By Tom Pannett, Kegler Brown Hill + Ritter
(Editor’s note: This is a companion piece to Tom Pannett’s article, “Navigating the Complex Landscape of Small, Disadvantaged & Minority Business Goals in Ohio’s Heavy-Highway Industry,” which appeared in the November-December 2023 issue of Ohio Contractor.)
Fortunately for everyone involved, it is extremely uncommon for majority-owned contractors that must meet vendor preference goals or minority-owned contractors who benefit from the goals to act in such a way or make decisions that lead to violations of a government contract or even state law. Often, even when such violations exist, they are unintended and can be rectified before any real penalties are levied. However, several times each year across the state and many times each year in federal government contracts, entities violate the rules to get a one-up on competition or because they are so uninformed that they stumble into a violation. Knowing the consequences for violations of these vendor preference programs and what may happen to a company and their owners can add some clarity to the decision-making process.
ODOT “CONSEQUENCES”
I wish I had a dollar for every time in the past 10 short years ODOT has updated its Proposal Notes for these programs. “PN 13” has probably become a four-letter word in the industry. On the construction side of the ledger, ODOT’s Proposal Note 13 has penalties/remedies, including but not limited to letters of reprimand; monetary damages if there is a goal shortfall; and suspension or debarment. Similar penalties/remedies can be found for violations of PN07, 015, 029, 031 and 061. Although all these notes do not involve the Disadvantaged Business Enterprise (DBE) program, they all involve both compliance with the contract and federal laws that are incorporated by reference.
ODOT’s purchasing contracts – think Minority Business Enterprise (MBE), Small Business Enterprise (SBE), Women-owned Business Enterprise (WBE) and Veteran-Friendly Business Enterprise (VFBE) – have provisions in its standard contract terms and conditions for failure to properly perform, including up to termination. They also have a specific section requiring certified vendors to maintain certification status – and failure could result in immediate contract cancellation and other associated consequences, including financial penalties and debarment.
DOD/DAS “CONSEQUENCES”
The Ohio Department of Development (DOD)/Ohio Department of Administrative Services (DAS) purchasing contractual consequences mirror ODOT’s. Although it, like ODOT, hasn’t updated its standard terms and conditions for a while and therefore references some old versions of the law. Nonetheless, they can terminate, suspend, demand recompense, etc., if they find a violation of the certification criteria during the performance of the contract. The DOD manages the preference programs (MBE, WBE, VFBE), but the contracts for purchasing and construction are managed by the DAS or its issuing agencies. Both the terms and conditions of ODOT and DAS state-funded purchasing contracts look primarily to violations of the rules for MBE certification. MBE “violations” (i.e., being illegally certified) in those contracts can be found under Ohio Revised Code Sections 122.83, 125.081 and 5126.071, which direct that anyone intentionally misrepresenting themselves as an MBE shall be guilty of theft under R.C. 2913.02. Presumably, similar violations could be levied for violations of the SBE, WBE and VFBE programs.
OHIO INSPECTOR GENERAL
The Ohio Inspector General (IG) is not shy and will take any allegation that they believe has any meat on it through investigation. Even if no “rules” were violated, it oftens determine that it would conduct processes differently in its findings. It does not have the power to “punish.” But their findings commonly result in the agency punishing employees or vendors and occasionally result in a finding that can be used for criminal prosecution by the local city or county prosecutors.
The Ohio IG has subpoena powers and can access financial records without notice to those it investigates. Finally, it also will record conversations without notice and perform investigations covertly. Thus, any time you get wind of the Ohio IG looking into any project or business, contact legal counsel no matter how benign the investigation may seem. It was their series of investigation, started in 2017 that resulted in the law change in 2021 moving the preference programs from under Ohio DAS to Ohio DOD, and making certified entities more accountable and the certification process more rigorous.
