sub will act as a supplier or broker, the PC understands the correct credit that
they will receive.
• Ensure that we. have an understanding of each sub’s role, and that each sub is performing a commercially
useful function. If there are any issues with the proposed goals or quality of the documentation received, we
contact the PC.
• Offer assistance to any PC who is having difficulty finding EBE subs in order to meet their goals.
• Assist contractors by providing them electronic templates for the compliance forms, to ensure that the forms
are completed in a neat and legible manner.
• We will issue a recommendation letter for firms which are determined to have made a good faith effort in
meeting all of the business participation goals.
• Once a firm has been awarded, we will request copies of the Letter of Intent to Perform and executed sub-
contracts for each EBE sub, in order to verify that the PC is starting to fulfill their intent to utilize the sub.

Keys to Success in Utilizing DBE Firms

Key to Success
Mentor-Protégé Situation
Competitive Pricing
Continued Relationship

Early Outreach
> Review RFPs and specs for utilization goals
> Upon acknowledging utilization goals, you should begin listing
scopes you may want to subcontract out
> Begin researching and contacting potential DBE firms requesting
quotes for certain scopes of work

Competitive Pricing
> Establishing early outreach will allow your firm to receive numerous
bids from DBE subcontractors
> You can competitively compare the bids your receive from DBE
subcontractors
> Early outreach allows you to competitively price the whole job and
increase likelihood of winning jobs while complying

Mentor-Protégé Situation
> Utilization goals provide opportunities for larger contractors to
mentor DBE firms
> Spend time with your subcontractor to teach them beneficial
business principles and practices
> Increase subcontractor efficiency
> Business Opportunity Program (BOP)

Continued Relationship
> Prime contractors and subcontractors benefit
> Developing a lasting relationship with a DBE subcontractor will
increase your firm’s competitiveness in bidding
> A lasting relationship will provide consistent pricing
> Increase opportunities for involvement in funded projects

Case Studies: Strict Penalties

Case Study #1
Carl M. Weber Steel Service, Inc. (Weber Steel) &
Karen Construction Inc. (Karen)
Background
President and VP of Weber Steel, a bridge and highway construction contractor, used Karen, a DBE,
as a front to obtain subcontracts in Pennsylvania. For 16 years, Weber Steel used Karen to obtain
$18.7 million from 224 federally funded bridge projects. Weber Steel controlled Karen’s sales,
marketing, project selection, price estimating, purchasing, project supervision, and hiring.
Sentences
> Weber Steel: 3 years’ probation
> Weber Steel President and VP: 6 months home confinement, 5 years’ probation, and ordered,
along with Karen Owner, to pay joint restitution of $1 million to FHWA
> Karen Owner: 3 years’ probation and ordered to pay joint restitution of $1 million with other
defendants, as well as an additional $336,219 in restitution to FHWA

Case Study #2
Boggs Paving Inc. (Boggs Paving) &
Styx Cuthbertson Trucking Company, Inc. ("Styx")
Background
North Carolina based Boggs Paving, used Styx, road construction hauler and a certified DBE, to
obtain government-funded construction contracts. For 9 years, Boggs Paving used Styx to obtain
$87.6 million from 37 contracts. Boggs Paving went to great lengths to hide the fraud, including
moving payments through Styx bank accounts and covering Boggs Paving logos on their trucks with
magnetic Styx decals.
Sentences
> Boggs Paving: $500,000 fine
> Boggs Paving President: 30 months in prison and a
$15,000 fine
> Boggs Paving CFO: 2 years of probation and
a $2,000 fine
> Boggs Paving VP: 15 months in prison
> Boggs Paving VP: 2 years of probation and a $1,000
fine
> Boggs Project Manager: 2 years of probation and a
$7,500 fine
> Styx President and Owner: 3 months of home
confinement followed by 21 months of probation, and
a $2,000 fine

Case Study #3
Schuylkill Products Inc. (SPI) &
Marikina Construction Corporation
Background
For 15 years, SPI used Marikina, a DBE firm, as a front. Marikina received the contracts on paper,
but SPI performed all the work and received all the profits. In exchange for using it’s name and DBE
status, Marikina received a fee. This scheme resulted in $136 million in government contracts in
Pennsylvania.
Sentences
> SPI Sales and Marketing VP: 24 months’ imprisonment, $119 million in restitution to the USDOT,
and two years’ supervised release
> SPI Field Operations VP: 33 months’ imprisonment, $119 million in restitution to the USDOT,
$82,370 in restitution to the Internal Revenue Service, and two years’ supervised release
> Marikina Owner: 33 months’ imprisonment, $119 million in restitution to the USDOT and $79,450
in restitution to the IRS, and 2 years supervised release

Case Study #4
MarCon, Inc. (MarCon)
MarCon Precast, Inc. (Precast)
MC Group, Inc.
Background
MarCon President and Owner submitted false applications so MarCon could participate in the U.S.
DOT DBE Program and the U.S. Small Business Administration (SBA) program. These
misrepresentations included making it appear that the owner’s net worth was lower by transferring
assets to others. This was done to demonstrate economic disadvantage and therefore qualify for the
DBE and SBA programs.
Sentences
> MarCon and Precast: Debarred for 56 months
> MC Group: Debarred for 36 months
> MarCon and Precast President and Owner: 84 months
in prison and ordered to pay restitution of $98,825 to
the IRS, $32,575 to the Idaho DBE Program, and
$22,859 in prosecution costs. Also ordered to forfeit
$3 million in proceeds. Debarred for 56 months
> MarCon Co-Owner: 3 months in prison,
ordered to pay $5,000 fine, and perform
100 hours of community service. Debarred
for 36 months
> MarCon and Precast Senior Official and
MC Group VP: Debarred for 36 months

Case Study #5
Diamond Coring Co.
Perdel Contracting of Lockport
Background
Perdel was used by Diamond Coring as a front to obtain a runway repair contract at O’Hare
International Airport. Perdel, qualifying as a DBE because it was a woman-owned business, received
millions in subcontracts, but did not actually perform the work. Perdel’s Owner submitted false
documents to the city showing that Perdel rented equipment to Diamond Coring, when the
equipment was actually owned by Diamond Coring.
Sentences
> Diamond Coring Owner: Cooperated and received 2 years probation
> Perdel Owner: 12 months in federal prison

Case Study #6
PennDOT Consultant Inspectors
Background
Three former PennDOT consultant inspectors provided kickbacks to a PennDOT manager to ignore
inflated billings related to project inspections that were never completed. This was part of a larger
$1.2 million corruption scheme involving 27 federally funded contacts in Pennsylvania.
Sentences
> The Former PennDOT consultant inspectors were each sentenced to 60 months’ probation and
ordered to pay between $35,000 - $53,802 in restitution

Takeaways
> Make sure you understand how a NAICS code is defined and that
the DBE possess the proper code to perform contracted work
> Apply a commercially useful function test to prevent issues later on
> Mentoring a DBE subcontractor can lead to a lasting relationship
benefiting both parties
> Increased enforcement of utilization goals will lead to harsher
penalties and sanctions

Questions and Discussion
Jeffrey D. Wild
jeffrey.wild@bakertilly.com
Brian P. Sanvidge, CIG, CFE
brian.sanvidge@bakertilly.com

DBE Participation and Labor & Employment Issues for Contractors

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