Welcome to the World of Minority Contracting
Government goals and set-asides for “disadvantaged” firms breed corruption and fraud, deepen racial divisions, and cost taxpayers billions.
For the past few years, Atlanta has been roiled by corruption scandals centering on the city’s decades-old program to favor minority-owned businesses in government contracting. The troubles started when Elvin “E. R.” Mitchell, Jr., a black contractor, began paying what became more than $1 million in bribes to city official and friend of the mayor Reverend Mitzi Bickers. Mitchell and his associates wanted to ensure that they could keep winning city-favored contracts and subcontracts for minorities, despite submitting bids higher than their competitors’. Mitchell also helped Bickers bribe officials in Jackson, Mississippi, so that she could secure minority-favored contracts on some of that city’s projects. Meantime, Larry Scott, head of Atlanta’s Office of Contract Compliance, which ensures that minority firms win contracts, started a side gig to help such businesses get favorable deals with the city—receiving over $220,000 in unreported income and partnering with the mayor’s brother and sister-in-law in the scheme. Mitchell, Bickers, Scott, and several other city officials have been sentenced on federal charges ranging from bribery to wire fraud.
Affirmative-action plans in schools or workplaces get the headlines, but the practice of favoring minorities in government contracts is almost as old, and even more far-reaching. Such favoritism—in the form of Disadvantaged Business Enterprises (DBE), or Minority and Women Owned Business Enterprises (MWBE) programs—exists across all levels of government and in states and cities of every political hue.
The subject of government contracting, or procurement, may not seem exciting, but its importance can’t be overstated. Nearly 10 percent of the U.S. economy goes through government contracts. The federal government spends over $600 billion yearly on contracts, making it the largest buyer of goods and services on the planet. State- and local-government spending on contracts totals about $1.3 trillion annually. Government contracts and purchases range from aircraft carriers and highway construction projects to office supplies and human-resources software. Favoritism to minority-owned companies pervades this vast universe.
Minority contracting was never a coherent way to make amends for the nation’s long, lamentable history of racism. Instead of righting historical wrongs, the policy has enriched a small subset of already-wealthy businesses, bred corruption and fraud, deepened racial divisions, and cost taxpayers countless billions of dollars—while doing nothing to help the truly disadvantaged. Indeed, minority residents of urban areas pay the highest price for lackluster and expensive services caused by such programs. One underappreciated reason for the unparalleled costs of American urban and infrastructure projects is that the government too often picks contractors based on their sex or race, not the quality or cost of their bids.
Government efforts to favor minority contractors began in the 1960s. Without outside prompting, President Lyndon B. Johnson took a previously race-neutral initiative—the Small Business Administration’s (SBA) so-called 8(a) program, designed to give federal contracts to small companies—and aimed it specifically at racial minorities. Johnson hoped that awarding more contracts to black companies could defuse the era’s urban race riots.
But as sociologist John Skrentny shows in The Minority Rights Revolution, it was Richard Nixon who made minority contracting a major part of government. In his 1968 presidential campaign, Nixon promised to promote “black capitalism.” After entering the White House, he created an office to encourage contracts to minority-owned firms, despite the active opposition of many civil rights groups. The Leadership Conference on Civil Rights said that the minority-contracting program revived the “discredited doctrine of ‘separate but equal,’ ” while the AFL-CIO deemed it “apartheid, antidemocratic nonsense.”
During the 1970s, though, such programs grew, and civil rights and minority-business groups became substantial supporters of them. A number of states and cities, especially cities that had recently become majority black, copied the federal model. Under its first black mayor, Maynard Jackson, Atlanta started one of the earliest local plans, mandating that minority firms get 25 percent of the contracts for the expansion of the city airport. In 1977, Congress began enshrining minority preferences in law, passing a public works act that required “at least” 10 percent of contract funds to go to minority businesses.
Scandal ensued. After leaving office, Jackson set up a joint venture that ran a TGI Friday’s restaurant at the Atlanta airport, benefiting from the minority quotas he had created. In the 1980s, a South Bronx–based company named Wedtech, which had previously manufactured baby-carriage parts, became one of the nation’s fastest-growing defense contractors. The reason: Wedtech was a certified 8(a) disadvantaged business, and it had bribed or coerced several public officials to keep its special contracting preferences. When the company collapsed in the late 1980s, two Democratic congressmen were convicted of racketeering, and many other individuals were indicted and sentenced.
