July 22, 1998 98-R-0887

FROM: Saul Spigel, Chief Analyst

RE: New York's Contract Set-Aside Program for Minority- and Women-Owned Businesses

You asked for information on how New York reserves state contracts for small businesses owned by minority group members and women.

New York law “encourages” state agencies to increase minority- and women-owned firms' participation in state contracts and subcontracts and establishes a Division of Minority and Women's Business Development (DMWBD) in the Department of Economic Development to help agencies award a “fair share” of contracts to such businesses. It does not set numerical goals or quotas on the dollar amount of state agency contracts that must be awarded to minority- or women-owned businesses. But each agency is expected to make a “good faith effort” to enhance participation and to this end must develop annual participation goals, which establish the “fair share” of awards, according to Matthew Besong, a DMWBD staff member.

The law applies to goods and services contracts and subcontracts valued at $25,000 or more and construction contracts valued at $100,000 or more, including those for some private, state-assisted housing projects. It requires companies submitting bids for these contracts to prepare a “utilization plan” identifying the minority- and women-owned businesses that have committed to perform work on the contract or that the bidder intends to use. The contracting agency must review these plans before awarding the contract. If the agency determines a plan is deficient, it can require the contractor to remedy it. A contractor that does not fix its plan can be disqualified. In practice, Besong said, bids are solicited from all contractors, and contracts are awarded to the lowest responsible bidder who must then submit its utilization plan and negotiates its affirmative action responsibilities with the agency.

Contracting agencies are responsible for monitoring compliance, and they can require the contractor to submit periodic compliance reports. The DMWBD enforces compliance. It attempts to resolve problems through arbitration, but can impose fines, civil penalties, and other sanctions.

As part of its statutory responsibilities, the DMWBD (1) certifies businesses to participate in this process; (2) maintains a directory of certified businesses categorized by business type and location (see http://www.empire.state.ny.us/mwb.htm); (3) reviews state agency contracting practices and procedures, including paperwork and bonding requirements that could pose obstacles to affected firms; (4) provides technical assistance to certified firms and applicants for certification; and (5) reports annually to the governor and legislative committees on the level of minority and women business participation in state contracts.

New York's state contract participation law (McKinney's New York Laws, Executive Law, Art. 15-A, and §§ 310-318) covers sole proprietorships, partnerships, and corporations owned and controlled by women and members of specified minority groups. At least 51% of the business must be owned by women or minority individuals; their ownership must be “real, substantial, and continuing;” and they must exercise their authority to control the business' daily operations. The eligible minority groups are:

1. Blacks;

2. Hispanic or Indian people of Mexican, Puerto Rican, Dominican, Cuban, and Central or South American origin;

3. Native American or Alaskan native peoples; and

4. Asian and Pacific Islanders, including people from the Indian subcontinent.

Covered Contracts

The law covers goods, services, and construction contracts and subcontracts let by all state departments, boards, and commissions; the State University of New York, except for community colleges; and many quasi-public agencies, including Metro North and the Long Island Rail Road, the New York City Transit Authority, and the New York Thruway Authority. It also covers construction contracts in state-assisted housing projects being built by private nonprofit or for-profit corporations. Goods and services contracts of $25,000 or more and construction contracts of $100,000 or more are covered.

Contract and Bid Requirements. The law requires the DMWBD director to issue regulations governing the measures and procedures used to (1) ensure that contracting agencies give certified businesses “the opportunity for meaningful participation” in state contracts and (2) identify contracts for which such business may best bid. In practice, Besong reports, each agency has committed to making a good faith effort to include minority and women businesses in its contracts, particularly as subcontractors. Agencies develop annual plans stating (1) their participation goals as a percent of their annual spending on contracts (typically they are in the 4 to 5% percent range), (2) the number of contracts for which they expect to set separate employment goals, (3) their implementation procedures, and (4) the names of staff responsible for implementation. Because they are good faith efforts, agencies are not penalized for failing to meet their goals.

