Prime Redlining is Some Big Agencies New Weapon Against Minority Owned Small Businesses

Policy Perspectives to Stop Prime Redlining in Government Contracts

EMERGENCY*** Hundreds of Millions of dollars from Government contracts are not getting into the hands of minority-owned businesses every year!

Purpose

My name is Joseph Anthony, I am the founder and CEO of Hero Collective, a Black owned advertising agency based in New York City. I have written this document because I believe my agency is a victim of “Prime Redlining,” by US Army advertising agency, DDB Chicago, a subsidiary of Omnicom Group. The following details my theory of what Prime Redlining is and the corresponding affects it has within economically disadvantaged communities. Every year the Department of Defense (D.O.D.) spends 900 Billion dollars with the private sector, comprised over 23,000 individual contracts. Despite the Black and Hispanic population making up over 30% of the US population, the D.O.D.’s goal is to award at least 5% (Approx. 45 Billion Dollars) of those contracting dollars to minority-owned firms/businesses.

While there are several programs and ways that a small minority owned business can be contracted by government agencies or the D.O.D, two of the more well known ways are as follows:

1. 8(a) Certified Supplier: By becoming an 8(a) certified supplier you can directly qualify for government contracts. This certification isn’t widely promoted and has low awareness within minority communities. The application process is long, complex and often requires the need to hire experts with the proper experience.
2. Becoming a Sub-contractor of a Prime Contractor: The majority of the time the D.O.D. engages a Prime Contractor, which is usually a large corporation that fits their size and financial criteria to qualify for the contract, which in and of itself is bias, as there are very few Prime Contractors that hold D.O.D. contracts that are minority owned. It is the Prime Contractors responsibility to ensure that 5% of their contract is sub-contracted to minority businesses.

We are seeking to reform policy and the method in which Depart of Defense and consequently government contracts in general are awarded to minority-owned businesses to ensure the resources intended to reach communities of color, actually do. Resources that are essential to creating job growth and the community driven reinvestment necessary to close the income inequality gap in America.

It is our hope that by bringing the criminal act of Prime Redlining to light, that not only will our situation be rectified but that congressional hearings will be called and a full audit conducted. Furthermore, our goal is to ensure that every penny earmarked for minority owned businesses gets appropriated fairly and those perpetuating these fraudulent actions are penalized to the full extent of the law.

What is Prime Redlining in Government Contracting?

Definition — Prime Redlining is when the prime applicant or beneficiary of a government contract teams up with a minority firm to apply for or secure a government contract; and after winning the government contract the prime redlines the minority firm out of the contract by denying or extremely limiting the minority firm from the financial benefit originally established in their teaming agreement or dictated by government compliance requirements.

Occurrences — Prime redlining is more pronounced in government and Department of Defense contracts as these contracts have minority and small business participation requirements that prime companies need to adhere to in order to secure the contract. In some cases up to 40% of a contract is to be allocated to small business, including minority owned firms, classified as Small Disadvantaged Businesses.

Motivation — For the prime, it is an economic advantage to use a minority firm as “window dressing” for a government contract acquisition and then redline them out after winning, because the amount required to be allocated to minority and small businesses is often a substantial part of the contract and directly impacts their earning potential. Since government contracts have usually one point of contact at the prime entity, minority partner input is not communicated/disclosed leaving the minority and small business partners at the behest of the prime contractor. This often leads to mis-appropriation, corruption and various abuses that adversely affect the minority partner.

Professional Observations — Based on our research, every year hundreds of millions of dollars from government contracts are not being allocated to the small minority owned businesses they are intended to reach. Because of a lack of oversight and agency/contractee accountability, this crime is being continually perpetuated.

What is the Impact of Prime Redlining in Government Contracting?

Prime redlining in Government Contracting has the following effects

1. Minority Firm Impact — Hundreds of minority firms economic position are damaged by the effects of Prime redlining, greatly reducing the agency’s direct ability to maximize their earning potential associated with their compliance designation. This minimization or elimination results in a myriad of cascading results that affect minority communities.

