Authors: Rodney Johnson, Larry Phillips
Supplier diversity requirements are not a new trend in the public sector. Each year, government agencies award billions of dollars' worth of contracts to businesses with one stipulation: those businesses must share a percentage of the work with diverse-certified businesses. These include disadvantaged business enterprises, minority and women-owned business enterprises, etc.
These programs are designed to boost the participation of minority and women-owned businesses that historically have been overlooked or underrepresented in certain industries and functions. The objective is that by supporting these underrepresented demographics, the industry as a whole will become more diverse and enriched.
In many cases, these diversity programs are hugely successful—but not in every case.
Where can contracts and diversity programs go wrong?
In theory, supplier diversity standards should provide a perfect solution for elevating minority businesses. But in practice, program loopholes can offer a gateway for businesses to unfairly game the system. Specifically, tying competitive contracting opportunities to diverse participation requirements can create an incentive for contractors to inflate utilization rates of diverse-certified firms.
There are two main ways businesses cut corners on supplier diversity requirements to win business:
- "Front" company: When a non-diverse firm creates a diverse-certified firm to compete on government projects.
- "Pass-through" company: When a diverse-certified firm bids for government projects, but passes on the majority of the work to a non-diverse firm.
However, cities and states across the country are struggling to provide sufficient oversight when it comes to minority and women-owned firms. As a result, much of the money that's targeted to help these minority and women-owned businesses doesn't really go where governments want it to."1 And while it's a stretch to say that these cases run rampant, they are not uncommon. Consider the following examples:
- Two minority businesses in Louisville were banned from contracting with the metro sewer district due to their subcontracting with nonminority-owned businesses.1
- A contract for work at the Denver International Airport was later deemed by the city as a failure, as the work had been awarded to a contractor that was subcontracting millions of dollars to a nonminority-owned contractor.1
- After employing a pass-through company to meet diverse contractor requirements for a bridge painting project, a Philadelphia project manager was convicted of wire fraud and false claims, and ultimately sentenced to 6 years in prison.2
In response, government agencies are taking a critical look to ensure that everyone is playing by the rules.