The US Department of Transportation’s (US DOT) Disadvantaged Business Enterprise (DBE)26 program is a legislatively mandated program designed to provide DBEs with an equal opportunity to compete for federally funded contracts. According to the US DOT’s website, the main objectives of the DBE program are as follows:
- To ensure that small DBE’s can compete fairly for federally funded transportation-related projects.
- To ensure that only eligible firms participate as DBEs.
- To assist DBE firms in competing outside the DBE Program.
US DOT has established regulations, specifically Part 26 of Title 49 of the Code of Federal Regulations, to administer its DBE program. These regulations require state transportation agencies that receive financial assistance from US DOT, such as the Massachusetts Bay Transportation Authority (MBTA), to establish goals for the participation of DBEs.
The MBTA’s operating agreement with Keolis is subject to the requirements of Part 26 of Title 49 of the Code of Federal Regulations. Therefore, Keolis, as operator of the MBTA’s commuter rail service, is required to establish its own DBE participation goals under this contract. According to Section 4.5.3.1 of the “Instructions to Proposers” document for the MBTA’s Request for Proposal No. 159–12 (for the operation and maintenance of the MBTA’s commuter rail system),
The DBE Participation goal for this [Request for Proposal] and the proposed Contract to be awarded is set at fifteen percent (15%). This DBE participation goal represents those elements of work performed by qualified DBEs for amounts totaling fifteen percent (15%) of the goods and services purchased or subcontracted.
In order to participate in the MBTA’s DBE program, a small business owned and controlled by socially and economically disadvantaged individuals must receive DBE certification from the Massachusetts Unified Certification Program.
According to the MBTA’s Request for Proposal No. 159–12, proposers were required to submit, among other information, a DBE Participation Schedule listing the qualified DBEs with which they “intend to contract for the performance of portions of the work under the contract.” The DBE Participation Schedule Keolis sent to the MBTA as part of its final DBE plan, dated March 25, 2015, contained 53 DBEs. We noted that 18 (or 34%) of these 53 DBE firms never ended up executing a contract with Keolis. In our review of documents provided to us by Keolis, we found that Keolis had executed a $425,000 settlement agreement with one of the firms initially listed on its DBE Participation Schedule, which included non-disclosure and non-disparagement clauses. See Other Matters2 for more information.
According to Section 4.1 of Schedule 3.13 of the MBTA’s operating agreement with Keolis, Keolis is required to submit monthly written reports to the MBTA summarizing the total expenditures made with DBE firms under the agreement. These reports also detail whether Keolis has met its monthly and year-to-date DBE goals.
We met with MBTA officials and determined that the MBTA did not have sufficient measures in place to ensure that Keolis achieved the DBE participation goals it committed to under this contract. For example, the MBTA had not established a formal process for reviewing and approving the monthly DBE reports it received from Keolis. From July 2014 (the inception of the contract) through the end of the audit period, the MBTA could not demonstrate that it had reviewed and approved any of the monthly reports it had received from Keolis. As part of a formal review process, we would have expected the MBTA to verify that the DBE subcontractors listed on these monthly reports (1) had current DBE certifications on file with the Massachusetts Unified Certification Program, (2) had executed contracts in place, and (3) that Keolis was meeting its monthly and year-to-date DBE spending goals. Further, as part of its monitoring efforts, we believe that the MBTA should have been reviewing project documents and accounting records and visiting project sites to verify that the specific DBE firms listed on monthly reports were the contractors ultimately performing the work. The MBTA could not provide us with any documentation to substantiate whether any of these efforts or comparable efforts occurred during this time period.
As part of this audit, we also obtained all of the monthly DBE expenditure reports Keolis sent to the MBTA from July 2014 through December 2023. We inspected each of the monthly DBE expenditure reports and found that Keolis included in these reports at least $3,004,880 in payments made to firms that did not have a valid DBE certification at the time of payment. Specifically, we noted the following:
- that $479,770 in payments made to firms after their DBE certification had expired or were withdrawn; and
- that $2,525,110 in payments were made to firms that never had a valid DBE certification on file with the Massachusetts Unified Certification Program.
After identifying the payments made to noncertified firms mentioned above, we removed them from the expenditure reports and recalculated the total DBE spending to determine what impact, if any, it had on Keolis’s ability to meet the DBE participation goals. This adjustment revealed that Keolis met the 15% DBE spending target in all 9.5 years we reviewed; however, we still believe that the MBTA needs to strengthen its monitoring process in this area. Without a formal review process in place, the MBTA is limited in its ability to evaluate the effectiveness of its efforts—in this instance, executed under contract with Keolis—to support contracting with DBEs.
The MBTA should develop, document, and implement policies and procedures to effectively monitor Keolis’s compliance with DBE requirements. These policies and procedures should ensure that Keolis is accurately reporting DBE award and other financial information and should include a reporting component.