DEBARMENT PROCESS
While at ODOT, I participated in several debarments of DBE and majority-owned companies. The classic scenario involves a “pass-through” minority-owned business acting as a front for a majority-owned business. Race, gender, financial status, etc., all have been used as inappropriate “vehicles” to get a sheltered procurement certification and then that certification is used as a front for a majority-owned company or person. The lucrative opportunities for sheltered procurement and the very nature of the lack of competition for those contracts makes them tempting for the unwary or unscrupulous.
For one of the cases I prosecuted, the two companies, one majority-owned and one minority-owned, shared the same building, shared the same staff, shared the same vehicles, shared the same accounting system, and there was even a familial relationship between the majority-owned business and the minority-owned business. Both companies were successful and employed talented individuals. Both were “debarred,” but one was debarred permanently while the other paid a fine and took a multi-year “time out” from government contracts. This example demonstrates two things:
- That even highly sophisticated companies and individuals can delve into these dark waters
- That a “debarment” may not be permanent and can involve any degree of punishment or be coupled with fines. But, once debarred, a company (or person) must disclose that action if asked on a government contract or face further penalties. Debarment can be of a company or an individual. So, while companies can come and go, being personally debarred carries a stigma that lasts forever.
As you look at your requirements to hire certified/disadvantaged companies, make sure that those companies meet the state and federal requirements for their certifications. They need to be separate from a majority-owned company, have their own equipment, hire their own people, and be truly ready, willing, and able to do the work and provide a commercially useful function doing the work. These should be table stakes for any engagement, but it is easy to see the bright lights and big dollars of these private and public contracts and let due diligence slide. This can happen especially if you are under pressure to meet a goal in this tight market.
State and federal governments maintain lists of debarred companies and individuals, and the links are:
- Federal Government: https://www. gao.gov/products/b-3368-190
- Federal Government SAM site to search known vendors or individuals: https://sam.gov/content/home
- ODOT: https://www.transportation.ohio.gov/working/contracts/invitation-to-bid-and-cooppurchasing-info/itb-info/debarment
- Ohio DAS: https://procure.ohio.gov/state-and-local-agencies/resources/08_debarment-csv-list
CRIMINAL PENALTIES
As previously noted, violating the rules as a certified company can result in criminal penalties, just as it is if you violate the rules as a majority-owned company if you knowingly use a fake minority-owned company or facilitate their fake status. If the violations result in significant dollars being “stolen” or fraud is found, prosecutors can seek up to first-degree felony convictions and penalties – including jail time for the business owners.
It currently appears there is plenty of work in the market and plenty of funds from the state and federal government, but government employees – despite their vigor in these programs – are stretched thin. We all know this is cyclical. When things slow down and attention is turned to auditing, when new systems or rules take effect that increase oversight, when administrations and priorities change, or whistleblowers start coming out of the woodwork for any number of reasons, good times and good feelings can turn on a dime. It is therefore always prudent to be vigilant with these programs whether you are a majority- or minority-owned company, and to understand them, to live well within their rules and to get qualified guidance if there are ever concerns with meeting their requirements or if you know of any vendors who appear to be crossing the line. Ohio DOD has a website and hotline for alleged violations: 1-888-623-8477 (MBETIPS). Use it and its FAQ site if you have questions about Ohio-based and federal programs; ODOT has a similar number to call: 1-888-778-4171. For any additional information about these matters or programs, feel free to call (Tom Pannett) 614-462-5432 or email tpannett@keglerbrown.com.
Pannett serves in an Of Counsel role at the Columbus Law Firm of Kegler Brown Hill + Ritter, which he assumed in 2021 after more than 31 years of government service. While at ODOT, Pannett worked as an engineer, attorney and manager. He managed the MBE/DBE/EDGE/ outreach and supportive services programs for several years and finished his career as the Administrator of the Office of Contract Sales and Estimating. He also served as an Assistant Attorney General representing ODOT. Pannett practices general transportation law with a focus on eminent domain and construction litigation and is a frequent presenter on engineering ethics.