Contracting agencies must include in their bid specifications and contracts provisions requiring contractors to (1) to make good faith efforts to solicit the active participation of certified companies, (2) agree to follow the law's complaint resolution procedure (see below), and (3) include these provisions in all its subcontracts. Bid documents and contracts must also contain language prohibiting contractors (and the unions and employment agencies they use) from discriminating against employees on the basis of race, ethnicity, gender, or disability and requiring them to take affirmative action (e.g., recruitment, job assignment, promotion, pay, and termination) to ensure women and minority groups are given equal employment opportunities. Contractors must include these provisions in all subcontracts.

Disqualification. After bids are opened but before contracts are awarded, the law requires contractors to submit to the contracting agency their utilization plan identifying the certified businesses that have committed to work on the project or that the contractor intends to contact seeking their participation. (In practice, Besong reports, only the low bidder is asked to submit its plan.) The contracting agency must review the plan and notify the contractor if it finds any deficiencies in it. If the contractor does not remedy these deficiencies, it may be found nonresponsible and disqualified from the contract. The contractor may appeal this finding, first in an administrative hearing, then in court.

Waiver. A contractor that cannot comply with the law's minority and women participation requirements even after making a good faith effort can ask the contracting agency for a total or partial waiver. In determining whether a contractor made a good faith effort, the agency must consider whether (1) the contractor advertised in appropriate media, (2) certified firms attended a pre-bid conference for the contract or responded to the contractor's request for quotations, (3) businesses in DMWBD's directory were notified of the contract, and (4) the contractor can reasonably restructure the subcontracting work in order to increase certified businesses' participation. The agency must consider the number and type of minority- and women-owned businesses in the region where the contract is to be performed, the scope of work, the project's size and term, and the total value of the contract. And it must consider whether other certified businesses outside the region have the financial capacity to perform the work.

If, based on these factors, the contracting agency determines that certified businesses are not reasonably available to do the work, it must issue a waiver.

Compliance Monitoring and Enforcement. Each contracting agency must report quarterly to the DMWBD comparing the total number of contracts it awarded and the spending on them to its contracts and spending for certified firms. The report must also detail waivers it granted.

The contracting agency is responsible for monitoring the prime contractor's compliance with the law and its plan for using minority and women subcontractors. It can require the contractor to submit periodic compliance reports on its workforce. In addition to this general monitoring, state regulations require each contracting agency to conduct in-depth compliance reviews on selected contracts. These reviews look particularly at the contractors' procedures for advertising and recruiting for women and minority groups. If a review leads the agency to believe a contractor is not complying with the law or the contract, it must notify the contractor of the deficiencies, give it a chance to respond, and then try to resolve the problem.

If the contractor does not respond, its response is inadequate, or the problem cannot be resolved, the agency can complain to DMWBD. Likewise, a contractor can complain if the contracting agency refuses its request for a compliance waiver. At this stage division staff attempt to resolve the matter. If they cannot do so within 30 days, the complaint must be turned over to a neutral arbitrator who then submits his recommendations to the DMWBD director. For compliance complaints, these may include fines, penalties, and other sanctions, which the director can adopt or modify or decide not to impose any penalties. The arbitrator may, apparently, require an agency to issue a compliance waiver. The arbitrator's decision is final but may be appealed in court, as may the director's decision concerning penalties.

DMWBD's Besong reports that the division is rarely called on to enforce compliance; contracting agencies and contractors resolve most problems internally.

The division is part of the Economic Development Department; it was moved there from the governor's office in 1992. Its director is appointed by the governor but serves at the economic development commissioner's pleasure. As part of its role in the state contracting process, the division is charged with:

1. periodically reviewing contracting agencies' practices and level of compliance with respect to minority and women business participation in state contracts and reporting on this annually to the governor and legislative tax-writing committees;

2. preparing a directory of certified businesses by type and location;

3. appointing independent hearing officers to adjudicate complaints from businesses denied certification; and

4. reviewing state agency bonding and paperwork practices to see if they pose an obstacle to participation.

1. receive complaints from minority businesses and refer them to appropriate government agencies;

2. provide technical assistance to minority firms, including business and financial planning, procurement and export assistance, referrals to public and private financing, and information about state programs;

3. study how the laws affecting minority businesses are being implemented, ask minority business owners how to improve state programs and encourage more minority businesses, and make recommendations on these issues to the governor and legislature; and

4. review pending legislation affecting minority businesses and report to the economic development commissioner.

SS:pa