The courts and politicians began fighting back. In City of Richmond v. Croson (1989), the Supreme Court struck down a local scheme that it said violated the Equal Protection Clause. Richmond’s argument that the effort was needed to remedy discrimination fell flat, as the city could offer no examples of discrimination in city contracting and had a black majority on its city council. In Adarand Constructors v. Pena (1995), the Supreme Court said that federal minority contracting had to pass the severest constitutional test, known as “strict scrutiny.” In the 1990s, such programs neared extinction, until President Bill Clinton—as part of his goal to “mend” rather than “end” affirmative action—promised to limit minority quotas and focus on amorphous goals for disadvantaged businesses.
But minority contracting has since expanded far beyond the most fervent hopes of earlier advocates. And recent racial obsessions have given it a fresh boost, turning a policy once intended to help small businesses into a big industry.
Today, governments use several methods to favor minority contractors. At the federal level, Congress has stated that “not less than 5 percent” of all contracts should go to “disadvantaged” businesses. Regulations clarify a “presumption” that “Black Americans; Hispanic Americans; Native Americans,” and “Asian Americans” are disadvantaged. Government treats the goal as a floor, not a ceiling: in recent years, the true share of contracts going to disadvantaged firms has been around 10 percent, and politicians have urged the bureaucracy to push the total higher. The SBA then sets goals for individual agencies—recently demanding, for example, that the Department of Transportation offer 21 percent of all contracts to disadvantaged enterprises. It also requires that federal “prime contractors” (the lead contractor on a project) create subcontracting plans to maximize minority participation.
State and local governments set even higher goals for minority procurement but usually focus on encouraging large businesses to subcontract out to minorities. Chicago insists that 26 percent of all construction dollars go to minority companies and 6 percent to women-owned businesses. But a city-funded report noted that “almost all City funded construction projects require M/WBE” goals for subcontractors and that “project goals should exceed the ‘baseline’ goal.” Maryland has a target of 29 percent of contract dollars to minority firms. New York City and State have set a goal of 30 percent of all contracts going to MWBE, and the city itself goes into more detail, setting precise contracting goals for each race and business category (for instance, black-owned businesses should get 11.81 percent of all city professional-service contracts).
Agencies have various ways of meeting these benchmarks. Federal agencies can directly award contracts to minority firms, without a normal bidding process and through a no-bid deal, if they cost less than $5 million. This arrangement, of course, has caused abuse. After 9/11, the federal government, hoping to accelerate security purchases, expanded awards to “Alaska Native Corporations,” which had a special exemption that allowed them to get no-bid minority contracts of unlimited amounts. Federal contracts to these corporations increased 20-fold in the decade ending in 2009, when spending totaled almost $6 billion. The army’s infectious-disease center at Fort Detrick, in a no-bid deal, shifted the management of all its contracts to an Alaskan Native Corporation, whose most significant former venture was a failed cruise-ship line. Another such corporation won a port-scanning deal and then subcontracted it out to traditional defense companies; only 33 of the corporation’s 2,300 employees were Alaskan Natives. Though Native Americans are the smallest “disadvantaged” group assisted by the federal government, they get 2.7 percent of all federal contracts—more than twice the proportion of any other group.
Local governments also encourage no-bid minority deals. New York City had permitted minority firms to get no-bid contracts of up to $150,000. The city increased the limit to $500,000 in 2019, and recently increased it again to $1 million. Mayor Eric Adams wants to raise it to $1.5 million. Union County, New Jersey, recently awarded a $1.8 million no-bid design contract to DIGroup Architecture for a new government complex, citing, in part, the company’s “diversity.” The fact that the group’s employees reportedly donated over $15,000 to one of the relevant government official’s campaigns probably didn’t hurt, either.
For firms that cannot get no-bid contracts, “set-aside” deals are the next best thing. Here, agencies must conduct public bids, but only minority firms can compete for them. Federal set-asides follow a “rule of two,” meaning that only two minority firms must be available to compete for contracts. Unsurprisingly, competition is often not fierce.
