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Scenario: You just finished quoting a government project and the contractor you submitted the bid to tells you that you will be awarded the contract to provide construction supplies for the project. However, there is a catch.  When you receive the contract for signature you notice that the party that you are contracting with is not the contractor that you provided the quote to. In a follow-up call to the contractor you are informed that because of the DBE (disadvantaged business enterprise) requirements for the project, the contractor needs you to contract with a DBE certified business and send your billings to the DBE, which will in turn send its billings to the contractor—same as originally planned with just that small adjustment. You will still work directly with the contractor in providing and shipping the materials. But, the billings and payments will be done through the DBE.

Don’t be fooled. That “small adjustment” could mean big problems involving both civil liability and criminal investigation or prosecution.

The above scenario illustrates a situation in which a DBE is merely involved as a “pass-through”—a violation of federal law and other laws intended to promote disadvantaged businesses.[1] In order for a DBE credits to be allowed, the DBE must perform a “commercially useful function” on the project. Simply requiring payment and invoicing to “pass through” is not considered a “commercially useful function” and subjects the DBE and anyone else involved to potential civil and criminal investigation and liability.

This is true even if the supplier “did not know” but can be shown to have intentionally avoided confirming the facts or learning the truth of the situation. The fact that the DBE was a “certified” DBE, as opposed to merely masquerading as a DBE, does not protect the supplier (or the contractor). Rather, the focus of any inquiry will be on the nature of the arrangement. If it appears that the certified DBE is merely acting as a pass-through, then the parties involved will be at risk of civil and criminal investigation and liability.

To be considered as providing a commercially useful function, the DBE suppling materials to a project must be responsible “for negotiating price, determining quality and quantity, ordering the material, and installing (where applicable) and paying for the material itself.”[2] Even when providing a commercially useful function, the amount of the DBE credit allowed for the value of materials purchased will depend upon other factors including whether the materials were supplied by a DBE supplier or not.[3]

So, how do you as a supplier avoid this risk?

  1. Do not sell product to a DBE that you know is simply being used as a “pass-through”. Rather, keep your dealings with the party that is requesting the materials.
  1. Educate employees that handle accounts regarding the risks of providing materials to DBEs so that proper inquiries can be made. Document those inquiries. Those inquiries could include: Is the DBE providing value to the project other than as a pass-through? Are the materials being delivered to the DBE or directly to the project? Is the DBE regularly involved in the type of business that it is involved in on this project? Does the DBE have employees and equipment necessary to provide a commercially useful function on the project? Was the original quote for materials provided to the DBE, or was the DBE’s involvement merely an accommodation after the fact?

Finally, if you have specific concerns or questions, contact an attorney familiar with DBE requirements.

[1] See 49 C.F.R. § 26.55(c)(2).

[2] See 49 C.F.R. § 26.55(c)(1).

[3] See 49 C.F.R. § 26.55(e).

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Conrad H. Johansen
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