Beware of pitfalls in 'MBE' relationships

Real Estate Weekly, July 21, 1993 by Michael R. De Chiara

In a determined effort to help minority-owned businesses gain their fair share of subcontracting work, government agencies are giving them special consideration when awarding contracts for construction, architectural and engineering services.

For example, the Port Authority of New York and New Jersey, which spends about $1 billion annually on construction and engineering projects, requires large contractors to subcontract 15% to 20 percent of their work to firms owned and operated by members of certain ethnic groups or by women.

The implications for prime contractors are clear: those that have good working relationships with qualified minority or women's business enterprises (MBEs and WBEs) could enjoy a significant competitive advantage in bidding for public contracts. In fact, some contractors have gone so far as to invest in a minority business.

However, getting too cozy with an MBE or WBE can engender legal problems that may offset the advantages. Therefore, contractors must understand exactly what they can and cannot do in forging relationships with minority businesses.

For starters, what is a minority business? To be certified by the state or city as an MBE, a firm must be at least 51 percent owned -- and totally operated -- by African-Americans, HispanicAmericans, native Americans, Asian-Pacific Americans or Asian-Indian Americans. Actual control of the management and daily business transactions of the enterprise is the key factor in the certification process. The same rules, of course, apply to womenowned firms.

For special consideration in bidding on federally funded transportation projects -- including not only highways and airports but also local transit systems financed in part by Washington -- it's necessary to have a "disadvantaged business enterprise" (DBE) certification. Fortunately, an MBE or WBE designation also qualifies a firm for a DBE.

But certification is not awarded for the lifetime of a business. Agencies that certify MBEs and WBEs are constantly policing them to ensure that prime contractors do not establish them as captive entities. Therefore, if a prime is in any way involved in the formation of an MBE or WBE, certain pitfalls must be side-stepped if certification is to be attained and liability avoided.

At all times, the minority or women-owned firm must be able to demonstrate that the prime firm has no control or influence in its business operations. If the prime contractor makes a seedmoney loan, there must be a real obligation to repay it. And if the prime holds equity in the MBE or WBE, it will have to demonstrate that its ownership is less than 50 percent, and that it does not exercise any control over operations or take part in management decisions.

Generally speaking, the weaker the ties between the two companies, the greater the chances that certification will be awarded.

The same potential problems concerning control and undue influence exist when a prime contractor and an MBE or WBE establish a joint venture that extends beyond one particular project. For example, an MBE electrical engineering firm that contracts to work exclusively with one construction company on project after project may be suspected of being controlled by that company. Such long-term contractual agreements between minority subs and primes can easily result in an in-depth investigation and potential loss of certification by the MBE.

However, working with a minority subcontractor on a project-by-project basis is a common arrangement that is universally accepted by public agencies.

There are thousands of certified minority and women-owned businesses in the New York metropolitan area that will complement and strengthen your ability to win public contracts. The key is selecting one that meets the contract and job requirements and becomes an important asset to your bidding team.

Federal, state and city agencies maintain updated MBE and WBE registries that list certified firms by region and technical specialties. In addition, many of those agencies review the firms' performance on a project-by-project basis and will share the results with prime contractors looking for minority partners.

Primes that make diligent use of these resources often stand the best chance of putting together the winning team of bidders.