The federal government urges state and local governments to expand their minority contracting. The federal Department of Transportation demands that governments receiving transportation funds implement their own minority-business initiatives and create subcontracting plans for minority businesses. It asks these governments to use minority-owned banks when receiving funds and to encourage contractors to use such banks. South Carolina has only one minority-owned bank, but the state transportation department wants contractors to use it.
The process of winning minority contracts is so complex that entire government agencies are devoted to facilitating it. Many local governments run the equivalent of Baltimore’s Minority and Women’s Business Opportunity Office (known as “Em-Boo”). Almost all federal departments have their own Office of Small and Disadvantaged Business Utilization, tasked with contracting to small and minority businesses. In the Department of Commerce, the Minority Business Development Agency coordinates efforts across agencies and doles out grants to assist such efforts. The agency funds “business centers” across the U.S., usually run by some explicitly ethnic organization that focuses on government contracts. The El Paso MBDA Business Center, run by the El Paso Hispanic Chamber of Commerce, works to get “increased financing and contract opportunities.” The Los Angeles center, run by the Pacific Asian Consortium in Employment, offers guidance on public bidding. Some business centers are run by minority consulting groups, which doubtless appreciate state support in getting clients. Perhaps forgetting that the putative goal is to assist small businesses, one center says that it focuses on businesses with annual revenues of at least $1 million.
The full cost of these programs for taxpayers may be unknown, but it’s substantial. In Baltimore, a contract for water-meter installation cost 17 percent above the price offered by the lowest bidder, since the lowest bidder lacked the required number of minority subcontractors. Before facing charges, E. R. Mitchell in Atlanta won snow-removal and salt-supply contracts costing up to 60 percent more than those of competitors. Sometimes, the extra cost is written in law or statute. The federal government gives extra cash—up to 10 percent of the subcontracted amount—to prime contractors that beat their minority-subcontracting goals.
Studies consistently show high costs for minority-procurement initiatives and small or nonexistent benefits. In a 2009 study, economist Justin Marion examined contracts on California highway projects before and after state voters banned racial preferences in government programs. Costs on the California projects dropped 5.6 percent relative to federally funded projects in which racial preferences remained in place. Another study, focusing on federal set-aside requirements for disadvantaged firms, found that they increased average expenditure overruns by 35 percent and delays by 6.4 percent, relative to normal government bidding. The set-asides also raised the number of costly renegotiations after contracts were issued. These costs, delays, and failures impose substantial burdens on taxpayers and impede the core functions of government.
In the Croson and Adarand cases, the Supreme Court held that governments could use racial contracting preferences only if they were remedying actual government discrimination. Instead of restraining such efforts, however, these cases spawned an industry for “disparity studies” that legitimate them. If governments want to argue that their present discrimination is justified by past discrimination, they hire highly paid researchers to lay out a litany of their sins.
A handful of firms—usually themselves run by racial minorities or women—write these studies, and it’s lucrative work. One estimate pegs the cost at around $500,000 apiece, though large portions of the studies tend to be copied from previous reports. In 2006, one researcher observed that despite these disparity studies’ glaring flaws, they were “perhaps the largest government expenditure for social science research ever.” Large national disparity-study firms are often encouraged to subcontract with local minority- and women-owned enterprises to help write the reports—since, obviously, cities have demanded more minority contractors for report-writing. That the local authors of a report have a direct financial interest in its outcome has not affected this practice.
The City of Austin Disparity Study for 2022, conducted by Colette Holt & Associates, a large disparity-study firm started by a lawyer who had previously worked for Chicago’s city government, is typical. It approaches 300 pages and contains a recitation of every supposed ill that has befallen a minority business in the Texas capital. The report uses only anonymous quotes that make accusations against unnamed individuals about racism or sexism. “There is no requirement that anecdotal testimony be ‘verified’ or corroborated,” the report notes.
Try as they might, these studies have had little success proving racism or sexism in contracting. They typically use a “disparity ratio” to show the difference between the number of available minority firms and the number of government contracts going to these firms, though these ratios rarely account for the ability of different firms to perform government jobs. Yet studies conducted by Austin and Washington State found that MWBE firms were more likely to get contracts than were those owned by white men. A Missouri disparity study found that minority firms were more likely to get contracts than nonminority firms. A Chicago disparity study found that black and Hispanic firms were about twice as likely to get construction contracts, and Asian firms four times as likely, relative to their availability.