2. Misuse of Taxes — Taxpayer budgets are being misused as the intent of the contract is not being followed.

3. Shell Minority Firms — Prime recipients of government contracts sometimes create or incentivize minority professionals to set up minority owned shell firms to funnel money through (essentially money laundering) to vendors they would more ideally want to work with or ones they have an equitable interest in. These firms maybe minority owned, but aren’t positioned as valued long term equitable partners. They get a pass through fee or some other minimized role that is meant to buy them off, while the larger investment goes back to Prime.

4. Contractor Fear — Minority firms who are lucky enough to team with a prime are helpless to speak out and cite the contract rules for fear of losing their contract and being banned from the industry by the prime.

5. Small Business Impact — Economic empowerment within minority communities does not occur through Government Contracting as a result or prime contract manipulation. Meaning, a reduction in minority employment, economic reinvestment, community development, home ownership, amongst other adverse outcomes.

6. Minority Community Impact — The lack of oversight contributes to the mis appropriation of resources otherwise earmarked for socioeconomically disadvantaged communities. This directly impacts job, growth, community development, an increase in the number of uninsured minorities professionals, amongst a variety of other adverse outcomes. For example, the current US Army contract list approximately 40% as its small business participation rate for its $4 billion, 10-year contract which means for every billion dollars spent, $400 million would support small and minority owned business and communities. With very little oversight or transparency, it’s hard to know how much is actually making its way to minority communities and how the impact is being measured. D.O.D. contracts are very rarely 100% in compliance, as their minority small businesses allocations are communicated as “goals, creating room for ambiguity in its interpretation. Primes often state that they are have tried to identify qualified vendors unsuccessfully as a tactic to keep more of the contract for themselves. These administration flaws and compliance work-arounds initiated by the prime, results in millions of dollars unappropriated to the individual small businesses.

7. Contract Law Impact — Government laws and rules are being violated as the intent of the contract is to redistribute economic wealth throughout all communities in America, not isolate wealth with large prime institutions.

Given the Contracting Laws, How is Prime Redlining Being Achieved?

1. AOR Rule — The Contracting requirement states that the small and minority owned business recipient of the government contract is to be managed through the agent of record (AOR) on the contract (Prime Contractor) and no one else. This practice allows Prime contractors to subvert federal laws required for minority participation.

2. Limited, to no Visibility — Over the years, Prime contractors have become savvy in how to conceal their fraudulent compliance practices. From implementing clauses that prevent subcontractor interactions, to establishing minority-owned shell companies, to taking advantage of an apathetic oversight committee.

3. Vague Language — The contracts themselves as it relates to economic participating for minority contractors use vague language such as: “strive to” or “seek to” achieve economic goals. The language of minority payments and invoice is in part of the “eligibility for submitting invoices” section of contracts. Invoicing requirements from the federal government appeared not to include specific delineation and calculations of allocation of federal grants to minority firms. This opens the door for the prime to say, “we can’t find a minority agency.”

4. No Oversight/Fear of Repercussions — There is very little oversight and recourse from federal agencies for primes who do not comply with minority participation rules. Think about it, when have you heard of a major penalty being given to a Prime for failure to meet their small business subcontracting goals. Sure it happens, but not with enough frequency to deter this fraudulent behavior. This lenient oversight results in Primes getting grace periods to come into compliance that are often abused and unenforced.

What Types of Government Contracts Are Most Susceptible to Prime Redlining?

1. Large & Long Term Contracts — The larger contracts that have the longest terms are the most susceptible to government prime redlining offenses. These would include long-term contracts with federal agencies like the Department of Defense or Health and Human Service who can have contracts up to five or ten years.

