Report 2001-127 Summary - July 2002
Disabled Veteran Business Enterprise Program:
Few Departments That Award Contracts Have Met the Potentially Unreasonable Participation Goal, and Weak Implementation of the Program Further Hampers Success
Our review of the Disabled Veteran Business Enterprise (DVBE) program found that:
- Many awarding departments do not report their DVBE participation levels; of those that do report, most do not meet the 3 percent participation goal.
- The reasonableness of the 3 percent goal itself is not clear.
- Outreach to potential DVBEs should be more aggressive.
- The program's overly flexible legal structure and limited clarifying regulations.
- The frequency with which certain departments exercise their discretion to exempt contracts from DVBE participation.
- Lack of effective evaluation of bidders' good-faith efforts and monitoring of contractors' compliance with contract DVBE requirements.
RESULTS IN BRIEF
Established in 1989, the Disabled Veteran Business Enterprise (DVBE) program is intended to ensure that disabled veteran business owners have an opportunity for full participation in the State's economy. This opportunity is provided through a statutory requirement placed on departments that award contracts (awarding departments) to expend not less than 3 percent of their contract dollars on qualified veteran-owned businesses during the fiscal year. Thirteen years after the establishment of the program, the State continues to struggle with attaining 3 percent DVBE participation in its contracting. For fiscal year 1999-2000, only 9 (13.6 percent) of 66 awarding departments met or exceeded the 3 percent goal, and an additional 79 such departments failed to report their DVBE participation levels as required by law. The State's overall reported participation rate was 1.6 percent. Statistics for fiscal year 2000- 01 showed only modest improvement, with a reported participation rate of 1.8 percent and 40 awarding departments not reporting.
The reasonableness of the 3 percent participation goal is not clear in light of the limited number of DVBEs and the lack of a thorough study examining eligible businesses and their ability to meet the State's needs. In their improvement plans for fiscal year 1999-2000, many awarding departments suggested that the 3 percent goal is unrealistic unless DVBEs are able to provide the requested services in the locations they are needed. Until such an analysis comparing DVBE services to the State's needs is completed, the reasonableness of the 3 percent goal will remain in doubt.
The fact that so many awarding departments fail to meet the 3 percent goal suggests that the goal itself may be unreasonable. All five agencies responding to our survey and many departmental DVBE improvement plans identified a limited pool of certified DVBEs as one of the impediments to meeting the goal. As of May 8, 2002, the Department of General Services (General Services) had certified only 797 DVBEs, yet we estimate 11,000 DVBEs may be eligible statewide.
The DVBEs themselves offered a wide range of reactions to the DVBE program's administration and effectiveness. We completed telephone surveys with 54 current and former DVBEs throughout the State, asking their opinions about their experiences with two main areas—the certification process and their actual contracting experiences through the program. The DVBEs were generally pleased with General Services' certification process, with over half (30 of 54 respondents) saying their experience was either positive or very positive. Several DVBEs applauded the recent improvements to simplify the certification process. Opinions about contracting were still weighted toward the positive. However, fully one-third of the respondents had no actual contract experience either as a prime or subcontractor through the program. The extent of respondents without program contracting experience appears to be a negative reflection on the program's effectiveness.
General Services needs to be more aggressive in its efforts to increase the certified DVBE pool through outreach activities that target the veteran community. It has not finalized a joint outreach plan with the Department of Veterans Affairs (Veterans Affairs) to increase the number of certified DVBEs, nor does it consistently monitor the effectiveness of its outreach efforts in increasing the certified DVBE pool.
The chance for a successful DVBE program is further weakened by its flexible legal structure. Although General Services has issued some limited clarifying regulations and guidelines, the awarding departments themselves have the option of developing their own regulations and policies. Furthermore, certain agencies are only now beginning to take steps to monitor the extent of DVBE participation at each of their subordinate departments.
