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Equitable Development Toolkit
Equitable Development Toolkit
Minority Contracting
What Is It?
Why Use It?
How To Use It
Keys to Success
Tool in Action

Encouraging greater economic participation by minority firms has two key components: increasing opportunity and increasing capacity.  The best programs combine at least one approach from each category.  But for any strategy, the first step is to determine who is being targeted, and what the goals are.

Identify Constituents and Goals

To craft a truly successful local minority contracting policy, the participation of the businesses that would benefit from it is essential.  So first, the main targets need SDB - Small Disadvantaged Business (a Small Business Administration term).  --- MBE - Minority-owned Business Enterprise --- WBE - Woman-owned Business Enterprise --- DBE - Disadvantaged  Business Enterprise  (a Department of Transportation term).to be identified.  Will the program focus on certain types of businesses within the construction industry, certain types of contracts, very small businesses, etc.? Or will it be focused on all aspects of a particular large construction project? How will eligibility be determined?

Many programs choose to borrow eligibility definitions from federal programs.  They usually have a size/income limit, and some definition of the owners' membership in a disadvantaged group.  "Disadvantaged" usually casts a wider net than just racial minorities; it could include, for example, someone with a physical disability.

The Small Business Administration considers general building and heavy construction contractors "small" if they have less than $28.5 million in average annual receipts. For special trade construction contractors the number is $12 million.  To qualify for SBA's "Small Disadvantaged Business" certification or its 8(a) technical assistance program, a small business must be "unconditionally owned and controlled by one or more socially and economically disadvantaged individuals who are of good character and citizens of the United States," and have a personal net worth of under $750,000. 

Once advocates have identified who the targets are, they should bring together an organized group of representatives from among those targeted minority businesses.  These business owners are the best suited to identify what barriers they are facing and what sorts of solutions they would like to see.  The needs and experiences they identify should be the foundation for any policy plan.

Prove the Need

Once a coalition is organized, research should be done on local agencies and their history of contracting with minority firms.  What percent of contracts go to minority firms, compared to the existing number of those firms?  Are there particular areas in which they are particularly under-represented? Being able to identify a pattern of neglect will be valuable for two reasons: convincing officials of the need for such a program, and defending its constitutionality once instituted. 

In the process, identify any large public subsidies to construction projects.  These are potential opportunities for developing agreements to increase participation by local and minority contractors.

Programs to Increase Opportunity

Small disadvantaged businesses are often caught in a catch-22 in trying to achieve parity with more established or non-minority firms.  It is easier to get large contracts when you have already gotten large contracts.  And the personal connections and networks that have been established are hard to break into, carrying past discrimination into the present. Programs to increase opportunity attempt to break through these patterns by changing the way those selecting contractors do business.

Set Aside or Affirmative Action Programs. The most common approach to increasing opportunity for minority contracting is affirmative action or set-aside programs. An affirmative action minority contracting program needs to include a clear definition of eligibility and a mechanism for checking on the progress toward that goal.  There are two major ways that these programs go about encouraging participation: setting target goals for the percentages of contracts going to minority firms, or applying a discount to minority firms' bids so they have a leg up in competing for contracts.

Affirmative action contracting programs take many forms:

  • City ordinance.   An ordinance makes goals for minority participation a matter of citywide policy and generally applies to all or most city contracts.  The city of Durham, North Carolina, passed a W/MBE ordinance in 1994 that directs the Equal Opportunity/Equity Assurance director to establish MBE and WBE goals for each contract to be awarded by the City. The goals are stated as a percentage of the total value of work for each contract. The goals take into account the availability of MBEs and WBEs to provide the goods and services to be furnished.
  • Agency policy.   Sometimes a particular agency will commit itself to minority firm participation, and include DBE goals in its Requests for Proposals (RFPs).  Most local transportation agencies have some sort of program, because by doing so they can receive partial federal reimbursement of project costs when they hire DBEs.
  • Large development projects. Any large development, public or private, but especially those receiving some significant amount of public subsidy, is a good target for a specific DBE outreach plan and goals.  When Dallas proposed raising rental car and hotel taxes to support construction of the American Airlines Center, a 26 percent "fair-share" minority contracting goal for the project was included-and it proved key to gaining community support for the measure.

