City Controller Alan Butkovitz Releases Report on MBEC

Audit Date: November 13, 2007
Controller: Alan Butkovitz

Executive Summary

For Immediate Release:
November 13, 2007

Contact: Harvey M. Rice

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Butkovitz Releases Report on MBEC
Criticizes MBEC for failing to accomplish mission

(Philadelphia)— City Controller Alan Butkovitz today released a special report on “Barriers Facing Minority, Women and Disabled-Owned Businesses in City Procurement and Contracting”.

Butkovitz initiated his investigation to examine the barriers facing minorities, women and disabled-owned businesses in securing city business and contracts.

“Minorities represent 55 % of our city – yet they are awarded less than 12 % of city contracts. This is patently unfair in a city that models itself on the ideal of fair and equal opportunity for all our citizens,” Butkovitz said.

“We interviewed many minority business owners who felt that the Minority Business Enterprise Council (MBEC) and other City agencies were not effectively carrying out their mission to increase minority participation in city procurement and contracting,” he said.

The Controller mailed out a comprehensive questionnaire to all eligible minority participants. He held three public hearings to investigate allegations aimed at MBEC, and to explore ways to increase minority participation in city procurement and contracting. The Controller audited 61 public works-construction project bid sheets to determine actual minority participation in the project.

Butkovitz continued, “In the course of our investigation, we found that despite some progress in recent years – minority, women and disabled-owned businesses still face several significant barriers that hinder their ability to gain a fair share of contracts generated by the City of Philadelphia.”

Some of the barriers to minority participation in the City’s procurement and contracting process are:

• Unnecessary granting of waivers from MBEC participation requirements to prime contractors
• Bid packages are too complex for smaller contractors to participate as prime contractors
• Lack of availability of bonding and insurance for smaller M/W/DSBE contractors
• Lack of a comprehensive plan of action to address diversity and inclusion in city contracting and procurement
• Slow certification process

Barriers during participation in the City’s procurement and contracting process are:

• Inadequate monitoring and enforcement of actual M/W/DSBE participation
• Deficient contract language and contract requirements
• MBEC certified firms are included in bid proposal, but are marginalized after contract is awarded.

Barriers to the growth and development of minority, women and disabled-owned firms are:

o Slow payment by the City of Philadelphia and/or prime contractors
o Limited access to working capital
o Lack of technical assistance for small businesses before and after contract awards
o Lack of M/W/DSBE participation goals for not-for-profit contracts
o Inexperienced and understaffed MBEC office

MBEC’s 2006 Disparity Study claims that the City has achieved substantial increases in its participation rates during fiscal year 2006, however these claims are based primarily on promised participation as reported by contractors prior to any work being done.

“These promised amounts represent goals only. They do not reflect whether a minority firm was actually hired and paid the original promised goal amount,” Butkovitz said.

“At present, the City cannot accurately determine how much of its contracting dollars actually go to minority, women or disabled-owned businesses. The City does not have a tracking mechanism in place to verify payments from prime contractors to MBEC-certified subcontractors,” he said.

Butkovitz released thirteen key recommendations.

1: Restructure the Minority Business Enterprise Council by making the majority of MBEC’s administrative and enforcement functions a cabinet level reporting position within the Mayor’s Office. The contract monitoring and oversight functions should be transferred to the City Controller’s Office.

Because MBEC has not taken the proper enforcement action against non-compliant contractors, a new counsel should be appointed who will properly monitor and enforce both the spirit and the law of the City’s Minority Anti-discrimination policy.

2: Improve Contract Monitoring and Enforcement by establishing more effective procedures for monitoring all joint ventures and subcontracting relationships sanctioned by MBEC. All relevant City department and agencies should be sanctioned for failure to properly administer and enforce the City’s “antidiscrimination policy,” which includes several penalties for prime contractor non-compliance including withholding of payments; termination of contracts in whole or in part; suspension from city contract bids for up to three years; and recovery of one percent of the total dollar amount of the contract for each one percent of the commitment shortfall.

3: Eliminate the Seven Day Rule which presently allows a prime contractor to identify its M/W/DSBE subcontractors seven (7) days after the awarding of a contract. This rule undermines the integrity of the City’s anti-discrimination policy. The City should require prime contractors to retain MBEC-certified subcontractors as a prerequisite for winning a contract.

4: Standard Contract Language Modifications should include privities of contracts for the third-party M/W/DSBEs that prime contractors include in the bids.

5: A Participation Waiver should only be granted after a prime contractor clearly demonstrates that a good faith effort was made to identify qualified M/W/DSBE participants.

6: Reduce Bid Packages and Contract Sizes and require purchasing departments and other relevant agencies to unbundle requests for proposals (RFPs) and bid packages — unless contracting agents can demonstrate that bundling provides significant financial or other tangible benefits to the City.
7: Create a Bonding Assistance Program for small and emerging businesses so they can participate as prime contractors rather than as sub-contractors.
8: Implement Prompt Payment Policy for Subcontractors. The City should penalize purchasing departments and prime contractors who fail to promptly pay subcontractors. The City should also allow subcontractors to receive “mobilization payments” in which a portion of a project’s value is paid in advance to pay for start-up costs and other early stage expenses.

The City should change its invoicing process to require prime contractors to document payments to subcontractors within a reasonable period of time.

9: Provide Technical Assistance and Training to M/W/DSBEs in the area of project and financial management, bonding insurance, bid preparation, marketing and technology support.

10: Promote more M/W/DSBE Collaboration by encouraging joint ventures among M/W/DSBEs.

11: Set goals for Not-for-Profit Contracts. The City should establish policy and procedures for setting goals for M/W/DSBE participation in City contracts with not-for-profit organizations. These organizations receive approximately 75% of the City’s annual contracting dollars.

12: Streamline the MBEC Certification Process and establish a goal to process new certification applications within 60 days and recertification applications within 30 days.

13: The City of Philadelphia should facilitate access to capital by establishing the creation of public/private financing mechanisms that can provide working capital, mobilization and term loans to businesses that have been awarded contracts through the City’s M/W/DSBE participation process.

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