DENVER – Denver needs to do more to meet goals to support minority- and women-owned businesses and disadvantaged businesses, according to a new audit from Denver Auditor Timothy M. O’Brien, CPA, and audit firm BerryDunn.
“We need to fix our system to support the small businesses in our community who have been failed for generations,” Auditor O’Brien said.
Auditor O’Brien contracted with BerryDunn to perform this audit of Denver’s Minority/Women and/or Disadvantaged Business Program in the Division of Small Business Opportunity. The audit found 34% of contracts during the two-year period studied in the audit did not meet the program’s goals, and there were no consequences for the contractors.
The Division of Small Business Opportunity is part of Denver Economic Development & Opportunity, which has recently made significant changes to its organization. The division certifies businesses for the program, sets goals for minority- and women-owned business participation on city projects, and monitors those goals throughout the project.
“We found some serious gaps in the program, but now is the perfect time to fix the problem,” Auditor O’Brien said. “We have an opportunity right now to do better, and I hope city leaders take the findings in this audit to heart.”
Certification is the first step for participating in the program as a minority- or women-owned business or a disadvantaged business. Businesses must get certified every three years and sign an affidavit every year stating there has been no change to any information affecting their eligibility.
Prime contractors can meet their assigned goals on city projects by either making subcontracting commitments with certified subcontractors in their proposals, using letters of intent, or by submitting waivers that show they made a good-faith effort to fulfill the goals but could not do so.
The Division of Small Business Opportunity has sanctioning authority if a contractor fails to comply with program goals, but the division does not use that authority.
Over time, failing to sanction noncompliant businesses will signal to some businesses that it’s acceptable to fail to meet project goals. As a result, there is no pressure to ensure the city supports diversity and equity on city projects. Commitment to program requirements may help some businesses win contracts over others because the city has in some cases prioritized equity goals over other factors such as lowest price. By not enforcing compliance, the city loses the benefit of achieving these program goals and also loses the benefit of using a more price-competitive procurement process.
“The intent of this ordinance to support minority- and women-owned or disadvantaged businesses was good,” Auditor O’Brien said. “However, the city cannot now fail to follow through on the law by letting businesses operate in noncompliance.”
The audit firm also found the division did not effectively monitor contractors’ compliance with project goals. For example, there is a risk that prime contractors might violate the ordinance by failing to use the certified contractors listed on a letter of intent and the division might miss this failure due to a lack of monitoring.
The division is supposed to work with companies if it appears they might miss program goals on a project. However, staff are assigned more than 400 contracts per person, and it is impossible for each staff member to follow up with every business. In addition, the audit found the division needs better skills with existing technology and additional technology solutions to facilitate monitoring compliance with project goals.
Another weakness that could lead to a failure to support diverse small businesses is a gap created by inconsistent and long processing times for certification or recertification. The Division of Small Business Opportunity does not have clear processes or response times for processing and renewing certifications. The audit firm found all four denied applications it reviewed took more than six months for the applicant to receive a response from the division.
Delays in certification could keep qualified businesses from being able to submit a bid for a city project. Delays in recertification could lead to extensions for contractors and subcontractors.
The division issued 254 extensions in the two-year period of this audit. If a contractor receives an extension, the business could submit a bid as a certified organization without actually meeting the criteria, and then it could continue to operate without meeting the diversity goals for the entire period of the contract.
“We need to do everything we can to make sure our efforts are truly serving those who need the support in our community,” Auditor O’Brien said. “Right now, the city is leaving gaps in the process that unqualified businesses could take advantage of — to the detriment of minority- and women-owned businesses.”
The high 34% noncompliance rate on city projects could be attributed to gaps in documentation of good-faith efforts, failure to count contractors toward goals, and gaps in policies and procedures.
The Division of Small Business Opportunity says it is already making changes and is working on updates to the ordinance.
Also this month, Auditor O’Brien released an audit of the Denver Public Library’s financial processes. Read more about the audit below.