Report 2013-115 Summary - February 2014

Disabled Veteran Business Enterprise Program

:

Meaningful Performance Standards and Better Guidance by the California Departments of General Services and Veterans Affairs Would Strengthen the Program

HIGHLIGHTS

Our audit of the Disabled Veteran Business Enterprise (DVBE) program highlighted the following:

RESULTS IN BRIEF

The Disabled Veteran Business Enterprise (DVBE) program directs state governmental entities, such as state agencies and departments, to procure goods and services from DVBE firms that the California Department of General Services (General Services) has determined have met the eligibility criteria required by law to be a certified DVBE firm. Principally established in the California Military and Veterans Code, the DVBE program requires that, collectively, state governmental entities that award contracts for goods and services (awarding departments) expend not less than 3 percent of the value of all their contracts on firms that are owned by disabled veterans (3 percent goal). However, the performance reporting requirements established in the State's Public Contract Code require awarding departments to report their levels of DVBE participation based on the amount of the contracts awarded to DVBE firms. The use of the different terms expended and awarded raises significant questions as to whether the State is measuring the program's performance in a manner consistent with legislative intent.

The legislative intent of the DVBE program is to target DVBE firms and have them benefit financially from doing business with the State. DVBEs benefit financially when they are paid for their services. However, based on the performance reporting requirements specified in the Public Contract Code, the State currently measures the success of the DVBE program by the value of the contracts that state departments and agencies have awarded—and not necessarily the amount ultimately paid—to DVBE firms. This performance measure may distort an assessment of whether the program is meeting the legislative intent, because awarding departments can subsequently amend or cancel their contracts with a DVBE if their procurement needs change. It is difficult to know the magnitude of the difference between amounts awarded and ultimately paid to DVBEs statewide because awarding departments enter into thousands of contracts with DVBEs each year, and the timing of when these contracts are completed and final payments are made varies. Nevertheless, we identified examples where some of the departments we visited had reduced the value of their contracts with DVBE firms after the original award. In one instance, the California Department of Transportation (Caltrans) had an on-call contract with a DVBE firm with a total award amount that was not to exceed $13.2 million, and it ultimately paid the DVBE roughly $12.4 million—approximately $821,000 less than the award amount. Although differences between the amount awarded and the amount paid may be permissible under state contracting laws, depending on each contract's terms, the variations underscore that DVBE participation reporting based on amounts awarded is not a good measure of whether the program is meeting the legislative intent.

In addition to lacking a true measure for the extent to which DVBE firms benefit financially from the program, the data in the State Contract and Procurement Registration System (SCPRS) maintained by General Services provide a strong indicator that only a relatively small subset of DVBE firms enjoy the major part of the State's business. Specifically, we noted that during fiscal year 2012-13, 83 percent of the DVBE contract award amounts went to only 30 DVBE firms. There do not appear to be any clear common traits among these top 30 firms, other than they seem to be successful at securing business with the State. For example, SCPRS data indicate that these top 30 DVBE firms have reached their levels of success either by winning a few state contracts or by winning a large number of state contracts. Specifically, eight DVBE firms were awarded five or fewer contracts, while the remaining 22 DVBE firms typically were awarded numerous state contracts with many different departments. For instance, one DVBE firm was awarded two contracts from Caltrans totaling $20 million. Conversely, another DVBE firm entered into 922 contracts with six different awarding departments, totaling nearly $3.5 million. The disabled veteran ownership interest in these top 30 DVBE firms also varied from 51 percent to 100 percent, with 16 of the top 30 DVBE firms being wholly owned by a disabled veteran business owner or owners.1 We also noted that of the top 30 DVBE firms, 21 have been certified for less than 10 years, and five of those firms first became certified in 2012.

