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Becoming Certified as an MBE/WBE/DBE: Legal Issues to Consider
By Emily Hermreck, Chantal Mehill on May 27, 2021 at 11:30 AM

Becoming certified as an MBE (Minority Business Enterprise), WBE (Woman Business Enterprise), and/or DBE (Disadvantaged Business Enterprise) may offer greater opportunities to those minority-owned, woman-owned, and socially or economically disadvantaged contractors and suppliers seeking to bid on publicly funded contracts. Because construction or procurement contracts awarded by federal, state, or local government entities often require that a certain percentage of the work be contracted to MBEs, WBEs, and/or DBEs, a contractor or supplier holding that certification may increase their likelihood of being selected for those projects. However, there are some legal considerations that contractors and suppliers should be aware of surrounding the MBE, WBE, and DBE certification process.

MBE/WBE/DBE certification qualifications vary by location

First, a contractor or supplier seeking certification must be aware that qualifications for certification are not a “one size fits all” scenario. Federal, state, and local government entities may have different certification qualification requirements and are likely to require that the business be certified with that entity, specifically. While some local government entities might recognize certifications by the state or another entity, this is not always the case. Thus, a contractor or supplier who would like to bid on a variety of public projects – federal, state and local – will likely need to hold multiple certifications.

For example, the state of Missouri requires state certification as an MBE/WBE to bid as an MBE/WBE on state projects. The state’s certification program defines an MBE as “a business that is at least 51% owned and controlled by one or more minority persons” and defines a WBE as “a business that is at least 51% owned and controlled by a woman.” For both, the owner(s) controlling the business must also 1) “have the requisite expertise,” 2) “manage … daily operations,” and 3) “be a U.S. citizen or lawfully admitted permanent resident.” A business that meets these qualifications and is successfully certified as a Missouri MBE/WBE can bid as such on state-funded contracts.

However, should a state-certified MBE/WBE wish to bid on a project for an agency, department, or division of the city of St. Louis, for example, the business would need to be separately certified as an MBE/WBE per the city’s certification rules. The city of St. Louis’ certification rules define an MBE in somewhat more stringent terms: “A for-profit sole proprietorship, partnership, limited liability company, or corporation owned, operated and controlled by Minority Group Members who (a) have at least 51% ownership of the business entity; (b) maintain day-to-day operational and managerial control of the business entity; and (c) have interest in capital and earnings commensurate with the Minority Group Member(s)’ percentage of ownership. … [T]he MBE firm must be a Local Firm, certified as an MBE by the Program Review Committee.” The city rules define a WBE similarly. Note that because state and local entities adjudge MBE/WBE certification qualifications separately, it is possible a contractor or supplier could qualify for certification with one public entity and not another. Contractors and suppliers should ensure they hold the requisite certification for the project on which they wish to bid.

Understanding the certification process

Second, the contractor or supplier seeking certification as an MBE/WBE/DBE must apply for certification with the applicable public entity and as a part of the application process should expect an inquiry into the contractor or supplier’s day-to-day operations. The contractor or supplier seeking certification should not, however, assume that the certifying entity will unquestionably accept as true the information provided in a certification application. In fact, some government entities, such as the city of Chicago, may affirmatively put the burden of proof on the applicant to show that it meets the qualification requirements for certification. The certification process may also entail on-site visits and/or interviews with the applicant to visually and verbally confirm that they meet the MBE/WBE/DBE certification requirements. The certifying entity could also request and require additional documentation as part of the certification process.

As part of its inquiry, the certifying entity may look to ensure that the applicant is truly minority-owned, woman-owned, and/or socially or economically disadvantaged and is qualified for certification in its own right. In other words, the certifying entity may seek to ensure that the contractor or supplier seeking MBE/WBE/DBE certification is not merely a façade for a separate, non-minority-owned, non-woman-owned, or non-disadvantaged business seeking to use the contractor or supplier to gain access to contract work reserved for MBEs/WBEs/DBEs. To avoid the appearance of impropriety that could disqualify an applicant from MBE/WBE/DBE certification, the applicant should ensure that it keeps its business separate and distinct from the business of any other company. The applicant should not set up its business through another non-qualified company and should avoid using another company’s physical address, funds, bank accounts, website, email address, etc. To qualify for certification, the contractor or supplier seeking MBE/WBE/DBE certification should be a fully separate entity.

Third, a contractor or supplier seeking MBE/WBE/DBE certification should consider its affiliations and how those affiliations might be viewed by the certifying entity during the certification process. For example, does the owner of the DBE certification-seeking business come from a wealthy family, where the owner might therefore not be considered “disadvantaged” due to their apparent access to family money? Does the female owner of the WBE certification-seeking business have a male spouse who owns a similar business in the industry, or has she previously worked for the male spouse, either of which might create the appearance that the female owner is not the true owner in control of the business? Does the owner of the MBE/WBE/DBE-certification seeking business have a family member who, either individually or because of their employer, creates a conflict of interest with the certifying entity?