Another major reason why the State is failing to meet its DVBE goal is the practice of awarding departments to exempt at their discretion a significant number of contracts from the DVBE requirements. When these exemptions occur, awarding departments are failing to require increased participation on the remaining contracts so as to ensure they meet the 3 percent goal. For example, the procurement unit within General Services estimated that it exempted more than 50 percent of its DVBE-eligible contracts in fiscal year 2000-01, and the Department of Health Services exempted 48 percent. Because of these exemptions, each would have had to assign about 6 percent of its remaining contract dollars to certified DVBEs in order to achieve the goal.
By frequently documenting their good-faith effort search to find a DVBE, instead of actually using one, winning bidders also contribute to the State's inability to attain the 3 percent goal. The law allows bidders to attempt in good faith to find and use a certified DVBE subcontractor and to document that effort. However, this effort negatively affects DVBE participation on a contract because a winning bidder's good- faith effort search, if approved by the awarding department, substitutes for actual DVBE participation. The prevalence of winning bidders documenting their good-faith effort search appears to be significant. In fiscal year 2000-01, 70 percent of the contracts assigned by the Department of Transportation's (Caltrans) contracts unit had DVBE requirements satisfied by winning bidders documenting a good-faith effort search, rather than actually hiring DVBEs. Further, awarding departments do not consistently evaluate bidders' good-faith efforts. Currently, bidders have a financial incentive to use the good-faith effort rather than use a DVBE as a subcontractor.
Finally, the methodology for reporting DVBE participation levels is flawed. General Services requires contract-awarding departments to report their DVBE participation levels based on the amounts contractors agreed to expend on DVBEs, instead of how much the contractors actually expended. Also, at the five awarding departments in our sample and their related units that we visited, we noted differences in the policies and practices regarding the monitoring of actual DVBE participation. For example, Caltrans' procurement and contracts division had particularly thorough procedures to monitor actual DVBE participation, but in our review of this division's contracts, we found that these polices were not consistently followed. Ultimately, awarding departments that fail to monitor actual DVBE participation cannot ensure that the winning bidder is complying with the requirements of the DVBE program.
To ensure DVBE statistics are accurate and meaningful, General Services should require awarding departments to report actual DVBE participation and maintain appropriate documentation of these statistics, continue its periodic audits of these figures for accuracy, and, if the audits reveal a pattern of inconsistencies or inaccuracies, address the causes in its reporting instructions.
To determine if the 3 percent DVBE goal is reasonable, the Legislature may wish to consider requiring either General Services or Veterans Affairs to commission a study on the potential number of DVBE-eligible firms in the State, the services they provide, and their geographic distribution, and compare this information to the State's contracting needs.
Based on the results of this study, the Legislature may wish to consider doing the following:
- Modify the current DVBE participation goal.
- Allow General Services to negotiate department-specific goals based on individual contracting needs and the ability of the current or potential DVBE pool to satisfy those needs.
To ensure that prime contractors make a genuine good-faith effort to find a DVBE, the Legislature should consider making General Services' DVBE regulations binding on awarding departments. In turn, General Services should issue regulations on what documentation awarding departments should require for the good-faith effort and how awarding departments should evaluate that documentation. Similarly, General Services should issue regulations on what steps departments should take to ensure contractors meet DVBE program requirements. These steps might include requiring awarding departments to monitor vendor invoices that detail DVBE participation or requiring the vendor and DVBE to submit a joint DVBE utilization report.
To increase the efficiency and effectiveness of the DVBE program, the Legislature should consider doing the following:
- Replace the current step requiring bidders to contact the federal government with
a step directing bidders to contact General Services for a list of certified DVBEs.
- Enact a contracting preference for DVBEs similar to the one for the small business
program—that is, allowing an artificial downward adjustment to the bids of
contractors who plan to use a DVBE, thus making these bids more competitive.
- Require awarding departments to go through their own good-faith effort search in
seeking DVBE contractors.
- Provide awarding departments with the authority to withhold a portion of the payments due to contractors when they fail to use DVBEs to the extent specified in their contracts.
The responding departments and agencies generally agree with the audit findings and plan to address the recommendations of this audit report. The Resources Agency and the Department of Fish and Game elected not to respond to our audit report.