Given that during fiscal year 2012-13, 30 DVBE firms accounted for 83 percent of all DVBE contract amounts reported in the SCPRS, we believe that the Legislature should enact additional legislation that promotes the use of more DVBE firms in state contracting. For example, the Legislature could expand on existing laws designed to increase the likelihood of contracting with a DVBE firm. Such existing laws include the DVBE incentive, which allows a department, when awarding a contract to the lowest bidder, to give up to a 5 percent preference to DVBE firms, thus making the DVBE more cost-competitive for evaluation purposes. The Legislature could expand on the DVBE incentive to include additional incentives when the bidder is a DVBE firm that the department has not previously used or when the DVBE is a prime contractor.

We also noted that all five of the awarding departments we visited—General Services, Caltrans, the California Department of Corrections and Rehabilitation (Corrections), the California Department of State Hospitals, and the California Department of Water Resources—lacked adequate supporting documentation for their reported fiscal year 2012-13 DVBE contracting activity.2 For example, Corrections reported approximately $52.7 million in contracts that it asserted were awarded to DVBEs during fiscal year 2012-13. However, it had not maintained supporting records as of the date it reported its DVBE participation activity, even though General Services' instructions require awarding departments to do so. Corrections tried to reconstruct the support, but was only able to provide information that accounted for approximately $18.4 million—or 35 percent of the amount it reported. Moreover, of the four awarding departments we visited that did maintain supporting documentation for their DVBE data, two departments decided to revise their DVBE activity reports during our review—resulting in a combined reduction of approximately $30 million in the amount these two departments originally reported as their claimed DVBE participation. We also found that, in conflict with state law, General Services and Caltrans initially included in their supporting documentation amounts awarded to businesses that were not DVBEs.

A significant cause of the problems we noted at these departments can be attributed to weak guidance from General Services—the department responsible for administering the DVBE program and for compiling and reporting statewide performance statistics. For example, General Services allows awarding departments to decide for themselves how best to report DVBE participation on contracts with terms that exceed one year (multiyear contracts). Specifically, General Services has not provided clear guidance on whether departments should report DVBE participation on these contracts all at once at the beginning of the contract or over the contract's performance period. The extent of General Services' guidance on this topic has been simply to refer departments to the reporting requirements found in state law and report multiyear contracts following a consistent approach from year to year. However, if departments can follow different reporting methodologies—as they do even within General Services' own divisions—the Legislature and the public cannot make meaningful department-to-department comparisons and identify departments that consistently outperform others to reveal potential best practices.

General Services has similarly deferred to awarding departments decisions regarding what level of support and documentation they can choose to use when validating their reported DVBE performance data. Specifically, General Services' reporting instructions simply require awarding departments to "maintain records to support total dollar amounts reported and to validate submissions," without further guidance. The fact that General Services allows awarding departments to use different approaches for reporting multiyear contracts, along with the lack of clear guidance as to what level of support and documentation is sufficient to support their reported DVBE performance data, has resulted in inconsistencies in the DVBE reporting process. To better measure the program's success, we believe the Legislature should amend the Public Contract Code to require departments to report DVBE participation based on actual payments to DVBE firms. Because state departments and agencies have payment information readily available in their accounting systems that identifies how much they have paid on each of their contracts, such a change should have little effect on awarding departments.

Our audit also found that General Services currently lacks the ability to obtain a complete and accurate copy of the State's procurement data—as currently maintained in the eProcurement data system. During the audit, we attempted to obtain procurement data from the eProcurement data system in order to identify, to the extent possible, the total number of DVBEs that have participated in state contracts over the past five years, along with additional information on the demographics of those DVBE firms, the value of the contracts awarded, the type of work the DVBEs performed, and the departments with which the DVBEs contracted. Although the terms of General Services' contract with the vendor that runs this system, BidSync, Inc. (BidSync),3 clearly establishes that the State has ownership of all of its data contained within the eProcurement system, BidSync was unwilling to provide the information we needed to verify the integrity of the State's procurement data, citing legal concerns over providing us with access to data that may include information not related to the State's data. Further, it is unclear what options General Services has to enforce the State's right to its data should BidSync fail to export and provide the State with all of its procurement data, because General Services did not assign a specific cost or due date for this service. Nevertheless, as of January 2014, it appears that General Services and BidSync have taken initial steps to ensure the State ultimately obtains its data.