These reports’ surveys of minority firms find that most aren’t worried about discrimination. Of those MWBEs responding to a survey in Austin, 75 percent said that they had not experienced barriers to contracting based on race or gender. Over 85 percent agreed that they did not get different prices or terms because of their race or gender. Disparity studies ignore such data and argue that the minority of minorities who report unspecified discrimination need assistance.
When studies admit that there is no discrimination in contracting, politicians refuse to abide by them. Miami-Dade County made the mistake of employing a legitimate accounting firm, KPMG, for a disparity study, which determined that companies owned by blacks and Hispanics were not underused. The Miami mayor rejected the study. Los Angeles’s city council rejected a study that found that black firms did not suffer discrimination in contracting. The occasional lawsuit will surface, challenging these disparity studies when they provide no evidence of discrimination. But in such cases, governments will simply look for another minority contractor to conduct another study calling for more minority contracting.
Minority-contracting programs are a magnet for fraud. No-bid contracts represent an obvious avenue, but the most common kind of MWBE fraud is simple: contractors with subpar bids either lie about being run by minorities or lie about involving other minority businesses in the contract. The Wedtech scandal in the 1980s involved such fraud; though John Mariotta, a Puerto Rican immigrant, had started the company, it was partially run by Fred Neuberger, a Romanian Jew who escaped the Holocaust in Europe but did not count as “disadvantaged” for the purposes of the 8(a) program. Similar issues arose with the recent Atlanta scandals: while contractor Charles Richards was white and won many “prime” contracts, he promised to subcontract work to Mitchell’s minority firm, and then paid Mitchell without asking his firm to do any work. A 2016 Department of Transportation presentation stated that more than one-third of its contracting-fraud cases involved minority contracting and that, over the preceding five years, cases involving minority-contracting fraud had led to $245 million in financial penalties and 425 months of incarceration for offenders.
These cases tend to follow a certain playbook. A minority-owned front company wins the government contract, takes a small cut, and issues a pass-through contract to a white-owned firm. The largest such case in American history involved Schuylkill Products, a Pennsylvania firm that manufactured concrete bridge beams but had used a Filipino-owned front company for 15 years to win more than $130 million in contracts. The federal investigation led to several prison sentences in 2014. Front-company and pass-through fraud has dogged construction work at Chicago’s O’Hare airport and New York casinos. According to the New York State inspector general, the minority firms in the casino-fraud case did little more than submit invoices. A former Dallas councilman, meantime, went to prison for his role in setting up minority front companies for government contracts. Sometimes, the fraud is even more direct: in Seattle, the owner of a company that was paid to clean up homeless camps falsely identified as black on city forms. She also happened to be a city employee.
Tens of billions of dollars are at stake in minority contracts, which means that the government must figure out ways to divine contractors’ race. Doing so isn’t easy because government definitions of race are inevitably unscientific. According to one estimate, more than 300 public and private organizations certify minority and disadvantaged statuses for businesses—usually for a fee that, naturally, must be repaid every few years. Minority-business certification counts as a substantial business in and of itself. One of the largest certifying agencies is the National Minority Supplier Development Council, which many states, as well as companies in regulated industries, employ. It requires business owners to submit evidence, such as birth or death certificates of parents or grandparents, that prove that they are at least 25 percent descended from a disfavored group.
As law professor David Bernstein has written in Classified: The Untold Story of Racial Classification in America, minority contracting and favoritism have led to legal cases where courts must perform the sordid business of ruling on someone’s race and ethnicity. Courts have looked at the races of individuals’ grandparents, their connections to ethnic organizations, and, most disturbingly, the color of their eyes and look of their hair. Though these cases evoke the segregation era, they are inevitable if racial characteristics are going to determine billions of dollars in government contracts.
