It may seem obvious that construction companies and federal agencies, such as the Department of Transportation, are to adhere to the federal regulatory statutes for federally funded construction projects, but you would be wrong in assuming that the rules are followed, particularly when it involves a minority or women-owned business. Let’s be upfront and honest. The construction industry is still predominantly male and non-minority dominated, with growing, but still smaller in terms of number, involvement from minority/women-owned companies. In an effort to increase the participation of minority/women-owned companies, the federal government enacted several statutes that require a certain percentage of subcontractors on federally funded projects be minority/women-owned companies. Without the participation of those companies, a general contractor’s bid should not be accepted by the DOT…unless all bids fall below the threshold or the GC can demonstrate they made a good faith effort to find a minority/women-owned subcontractor but there were none to be found. This statutory backdrop sets the stage for the following matter that was successfully prosecuted by the team at Spilman after a long, hard-fought battle lasting eight years. 

We will not name the client so as to keep the parties anonymous. The client is a minority-owned subcontractor on a federally funded DOT project. The project engineer who was employed by the DOT received a request from the GC to remove our client from the project. The grounds for removal were dubious at best and flat-out fabricated at worst. Naturally, our client disputed the grounds for removal, enlisting the help of the DOT engineer. The DOT engineer refused to listen to our client stating that his loyalties were to the GC and not our client. As a result, the engineer approved the removal of our client from the project. It is critical to note, that the engineer did not do any independent investigation into the grounds for removal and simply took the word of the GC. The federal statutes prohibit removal of a minority-owned company from a project absent “good cause”. Specifically, federal regulation 49 C.F.R. 26.53(f)(3) stipulates that good cause to terminate a minority subcontractor includes circumstances where:

(ii) The listed DBE subcontractor fails or refuses to perform the work of its subcontract in a way consistent with normal industry standards. Provided, however, that good cause does not exist if the failure or refusal of the DBE subcontractor to perform its work on the subcontract results from the bad faith or discriminatory action of the project.

[and]

(ix) Other documented good cause that you determine compels the termination of the DBE subcontractor. Provided, good cause that you determine compels the termination of the DBE subcontractor. Provided, that good cause does not exist if the prime contractor seeks to terminate a DBE it relied upon to obtain the contract so that the prime contractor can self-perform the work for which the DBE contractor was engaged or so that the prime contractor can substitute another DBE or non-DBE contractor after contract award.

After an investigation by the compliance department of the DOT, it was determined that our client was terminated without “good cause”. You would think that the story would end there, but you would be wrong. By the time the DOT compliance department made its determination, the vast majority of our client’s scope of work had been done by other subcontractors. So our client was forced to bring an action against the DOT for the engineer’s failure to prevent its removal from the project. Fast forward eight years, the survival of numerous motions to dismiss and a loss at the deputy commissioner level, the North Carolina full commission found in favor of our client, holding the DOT liable and awarding damages for our client’s lost profits.

So what is the moral of this case? On federally funded projects, the federal agency overseeing the project (i.e., DOT), the GC, and the subcontractors are all subject to the federal regulations that govern the parties’ various duties of care to each other on the project. This creates liability for failing to follow that duty of care on the part of the federal agency and potentially the GC. Likewise, the minority/women-owned businesses have statutory rights that they can enforce in a court of law, holding the tortious parties responsible for their actions and obtaining monetary? judgments. So ignore the federal statutes at your peril.