2. Recent Public Examples

1. Public record will show that the last US Army marketing contract was riddled with fraud, waste, and abuse of the prime McCann Worldwide which caught the eye of the current Administration resulting in a Federal investigation. https://www.hollywoodreporter.com/thr-esq/us-armys-ad-agency-sued-fraud-by-cable-network-1136018

What are Some Policies that Can Prevent and Reduce Prime Redlining with Government Contracts?

1. Prime Teaming Term Rule — This rule means that the team that won the federal contract at the beginning shall serve as the team throughout the entirety of the contract at the stated percentages identified at the beginning of the contract.
2. Quarterly Minority Reporting Requirement for Processing Invoices- This means that the prime must include a minority participation report with every quarterly invoice. The report shall include the invoices of the minority firm as consistent with the direction and intent of minority financial participation on the contract.
3. Minority Technical Assistance Rule- Given the financial advantages of the prime contractor they will provide ongoing technical assistance to minority agencies who make mistakes errors and other challenges that may arise due to the circumstance of being a disadvantaged minority entity. Prime contractors are to expect minorities to require technical assistance of unknown nature’s to properly fulfill execution of contract requirements and will provide the technical support and training to the minority firm and patiently support their transition to a more effective support agency.
4. The Minority Seat At The Table Rule- A minority firm representative is to participate at the table with all discussions with the prime negotiator and the government contractor as it relates to budget and other government orientated deliverables. An agenda item will be part of budget meetings for minority firm participants to provide comments on the direction and strategy and wait for designated allocation of the budget for that meeting consistent with the law of the original contract relating minority participation and their financial requirements.
5. The Minority Pay and Train Rule- Minority contractors labor are to be paid at the first of the month to provide the minority contractor with the basic necessary cash flows for operation regardless of prime billing arrangement with the government agency. The prime should view minority contractors at the onset of awarded contracts as the time for training the minority contractors to be better performing partners. This includes paying labor rates upfront monthly and providing training courses as appropriate for the minority contractor to take in order to be a more effective partner on the government contract. Training courses required on government contracts include but are not limited to accounting training, software training, rules and ethics training, creative development training, editing training, client service training, and other standard service provided on federal contracts. Should government contracts awarded began immediately then the prime is to find time over the course of the contract for such training to ensure quality delivery of programming to government agencies.

What are Some Policies that Can Prevent and Reduce Prime Redlining with Government Contracts?

1. Clear Minority Participation Rule- The clear minority participation rule is where government contracts clearly State what percent of the contract that is to be subcontracted to minority firms. This means government contracts stating specifically what percentage should be allocated per ethnic group (i.e. 5%, 10%, 30%, or 40%) in the contract itself so that it is transparent on the intended economic development efforts of the government as it relates to minority contractors and related minority communities. Make this percentage not a goal, but a mandatory amount that needs to allocated from the first dollar received by the prime.
2. Always A Minority Rule- The always a minority rule means that regardless of the size of the company that the minority achieves, they are always still a disadvantaged business. Minority firms should not lose their status because of their size. This rule due to the nature of government contracts being temporary, while the community need for the minority business for economic development being permanent.
3. Minority 75% Rule- To qualify as a permanent minority vendor regardless of size the minority firm must comprise of at least 75% minority personnel. A minority company is one where it originated with 75% minority ownership.
4. Minority Shell Company Avoidance Rule- If Prime contractors who own a minority firm choose to use their own partially-owned minority firm as a subcontractor on the contract, the revenue subcontracted to that firm should not to be counted against their compliance requirement.
5. Minority Outreach and Ideas Review Rule- Prime and subcontractors of government contracts are to provide outreach efforts in minority communities and provide ongoing technical assistance to support minority participation on government contracts to include review protocols for all new ideas submitted from minorities.

Conclusion:

The goal of this prime contracting policy reform white paper is to bring attention to an area in government contracting that has significantly failed to help people of color. Our taxpayer dollars go to funding huge corporate contracts that we are not fully participating in. It is our hope that this document sparks the conversations that result in the policy reforms that economically empower communities of color in America.