A Short Survey of Existing CUF Regulation in the DC Metro and Mid-Atlantic Region

Most public procurement projects have participation goals or requirements for minorities and other disadvantaged groups (Disadvantaged Business Enterprise or “DBE”). The DBE regulations vary for different state and federal agencies. Those DBE regulations sometimes include a “commercially useful function” (CUF) requirement of actual participation by DBEs, so that the disadvantaged groups gain actual experience in government contracting. General contractors, subcontractors and suppliers risk fines if they knowingly participate in transactions in which a DBE acts as an “extra participant in a transaction, contract or project, through which funds are passed in order to obtain the appearance of DBE participation.”

There are commercially useful function (CUF) requirements on only a limited number of public projects in Virginia, Maryland, Pennsylvania and the District of Columbia.

In the federal realm, there are CUF requirements only in U.S. Department of Transportation (DOT) assisted contracts, and Environmental Protection Agency (EPA)-assisted contracts.

The DOT has always had the most complete regulatory scheme for DBE participation goals. The DOT regulations are a good place to start any discussion of DBE regulation. These regulations are the most complete and have the most court and administrative case law to explain how they work. The DOT has always prosecuted what I call a more active fraud, like setting up and controlling a false DBE. General Contractors that have agreed in their contracts with the government to comply with DBE regulations are also more often regulated and prosecuted.

Suppliers and subcontractors that have not agreed to comply with DBE regulations have been investigated to a more limited extent. Those investigations have been on a CUF and False Claims Act theory, that the remote supplier knowingly participated in the submission of a false claim for payment from the government, because the supplier sold material to a “pass through” DBE that did not perform a commercially useful function on the project. It is also significant that most enforcement of CUF regulation has been on DOT projects and to a lesser extend EPA projects, with most of these in the Southern District of New York.

DOT and EPA regulation ends the federal discussion. We are not aware of any CUF regulation in the SBA Act, Department of Defense or Housing and Urban Development projects for example.

The DOT regulation carries over to most or all state transportation projects, either in funding agreements with the federal DOT or both Maryland and Virginia DOTs have also passed their own independent CUF regulations that largely track the federal DOT regulations. So these CUF regulations would cover any work on highways, airports or subways. In the D.C. area, that is the Metropolitan Washington Airport Authority (MWAA) and the Washington Metropolitan Area Transit Authority (WMATA).

The state of Maryland has passed at least two CUF regulations that cover most, but not quite all Maryland state and county public procurement projects. These regulations are not identical to the federal DOT regulations, but are similar and do carry the same CUF concepts. We advise clients to simply assume that any public project in Maryland has a CUF requirement. One relevant factor, however, is that we are not aware of any enforcement of CUF requirements in Maryland, other than against the general contractor (who has contractual requirements) or the DBE itself.

There is no CUF regulation in the state of Pennsylvania, except City of Philadelphia projects. Philadelphia has unusually welldeveloped CUF standards and requirements. I am aware of two CUF enforcement actions in Philadelphia, discussed in the Construction Law Survival Manual HERE. However, they both involved what I call the more active fraud of setting up a false DBE and not a False Claims Act sort of enforcement.

The Virginia regulation applicable to non-transportation projects seems to speak only to whether a DBE should be certified. It is clear that the DBE can lose certification and a general contractor can be in breach of its contract with the government if any DBE is not performing a CUF. It is difficult to say what this could mean for a remote supplier that did not contract directly with a government entity and did not certify anything to any government entity. However, the federal DOT regulation seems to speak only to whether participation by a DBE should be count towards the DBE participation goals in a contract and this has resulted in penalties to remote suppliers.

The District of Columbia Code creates a discretionary standard for the Department of Small and Local Business Development, which has the authority, but not the duty to disregard DBE participation if the DBE serves no commercially useful function in the performance of a contract. The D.C. actual performance definition of CUF is from the DOT regulations. However, the operation of the statute seems to be discretionary. Even the government agency does not have to enforce it. It is a little hard to see how it can create compliance risk for a traditional material supplier.

There is no CUF (or DBE) statute or regulation in Virginia, Maryland, Pennsylvania and the District of Columbia that applies to private projects, except that a private project must comply with the statute in D.C. if it receives “Government-assistance.” “Government-assisted” is fairly broadly defined as a contract executed on behalf of the City that involves City funds or that the City administers in accordance with a federal grant; a project that receives a loan or grant from a City agency; a project that receives bonds or notes issued by a City agency; a project that receives City tax exemptions or abatements; or a development project that involves property sold or leased by the City. Many large private projects have DBE regulation as a result.

New York state regulations contain a CUF provision similar to the DOT CUF regulation. Like the federal, the state requirement means that there will be no DBE participation credit on a state contract if the DBE business utilized was not performing a CUF. Based on the federal enforcement in New York, I would be concerned about state enforcement also.

In New Jersey “only businesses performing a commercially useful function may be certified’ under programs for state projects. This regulation seems to speak only to the qualification for certification as a DBE. So this is like Virginia and it is hard to say how this could impact a remote supplier.

All North and South Carolina Department Transportation projects must comply with the “commercially useful function” (CUF) requirement, but other state and private projects do not.