Empowering small builders: The DBE advantage and compliance essentials

The construction industry is a layered ecosystem where giants and startups share the same job site, each with unique risks and rules. In a highly competitive industry, the Disadvantaged Business Enterprise (DBE) Program provides marginalized businesses with a fair opportunity to compete and thrive. However, rising fraud, such as firms posing as DBEs or using certified DBEs as pass-throughs, undermines the program’s purpose.  

Why it matters: What was once solely the subcontractor’s responsibility is now also a concern for credit managers, especially when compliance issues can impact payment security. To protect the integrity of the program and avoid serious penalties, it’s essential that credit managers to double check and verify if the DBE is legitimate and it’s performing the work it’s contracted to do 

What Is the DBE Program? 

Established by the U.S. Department of Transportation (USDOT) in 1983, the DBA Program ensures that federally funded highway, transit and aviation contracts are accessible to small businesses owned and controlled by socially and economically disadvantaged individuals. For example, USDOT projects often require that at least 10% of specific highway funds go to certified DBEs, meaning contractors must ensure DBEs perform at least 10% of the actual work. 

The program’s rules and regulations vary by the state or local government funding the project and are made known by the owner before the project starts. Usually, at the beginning of the project, the owner and contractor ensure certified DBEs are retained to perform commercially useful functions at least to the extent of the required percentage for the project.  

Credit managers who extend credit to an illegitimate DBE can face significant financial and legal risks, especially if issues arise with the DBE in the middle of the project. Consider a material supplier selling materials to a DBE on a public construction project. On paper, everything appears legitimate—the DBE is certified, listed in the contract and seemingly compliant. But midway through the project, it becomes clear the DBE is merely a pass-through, lacking trucks, warehouses or operational control. When payment issues surface, the supplier files a lien, only to learn it is invalid because the DBE was not performing a commercially useful function (CUF). This can not only delay payment and jeopardize lien and bond rights but also lead to financial losses and reputational harm for the credit manager’s company. 

Understanding a Commercially Useful Function (CUF) 

At the heart of the DBA Program compliance is the CUF requirement. A DBE must meaningfully perform, manage and be responsible for its portion of a project. That means no pass-throughs, where DBEs are used in name only. 

“A legitimate DBE supplier operates like any other business,” said Christopher Ng, managing partner at Gibbs Giden Locher Turner Senet & Wittbrodt LLP (Westlake Village, CA). “They negotiate directly, place their own orders, assume delivery and storage risks, and pay from their own accounts. You’ll see real infrastructure—warehousing, trucks, procurement systems, experienced staff.” 

By contrast, an enterprise acting as a pass-through might only add a 2–3% markup on an invoice without handling the goods, making decisions or assuming financial risk. “If they aren’t making meaningful contributions, they aren’t performing a CUF, and that’s a compliance red flag,” Ng said. 

Consequences of noncompliance 

DBE violations can result in serious legal and financial consequences, including government investigations, civil or criminal prosecution, fines, treble damages under the False Claims Act and even jail time. Companies may also face debarment, contract termination, withheld payments and liquidated damages. The reputational damage alone can significantly harm business relationships and attract negative publicity.  

Best practices and compliance 

Companies are taking proactive steps to protect themselves and ensure compliance. Some credit managers include a verification step in their onboarding process. “We have DBEs complete a questionnaire up front,” said George Demakis, corporate credit and accounts manager at Scafco Corporation (Spokane, WA). “We also updated our credit application to include business structure and a DBE designation. This helps us document our due diligence if a transaction is later flagged.” 

Including contractual safeguards can help detect illegitimate enterprises. “We prohibit customers from subleasing our equipment to third parties,” said Ty Knox, ICCE, director of credit and risk at EFCO Corp (Des Moines, IA). “Our goal is to work directly with the end user on a specific project. This not only protects our lien rights but also avoids pass-through risks.” 

Common pass-through red flags to watch for: 

• Prime contractor involvement: The general contractor—not the DBE—is making purchases or managing materials. 
• Irregular payment flow: Payments are routed through the general contractor instead of the DBE. 
• Minimal markup: The DBE adds a nominal fee but provides no actual service. 
• Lack of operational capacity: No trucks, warehouses, or staff capable of fulfilling the contract. 
• Re-invoicing requests: Attempts to shift billing to a third party unrelated to the work. 

“We invoice only the party we contract with,” Knox added. “That’s one more layer of protection to ensure compliance.” 

Understanding your role as a material supplier is key to ensuring CUF compliance. In many states, being tied to a DBE pass-through can void your lien rights. Some states allow lien rights to be assigned, but others don’t. On public projects, always ensure you’re protected under the payment bond. 

“We created a CUF audit checklist years ago,” said Sam Smith, senior corporate and collections manager at Crescent Electric Supply Company (Hazel Green, WI). “It walks through questions in a flowchart to help determine if the CUF standard is met. We keep those on file in case we ever need to justify our decisions.” 

Training is also essential. “It’s not just the credit team that needs to understand this—your sales team plays a big role too,” Smith said. “At Crescent, we hold annual training for all employees on working with minority businesses. It’s documented and consistent.” 

The bottom line: DBE compliance is a serious matter, and violating the regulations can have significant legal and financial repercussions. For credit managers, adhering to DBE rules and regulations is not just about checking a box—it’s about ensuring the financial and operational health of the projects they’re tied to.“At the end of the day, this comes down to doing your homework, asking the right questions, and not relying on assumptions or outside certifications,” Smith said. “If something doesn’t feel right, trust your instincts and dig deeper. Protecting your company starts with understanding what a CUF really is.”