    The 1998 plan to expand Lambert Airport in St. Louis, Missouri, includes a goal that "disadvantaged business enterprises" account for 30 percent of contractors for design, environmental consulting, and construction.  (They achieved 37 percent.)  The Market Creek Plaza commercial development in San Diego, which has had a large amount of resident planning input, met its  goal that 65 percent of construction be done by community-based contractors.
  • Community benefits agreements .  Sometimes community groups will take the lead on negotiating agreements that include items like local hiring and minority contracting with developers entering their neighborhoods. For more on CBAs, see PolicyLink's Local Hiring Tool.

Affirmative action-type policies must be carefully worded to attend to local needs and meet constitutional requirements.  The Supreme Court requires that affirmative action programs be "narrowly tailored."  This means:

  • Goals must be set relative to availability of qualified firms in the relevant industries;
  • Programs must include the option of race-neutral alternatives (like general outreach and technical assistance) in addition to race-conscious goals;
  • Quotas are prohibited;
  • Waiver mechanisms must be available;
  • Factors other than race must be included in determining eligibility (e.g. net assets);
  • Duration of the program must be clearly defined and the program must go through periodic review; and
  • Program must analyze the degree of burden it places on non-DBEs (e.g., evaluating concentration of DBEs in any one industry);

The best way to ensure that a policy designed to encourage minority contracting withstands challenge is to tie it carefully to a disparity study that shows the policy is needed.

The most well-crafted, progressive policies will make no impact without firm and effective monitoring tools. All set-aside programs should include some way to ensure compliance.  A basic approach is to require contractors to document good faith efforts and explain why hiring did not occur in cases where a minority contractor did not win the bid.

Break up large contracts. Cities can also increase smaller firms' access to public contracts without new set-aside programs. Breaking up what would usually be large public contracts into multiple, smaller opportunities, allows firms with lower capacity to bid on city contracts.  In the face of Initiative 200, which outlawed race-targeted programs, Seattle, Washington, has begun breaking up its contracts into smaller projects as one way to continue to increase opportunity for disadvantaged businesses.

Offer Advance Payments .Lack of capital up front prohibits many minority firms from being able to bid on public contracts.  One way to increase access to public contracts is to offer advance payments to competent businesses that are unable to work on a contract without a little initial assistance. In 2000, Chicago strengthened its original M/WBE ordinance by allowing the city to make advance payments of 10 percent of the total contract value, up to a maximum of $200,000.  This changed existing law, which had set the limit for advance payments at  $50,000.

Connect DBEs with prime contractors. An important way to increase opportunity for minority firms is just making connections between them and general contractors or owners.  An intermediary group can identify DBEs that are serious about bidding for larger projects and connect them with those who are collecting bids. San Diego's Multicultural Contractors Group has secured more than $25 million in contracts for over 200 membership contractors. Big successes include 80 percent minority participation on a naval housing project and increasing minority participation from 3 to 35 percent on the Otay Mesa pipeline project.

Programs to Increase Capacity

A wide range of training and technical assistance programs have been created to help small and minority businesses increase their capacity and gain parity with other firms.  Any comprehensive minority contracting program should include some of these approaches along with those to increase opportunity.  Some examples of these programs follow.

Help with Bonding. One focus of technical assistance for minority firms should be help with the bonding process.  Most public contracts require a contractor to be bonded, and yet smaller firms often have trouble getting bonded without the experience of larger contracts.

