Memorandum
U.S. Department of Transportation
Federal Highway Administration

Recently, several concerns have been raised about the use of joint checks under the Disadvantaged Business Enterprises (DBE) program. We have observed that a number of State Transportation Agencies (STA) have allowed the use of joint checks. From our experience a joint check is a two-party check between a DBE, a prime contractor and the regular dealer of material/supplies. Typically, the prime contractor issues the check as payor to the DBE and the supplier jointly (to guarantee payment to the supplier) in payment for the material/supplies used by the DBE. Due to the issues and concerns brought to our attention and requests for guidance, this memorandum sets forth FHWA's policy on the use of joint checks on Federal-aid highway projects.

A primary concern with allowing joint checks is that such a practice may make it difficult to determine whether the DBE is performing a commercially useful function. It also makes it much more difficult to gauge the extent to which the DBE is controlling its operations (independent of the other party involved in the joint check arrangement). The cost of material and supplies purchased by the DBE is part of the value of work performed by the DBE to be counted toward the goal. To receive credit, the DBE must be responsible fornegotiating price, determining quality and quantity, ordering the materials, and installing (where applicable) and "paying for the material itself." See 49 CFR 26.55(c)(1). When joint checks are used, a question is raised as to whether the transaction being carried out complies with regulatory requirements because of the involvement of another party other than the DBE in the issuance of the check for payment to the supplier.

In light of these concerns, FHWA will not object to the use of joint checks when the following conditions are met: (1) the second party (typically the prime contractor) acts solely as a guarantor, (2) the DBE must release the check to the supplier, (3) the use of joint checks is a commonly recognized business practice in the industry, (4) the STA approves the practice before it is used, and (5) the STA monitors its use closely to avoid abuse.

As part of its approval process (programmatically or on a case-by-case basis), the STA should analyze industry practice. Standard industry practice is one of several factors to consider in approving the use of joint checks. However, using joint checks should not be approved if doing so conflicts with other aspects of the DBE regulations regarding commercially useful function (CUF). For example, the practice of joint checks might be standard industry practice in a State, but the regulations do not allow the DBE to be used as an "extra participant in a transaction, contract, or project through which funds are passed in order to obtain the appearance of DBE participation. In determining whether a DBE is such an extra participant, [the STA] must examine similar transactions, particularly those in which DBEs do not participate." See 49 CFR 26.55 (c)(2). Thus, standard industry practice cannot be shown unless the practice is commonly employed outside of the DBE program for non-DBE subcontractors on both federal and state funded contracts.

A STA that approves the use of joint checks in their DBE program should have a well defined monitoring process that ensures its use comports with agreed upon conditions and that such practice is not in conflict with the requirements of the DBE program. Furthermore, the STA should incorporate its policies and procedures for handling joint checks in its DBE program. This will ensure that all parties (internally and externally) are informed of the STA's process and that the DBE staff, field project engineers, and others implement it consistently statewide. A method for monitoring the use of joint checks used by some STAs is to require the prime contractor/DBE furnish the cancelled check used for the payment of materials/supplies under the contract.

The attached document lists a set of circumstances and conditions that should be considered in approving the use of joint checks. This guidance has been coordinated with the FHWA Office of Chief Counsel. We trust this information is helpful to you and your respective STA. Should you have any questions, comments or additional concerns regarding this subject, please contact Calvin Gibson (202) 366-2024.

Attachment

DBE Program -Joint Checks

The practice of using joint checks in the DBE program is not a new phenomenon. In fact FHWA addressed the use of joint checks as far back as the mid 1980s. The FHWA has always maintained that joint checks could be allowed but needs to be closely monitored to ensure that such a practice did not erode the independence of the DBE firm. Close monitoring also ensures that the use of joint checks does not inhibit the DBE's ability to control its work and perform a commercially useful function (CUF). The STA should establish a solid basis for the use of joint checks that strikes a reasonable balance between the benefit to the DBE and the potential for abuse. Joint checks should not be allowed simply for the convenience of the prime contractor.

General circumstances to be present toi support joint checks:

1. –  Standard Industry practice applies to all contractors (federal and state contracts)
2. –  Use of joint checks must be available to all subcontractors
3. –  Material industry sets the standard industry practice, not prime contractors
4. –  Short term not to exceed reasonable time (i.e., one year, two years) to establish/increase a credit line with the material supplier
5. –  No exclusive arrangement between one prime and one DBE in the use of joint checks that might bring independence into question
6. –  Non-proportionate ratio of DBE's normal capacity to size of contract and quantity of material to be provided under the contract
7. –  DBE is normally responsible for both to install and furnish the work item
8. –  DBE must be more than an extra participant in releasing the check to the material supplier

General conditions for allowance:

1. –   DBE submits request to STA for action
2. –   Subject of formalized agreement between all parties that specify the conditions under which the arrangement will be permitted
3. –   Full and prompt disclosure of the expected use of joint checks
4. –   Require prior approval
5. –   Even with joint checks, DBE remains responsible for all other elements of 26.55(c)(1)
6. –  State clearly determines that independence is not threaten because the DBE retains final decision making responsibility
7. –   State clearly determines that request is not an attempt to artificially inflate DBE participation.
8. –  Standard industry practice is only one factor
9. –   State is to have a well-established monitoring process that has oversight mechanisms such as, for example, receipt of cancelled checks and/or certification statement of payment
10. –   No requirement by prime contractor that DBE is to use a specific supplier nor the prime "contractors" negotiated unit price