Modern progressive racialism has supercharged previous minority-contracting initiatives. As part of President Joe Biden’s proposal to “Build Black Wealth and Narrow the Racial Wealth Gap,” his administration pledges to increase federal contracting to disadvantaged businesses by 50 percent a year, or 15 percent of all contracts. The administration has directed all federal agencies to add minority contracting success to their evaluation of senior managers, required all departments’ offices of disadvantaged businesses to report directly to senior leadership, and encouraged other governments to sign the “Equity in Infrastructure Project Pledge,” which requires them to increase their contracting to minority firms. In a February executive order, the administration asked government departments to create “Agency Equity Teams,” submit annual “Equity Action Plans,” and advance “Equitable Procurement.”
Regulatory changes to boost minority contracting are also under way. The Federal Aviation Administration can now issue “noncompetitive awards” of up to $10 million, over twice the previous limit, to qualifying companies. The Department of Transportation has proposed to hike the maximum net worth of minority owners to $1.6 million, excluding retirement assets—to help the supposedly “disadvantaged.” Many writers have lamented the administration’s transformation of the CHIPS and Science Act, proposed as a means to boost American competitiveness with China, into a general subsidy program with giveaways to labor unions and requirements for child care. Fewer have noted that, when awarding these funds, the Department of Commerce will consider whether firms “create inclusive opportunities for business” and support “minority-owned” and “women-owned” businesses.
The next front in the minority-contracting struggle is giving lesbian, gay, bisexual, and transgender people special access to contracts. There is scant evidence that the government has ever considered the sexual proclivities of, and therefore discriminated against, the owners of bus services or wire-repair companies. That hasn’t stopped the flood of special contracts. The National LGBT Chamber of Commerce has its own certification program, costing $400 per application, to demonstrate that business owners are LGBT. This is, admittedly, tough to prove: the chamber gives business owners several options, including providing three “letters of reference” to attest to an owner’s sexual identity. One of the chamber’s representatives must then conduct a “site visit” of the business. It must be hard to determine if the owners are acting too heterosexual to qualify.
As the congressional LGBT caucus observed a while back, “Being Gay Is a Growing Asset for Business Owners.” Last year, the federal General Services Administration signed an agreement with the LGBT Chamber to enhance such contracts at the federal level. California already has a “voluntary” 1.5 percent LGBT procurement goal for private utilities, which must submit plans on how they will try to contract with, say, excavating companies owned by bisexuals.
Can contracting rules lift the fortunes of an entire group? As large as government contracting is, only a limited number of business owners directly benefit from it—and they tend to be better off than the average American, let alone the average disadvantaged minority. The SBA’s 8(a) program considers a business owner “economically disadvantaged” if he earns less than $400,000 a year and has less than $6.5 million in assets, not including retirement accounts. The entire 8(a) program includes about 4,200 “small” businesses, but it awards about $20 billion in contracts annually. Under the pretense of improving the well-being of tens of millions of minorities, the federal government is sending billions to just a handful.
Affirmative action may be inhibiting minority businesses. One study found that minority self-employment rose after California and Washington ended their affirmative-action programs. The reason is that individuals who would otherwise be affirmative-action hires in stolid government bureaucracies instead started businesses. Other studies show mixed evidence, at best, for the proposition that affirmative-action and minority-preference efforts boost minority entrepreneurship. A study of the 8(a) program found that certified firms were no more likely to stay in business than other firms. But those companies that did stay in business got much more funding. Instead of expanding minority enterprise, the government may merely be enriching a select few.
A government that really cared about disadvantaged businesses would reduce the burdensome rules that make it hard for anybody except the well-connected to get deals. Minority-contracting initiatives add to the number of rules and requirements, advantaging inside players and longtime networkers. The Maryland Minority Contractors Association actually filed a lawsuit against the City of Baltimore to end its MWBE program, arguing that just seven large companies had been the major beneficiaries of no-bid contracts and that many of the association’s members had lost deals despite having lower costs. They also complained that the city overpaid by $316,000 on a no-bid contract for a disparity study, which, they argued, could have funded three fire stations for a year.
As government and, especially, government contracting continue to grow, Americans of all races don’t want to spare ever more funds for ever worse service. They don’t want their infrastructure projects sabotaged by costly requirements about the sex and race of their contractors. And they don’t want the government to enrich a small group of already-wealthy businesses that somehow get to claim the mantle of discrimination.
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