Knowledgeable guidance through the process can help small and minority firms achieve bond-readiness.  The Lambert Airport Expansion in St. Louis, which has met and surpassed its high goals for minority contractor participation, operates one of the more comprehensive efforts to bond minority firms.  The Contractor Assistance Program (CAP) initially assesses bonding readiness by evaluating the contractor's bond history, gross receipts in recent years, financial strength, ownership, banking relationship, and performance on past jobs.  Based on this assessment, CAP's bonding specialist determines how close the contractor is to being able to obtain bonding, and resources are offered accordingly.  Help is targeted to strengthen the company's weaknesses and develop the firm's financial control and reporting tools.  Help is also provided on the bonding applications themselves.

Create Business Incubators . Incubator-style programs build firms' capacity by providing a supportive environment and lowering overhead through shared space and other capital costs.  The North Amityville Community Economic Council has pioneered an "incubator" project wherein a 15,000 sq. ft. office and warehouse space is shared by up to seven small disadvantaged businesses who pay market rate rent for the space but save money by sharing costs such as insurance, support staff, and conference rooms. 

The Tennessee Valley Authority has implemented this strategy on a policy level.  It operates a Business Incubation Program with more than twenty incubator facilities throughout the valley, where tenants share services, equipment, and building space, while the TVA provides technical and financial assistance.

Cooperative solutions like business-incubators can go a long way toward increasing the capacity of small firms. Local governments or CBOs can found and fund incubators and recruit businesses to participate.  But this type of strategy can also be adopted on a long-term basis by firms who choose to come together and share costs.

The National Business Incubation Association reports that the small firms' average stay in an "incubator" is 2.3 years, and they enjoy an 87 percent success rate.

Mentorship Programs. Create mentoring opportunities for large, established businesses to mentor small, aspiring minority firms.  A mentor-protégé relationship helps disadvantaged businesses by providing basic support and technical assistance as well as developing a relationship that can be the source of future contracts.  It also brings in large business firms as partners and allies in a movement to increase and support minority business enterprises; these mentor-protégé relationships may also grow into future alliances.

Benefits of a Mentor Program

Minority Business Loans. Increasing access to capital funds is an essential component of increasing the capacity of minority firms.  The following programs work to make capital more accessible for disadvantaged firms.

  • The Tennessee Valley Authority operates a Minority Business Development Loan Fund (MBDLF), a $9 million revolving fund that supports minority businesses either in their start-up or expansion with loans ranging from $50,000 to $500,000.  In the 2001 fiscal year, the fund lent $1.5 million to 10 companies. 
  • Wisconsin's Bureau of Minority Business Development operates a similar program, the Minority Business Development Loan Program, designed to provide financial assistance for minority business start-up or expansion.  This program offers loans for fixed-asset financing and working capital at fixed-rate below-market interest (usually 4 percent).
  • Virginia Department of Minority Business Enterprise administers a $1 million Capital Access Fund for Disadvantaged Businesses, through two loan programs within the Providing Access to Capital for Entrepreneurs (PACE) program.  This loan fund, unlike those in Wisconsin or Tennessee, provides loan guarantees to banks that fund disadvantaged firms, rather than to the businesses themselves. The guarantee program provides a bank with up to a 90 percent, or $50,000 guarantee on a loan offered to a disadvantaged firm.
  • The Minority Enterprise Development Corporation is a for-profit community development financial institution in Providence, Rhode Island.  Its mission is to increase access to capital for minority and disadvantaged entrepreneurs statewide, and for entrepreneurs in low/moderate income communities.  It does this through a range of flexible and targeted lending options.

Comprehensive Programs. Many capacity-building programs incorporate a number of the above elements. For example, Winning Opportunities for Responsible Contractors (WORC) targets companies who do less than $10 million in business annually. WORC offers classes on the business of contracting - software, bonding requirements, certified payroll, etc., and pairs contractors with First International Bank and Willis Corroon Surety Co. who coach contractors individually. In addition, Willis Corroon has secured a $1 million line of surety credit for participating contractors who go through the program and necessary steps for obtaining bonding.

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