Finally, the California Department of Veterans Affairs (CalVet) should take a more active role in fulfilling its responsibilities under the DVBE program. State law indicates that CalVet is primarily responsible for promoting the DVBE program by encouraging new disabled veteran-owned businesses to become certified and for coordinating with awarding departments to help them meet the DVBE program goals. While CalVet does participate in outreach events, it could not demonstrate whether its promotional efforts have been successful, thus limiting its ability to determine whether it is maximizing the return on its outreach activities. Nevertheless, to its credit, CalVet has recently started taking proactive steps to make positive contributions to the DVBE program, such as surveying former DVBE firms that had allowed their certifications to expire; this should help CalVet identify, among other things, barriers preventing DVBEs from successfully participating in the program. Moreover, CalVet indicated that it will develop a formalized process for evaluating and interpreting these survey responses and incorporate them into its DVBE outreach plans.

CalVet is also responsible for appointing the statewide DVBE advocate, a position established in state law to help awarding departments meet the 3 percent goal. However, CalVet management confirmed that it has not taken an active role in coordinating with awarding departments to promote DVBE contracting opportunities. For example, CalVet's fiscal year 2013-14 outreach plan is targeted to veterans groups but does not specifically address the needs of state departments to help them meet the DVBE participation goals. To address this concern, CalVet indicated that going forward it would be more active in the DVBE program, such as taking a more prominent role in leading DVBE advocate meetings.

RECOMMENDATIONS

THE LEGISLATURE

To provide a more meaningful measure of how well disabled veteran-owned businesses benefit financially from the DVBE program, the Legislature should amend the DVBE reporting requirements in the Public Contract Code to require that all awarding departments report DVBE participation annually based on amounts paid, and maintain accounting records and certifications from DVBE subcontractors, as applicable, that support the DVBE participation data reported.

For the DVBE program to financially benefit a broad base of disabled veteran-owned businesses, the Legislature should enact legislation aimed at increasing the number of those DVBEs that contract with the State, including increasing the amount of the DVBE incentive that awarding departments can apply when considering bids on state contracts. Such an incentive could include additional preference points for certain bids when the bidder is a DVBE firm that the department has not previously used or when the firm is bidding as a prime contractor.

GENERAL SERVICES

To ensure that the State enforces its contractual right to obtain a complete copy of its procurement data, General Services should take all necessary steps to ensure that it can extract a reliable copy of all the State's procurement data from BidSync so that the data can be used and analyzed to the State's benefit. These steps should include testing to ensure that the data it obtains from BidSync is accurate and complete.

GENERAL SERVICES AND CALTRANS

To help ensure that General Services and Caltrans do not improperly report businesses that are not certified DVBEs, they should verify, at least on a sample basis for high-value contracts, the certification status of the DVBE firms before submitting their DVBE activity reports to General Services.

CALVET

To ensure that CalVet is meeting its statutory obligations for the DVBE program, it should do the following:

AGENCY COMMENTS

Corrections, Caltrans, and CalVet generally agreed with our conclusions and recommendations. Although General Services also generally agreed with our conclusions and recommendations, it offered additional comments regarding our recommendations to the Legislature. Because we did not make specific recommendations to the California departments of State Hospitals and Water Resources, they did not need to respond in writing to the audit report.

1 One of the criteria General Services verifies in certifying a firm as being a DVBE is that at least 51 percent of the firm is owned by one or more disabled veterans.

2 For the purposes of our report, we considered adequate supporting documentation to mean an awarding department's ability to provide a list of contracts and purchase orders that agreed with the dollar amounts reported on its DVBE activity report submitted to General Services on or before August 2013.

3 At the time of the original contract, BidSync's legal business name was RFP Depot, LLC.