DBE Violations Can Be Costly—A lesson in what not to do.

The federal government takes very seriously the Disadvantaged Business Enterprise (DBE) regulations. When a contractor hires a DBE, the DBE must do the work with minimal involvement or control by the general contractor. A Chicago based contractor, James McHugh Construction, decided to ignore the regulations and hired a DBE that it could control and used them as pass-throughs in order to obtain over $156 million in projects.

McHugh won the bid on various road, highway and transit-line contracts for the Chicago Transit Authority. McHugh hired Perdel Contracting and Accurate Steel Installers, both of which were women owned businesses, to perform various portions of the job.

After the projects were completed, McHugh terminated one of the project managers that worked on three of the projects. He brought wrongful termination and whistle blower claims and informed the U.S. Attorney about McHugh’s abuse of the DBE regulations.

The U.S. Attorney filed charges alleging that McHugh hired the Perdel and Accurate, but they did little if any contracted work because the work they were hired to do often times exceed the companies’ capacity and experience. Of equal concern to the U.S. Attorney was the fact that McHugh frequently managed the workers hired by Perdel and Accurate and even instructed Perdel and Accurate as to which union crews to hire. McHugh also selected suppliers, determined the quality and quantity of materials, negotiated prices and prepared purchase orders for Perdel and Accurate to send out on their letterhead.

McHugh paid $12 million to settle state and federal DBE charges. In addition to paying $12 million, McHugh had to terminate one of its senior vice presidents and its general counsel and had to agree that it would never contract with a company that employed either of these two ex-employees.

The ex-project manager that brought McHugh’s conduct to the attention of the U.S. Attorney will receive around $2 million from the settlement proceeds.

Take Away: If you are hiring DBE contractors on projects, you must be familiar with regulations and abide by them. Otherwise, you could be looking at a hefty fine.