How to identify and qualify the right diverse-certified business partner

Authors: Rodney Johnson, Larry Phillips

Minority Contractors in the Public Sector

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:

Public Sector Risk Management and Consulting

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  • "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.

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Fraudulent contracts hurt the very people who diverse contractor requirements are intended to help—ultimately excluding diverse-certified firms from new business opportunities.

How can I identify qualified contractors to work with?

This begs the questions: How can I ensure that I'm fully hitting my diversity program requirements? And how can I ensure that my partner is truly diverse-certified?

Doing your due diligence is critical. Pay close attention to these three areas when contracting and documenting your program.

  • Certification: There are a variety of diverse certifications that a company can pursue, and the requirements to become certified look different from state-to-state. Ensure your partner checks all the boxes for your project.
  • Good-faith efforts: Contractors must make "good-faith efforts" to ensure the minimum diverse participation requirements are met.
  • Commercially useful function and inclusion: Once contracted, confirm the diverse enterprise is given an opportunity to add value and is actually doing the work (as opposed to operating as a pass-through for non-diverse subcontractors).

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We also encourage you to use existing resources and networks that ensure you're working with business partners that are fully vetted, experienced and certified.

Gallagher has curated a network of diverse-certified partners to help our public-sector clients meet their diverse spend requirements. This network—Gallagher Connect Partners—has been qualified through organizations like Coupa, which verifies our partners' diverse certifications. We also utilize our partnerships with the National Minority Supplier Diversity Council (NMSDC), and the Women's Business Enterprise National Council (WBENC), to identify new and high-performing, diverse-certified partners, so we're continually working with the best.

Our network of Gallagher Connect Partners is at-the-ready to help our clients improve their insurance and risk management programs, and create a new vertical to increase their supplier diversity spend:

  • A growing network of 50+ diverse-certified partners in 40+ states
  • Fully vetted, experienced, and certified
  • Empowering clients to bolster their risk management and insurance program, and meet or exceed their supplier diversity goals through their risk management spend

Author Information:

Sources

1 Governments Struggle to Root Out Fake Minority Contractors (governing.com)
2 Passing on the Pass-Through: How to Avoid DBE Fraud Through Due Diligence | Construction in Brief: 2020 Volume 2 (cohenseglias.com)

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