In the same vein, the certifying entity may investigate whether the owner of the MBE/WBE/DBE certification-seeking business actually exercises real control of the company. The certifying entity may seek to ensure that the owner really “knows” the business and exercises real control of the business by, for example, confirming that it is the owner who makes key decisions that impact the business and supervises and directs others in the business. The certifying agency might also try to confirm ownership by inquiring as to whether the owner of the MBE/WBE/DBE certification-seeking business put up its own capital to obtain ownership status. In sum, the applicant should be prepared for the possibility that the certifying entity will scrutinize all the details surrounding the applicant’s business, ownership structure, and even the owner’s personal background and personal relationships.

Moreover, it is possible that even after a contractor or supplier seeking MBE/WBE/DBE certification has fully completed the application process and complied with all interviews, inspections, and/or requests for information, its MBE/WBE/DBE certification application will be denied. It appears that most government entities provide for an appeals process that must be initiated within a certain number of days. If the denial is upheld on appeal, the certification-seeking business may be required to wait a period of days or months before re-applying.

Finally, a contractor or supplier seeking MBE/WBE/DBE certification should understand the importance of being truthful during the certification application process. Untruthfulness could result in decertification as well as other potentially serious legal and/or financial consequences, particularly if the MBE/WBE/DBE that was wrongfully certified is ultimately awarded contracts for which it would not otherwise have been qualified. MBE/WBE/DBE fraud is an issue that all levels of government are leery of; government entities at the federal, state, and local levels provide hotlines to the general public for the express purpose of reporting potential MBE/WBE/DBE fraud. In Missouri, third parties who believe that an MBE/WBE was wrongfully certified may also file a third-party challenge with the Office of Equal Opportunity.

There are potential civil and criminal implications for committing fraud in applying for MBE/WBE/DBE certification. A company that makes a false statement in connection with MBE/WBE/DBE certification can be sued for civil fraud in addition to being criminally charged with fraud or making a false statement to a government agency, which can result in jail time and heavy fines. As part of the criminal prosecution or as part of the plea bargain reached to avoid criminal penalties, the company may even be required to dissolve operations. Again, to avoid any appearance of impropriety and a possible investigation for wrongdoing, it is necessary that the MBE/WBE/DBE applicant be truthful in its application for certification.

Other items to keep in mind

Commercially Useful Function

An MBE/WBE/DBE’s autonomy remains important even post-certification in that the MBE/WBE/DBE must also be capable, in its own right, of performing a “commercially useful function” (CUF) on publicly funded projects. Prime contractors on publicly funded projects must generally strive to attain a certain level of MBE/WBE/DBE participation, and an MBE/WBE/DBE subcontractor’s participation only counts toward the prime contractor’s goal if the subcontractor performs a CUF. An MBE/WBE/DBE performs a CUF where it actually performs and controls a majority of that portion of the work for which it is contracted. The MBE/WBE/DBE generally should not subcontract out a greater share of the work than the MBE/WBE/DBE itself performs and/or supervises or than is typical in the industry. If it does, it is at risk of being identified as merely a “pass-through” participant, for which it could be removed from the project and, in the case of fraud, could be criminally prosecuted. The MBE/WBE/DBE awarded a contract on a publicly funded project must be performing a CUF in order for that MBE/WBE/DBE subcontract to count toward the prime contractor’s goal of MBE/WBE/DBE participation, and the government entity may periodically inspect the MBE/WBE/DBE’s performance of the work to ensure it is performing a CUF.

Mentor-Protégé Programs

Note also that even though the MBE/WBE/DBE should be kept separate and apart from other companies in the business sense, some government entities have established “mentor-protégé” programs wherein larger, successful non-MBE/WBE/DBE companies engage in a “mentor-protégé” relationship with MBEs/WBEs/DBEs. These informal relationships are intended to help the MBE/WBE/DBE benefit from the advice, knowledge, and experience of their mentor, generally a prime contractor who has already had success in the industry. These programs typically offer training to the MBE/WBE/DBE protégé and assistance in competing in the marketplace and help to establish mutually beneficial business connections and foster positive working relationships with other contractors in the industry. Note that these programs are limited in nature and may not be available in all jurisdictions and states.

If you would like to learn more about becoming certified as an MBE, WBE, and/or DBE, or would like assistance in completing the certification application process or appealing a denial of your MBE, WBE, and/or DBE certification application, please contact an attorney in Greensfelder’s Construction Practice Group.

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