Auditee’s Response
The MBTA appreciates the SAO’s input and suggestions when it comes to the handling of monitoring Keolis’ compliance with disadvantaged business enterprise (“DBE”) requirements. The MBTA’s current handling of Keolis’ compliance with DBE requirements has changed significantly from the audit period, which goes back to July 2014. The MBTA provides Keolis with policies and procedures for DBE requirements following a change in the Keolis oversight manager within the MBTA’s Office of Diversity and Civil Rights (“ODCR”). When DBE reports are filed, the ODCR manager reviews documentation with Keolis representatives for accuracy and completeness, including contractor certification, subcontractor accounting accuracy, and ensuring new subcontractors are reviewed for their specific scopes of work. Prompt payments and Equal Employment Opportunity (“EEO”) verification are also provided with monthly reports. Since the change in oversight occurred, only one company has been removed for noncompliance and the associated monthly report was revised appropriately. Further, the MBTA ODCR intends to conduct further training with Keolis regarding prompt payment, EEO, and Semiannual reports. . . .
The payments of $479,770 made to vendors after their DBE certification expired or was withdrawn are valid payments, given that federal regulations guiding the DBE program allow a vendor to be kept on DBE reports until the full-close out of the company’s payment. In this case, the $479,770 can be attributed to retention or final payments owed to these company, noting that some of these vendors do not request final payments for months. The MBTA is addressing these types of payments with Keolis in reviewing its close-out requirements and invoicing from contractors. . . .
The [Office of the State Auditor (SAO)] identified [$2.475 million] in spend to two vendors, Ketchie & Anta Electric, for which the Massachusetts Supplier & Diversity Office (“SDO”) have no records as being certified DBEs.2 Keolis payments to Ketchie and Anta Electric were reported as a Tier 2 spend through Keolis’ prime supplier, Harsco Rail, based in North Carolina. Harsco is an equipment and parts manufacturer of railroad track equipment. Both Ketchie and Anta Electric are certified DBEs in multiple states and actively work with other public transportation agencies.3
As discussed in the SAO’s report, the MBTA-Keolis Operating Agreement incorporates 49 [Code of Federal Regulations (C.F.R.)], Part 26. Under 49 C.F.R., Part 26, a DBE must be certified by a Unified Certification Program (UCP) in the state where the business seeks to participate as a DBE on federally funded projects. Certification reciprocity is recognized in 49 C.F.R. § 26.81(e), which requires each state’s UCP to accept DBE certifications from other states, provided the out-of-state DBE applies for recognition and provides all required information. The Operating Agreement does not restrict DBE participation to only Massachusetts-based DBEs. As Tier 2 vendors to Keolis’s prime contractor, Keolis received reporting information from Harsco that it was using valid DBE sub-vendors. Upon investigation, while both Ketchie and Anta Electric are DBEs, it was discovered that neither company secured the necessary reciprocal certification within Massachusetts. As such, while the MBTA and Keolis agree this was a procedural oversight and believe the improved oversight program would recognize and correct any such future issues, the intent of the DBE program of using DBE vendors appears to be satisfied, even if not technically compliant. Furthermore, even removing the [$2.475 million] reported spend with these two Teir 2 vendors during [fiscal year 2022 and fiscal year] 2023, Keolis achieved [18.33% and] 19.59% DBE spend for those years.
[. . .]
2. The SAO also identified WWP [doing business as] d/b/a VOIP Networks as having no records as being certified by the SDO. MBTA agrees WWP [doing business as] d/b/a VOIP Networks does not have proper DBE certification, and it was an error to be included. Removal of this spend has had no material impact on the overall DBE goal for that year.
3. With this response the MBTA provides the SAO with documentation of Ketchie and Anta Electric DBE certifications.
Auditor’s Reply
In its response, the MBTA refers to federal regulations that allow vendors to remain on DBE reports until the final payment for a contract is closed out. The MBTA suggests that the $479,770 in payments made to firms after their DBE certification had expired or were withdrawn were retention or final payments owed to these companies. We were unable to verify that these payments were final or retention payments, as the MBTA did not provide supporting documentation to substantiate this claim. However, based on the data available to us, it appears that these payments are not final or retention payments, as final payments typically would not span over a period of several months, as these payments did. Indeed, some of these payments span across a 14-month period, undermining the claim that they were retention payments or final in nature.
Regarding the payments made to firms that never had a valid DBE certification on file with the Massachusetts Unified Certification Program, the MBTA’s suggestion that these firms’ valid DBE certifications in other states minimizes the issue. The fact remains that these firms did not meet the necessary Massachusetts-specific compliance standards, regardless of their certification status in other states. We acknowledge that federal regulations allow for the recognition of out-of-state DBE certifications. However, this process requires the out-of-state DBE to apply for recognition and provide all required documentation in Massachusetts. These firms did not fulfill that process for Massachusetts, which means that they were not compliant with the state’s DBE program. Allowing out-of-state vendors to participate based solely on certifications from other states undermines this process and could unfairly exclude local firms that meet Massachusetts requirements.
Since the end of the audit period, the MBTA has implemented policies and procedures aimed at addressing the issues identified in our audit. We will review progress made, during our post-audit review in six months.
| Date published: | March 4, 2025 |
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