The Spotty Success Of MWBEs: ‘Forced Inclusion’ Can Help, But Many Programs Fall Short

Boston has been one of the country’s hottest real estate markets for years, but even in this bastion of progressive politics, its regressive handling of city contracts has come under scrutiny this year after a scathing report was followed by a federal lawsuit.

Boston doesn’t have a rule that requires a certain percentage of its contracts to be allocated to minority and women-owned business enterprises, and as a result, just 1.2% of the $2.1B in contracts awarded by the city between 2014 and 2019 went to Black and Latino-owned businesses, according to a 703-page study by BBC Research & Consulting published this year.

“In our opinion, we didn’t need the 700-page document to do things that matter,” Black Economic Council of Massachusetts Executive Director Segun Idowu said. “Other cities, they don’t need a disparity study. They just know it’s an issue and address it.”

Boston’s failure to equitably distribute its contracts is a reflection of the larger conversation taking place around MWBE programs. Government officials and small-business owners say that the programs are essential to provide business opportunities to people of color — but robust goal-setting and enforcement, as in the case of Boston, are often lacking.

In the cities where MWBE spending goals on government contracts aren’t prioritized, minority-owned businesses frequently end up losing out to White-owned businesses, because they don’t get considered in the first place.

“We've repeatedly seen that when we don't have these focus goals on our contracts, the majority of contractors do not use our MWBEs,” city of Houston Office of Business Opportunity Director Marsha Murray said.

MWBE programs have been around for decades, and in that time have contributed to the creation and growth of hundreds, if not thousands, of minority-owned businesses. But MWBE programs are also limited in their ability to address a much bigger, pervasive issue: the lingering effects of centuries of ingrained racism within America’s financial systems.

Some of those effects, including a lack of generational wealth and access to capital, have made it difficult for MWBEs to secure the bonding necessary to take on larger projects. MWBE programs can make positive inroads, but only governmental intervention to address deep socioeconomic inequalities can tip the scale in the long run.

“Black people, just like White people, should have the right to entrepreneurship,” The New School Henry Cohen Professor of Economics and Urban Policy Darrick Hamilton said. "But [MWBE programs’] impact on addressing larger economic disparities has been exaggerated."

‘An Equitable And Level Playing Field’

The push for targeted government spending goals with MWBEs stretches back to the U.S. civil rights movement. Following major legislative changes in the 1960s that removed legal discrimination around housing and voting, policymakers began to pay attention to the impact of minority businesses on the nation’s economy.

The nomenclature of these programs depends on the jurisdiction, with MWBE the widest designation, though some programs are designed specifically for racial minorities. In 1969, President Richard Nixon established the Office of Minority Business Enterprise, a federal agency dedicated to promoting the growth of MWBEs through public and private sector programs, as well as business assistance services. The office was renamed the Minority Business Development Agency in 1979.

Though the agency was founded with the intention of helping MWBEs access opportunities, capital and development, the extent of the MBDA’s effectiveness has historically been limited by narrow authority and meager funding. Instead, it has largely fallen to cities to create and drive programs that help local MWBEs access the world of competitive government contracts.

“Look, it's really only been in my lifetime … where there has been a remotely level environment of opportunity,” Peebles Corp. Chairman and CEO Don Peebles said. “There's always been a number of different ways and different approaches to how do you address the past oppression, and to create an environment where Black entrepreneurs can compete on an equitable and level playing field.”

MWBE programs tend to present positive results in cities where leaders make a real effort to push for diversity in city contracting. But in other cities, observers caution that existing MWBE programs are simply “pro forma,” or a form of lip service.

"For the developer, it can be a box they have to check and a cost they have to pay," said Charmaine Curtis, a Bay Area affordable housing developer. "It would be great if there was more attention on the real outcome of these programs and not just the box-checking.”

In general, MWBE programs at the city level tend to be subcontracting programs, because MWBEs are typically small businesses with limited access to capital. With this challenge in mind, many municipalities offer development programs and provide incentives for prime contractors to partner with MWBE firms on projects.

“There's this forced inclusion, but it's trying to expose the majority companies to these other companies that they would normally not consider,” Murray said.

Because the programs are so focused on helping subcontractors, Murray acknowledged criticism that more could be done to move MWBEs into prime contracting roles.

“I know there's frustration. Some people believe that we've just basically just created … a perpetual subcontracting role for MWBEs,” she said. “The intention was to provide them with those opportunities to be able to grow their capacity, and develop to be able to become prime.”

‘There Are Barriers That Just Don’t Need To Exist’

The failures of some MWBE initiatives ring loudly in Boston. After the city-commissioned report was issued in February, the nonprofit Lawyers For Civil Rights filed a federal complaint on behalf of nonprofit groups Black Economic Council of Massachusetts, Greater Boston Latino Network and Amplify Latinx, alleging the city was in violation of the Civil Rights Act.

“The City’s discriminatory contracting practices are shameful—and a direct violation of well-established federal law,” the lawsuit states. “Specifically, these practices fly in the face of Title VI of the Civil Rights Act of 1964 and its accompanying regulations, which prohibit federal funding recipients from engaging in unjustified practices that create a disparate impact and exclude minorities.”

Between 2014 and 2019, women-owned businesses received $185M, or 8.5% of city procurement dollars, according to the BBC study. During the same time, Black-owned businesses received just $9.4M, or 0.4% of city contracts for construction and professional services.

A day after the complaint was filed to the Department of Justice and the Department of Transportation, then-Mayor Martin Walsh issued an executive order encouraging, but not requiring, up to 25% of MWBE participation in city contracts.

“The city waited all this time for the disparity study to then be able to do something to try to address the issues,” said Idowu, a plaintiff in the lawsuit.

Walsh had already been nominated to serve as President Joe Biden’s secretary of labor. A month after he issued his order, he was confirmed to the post and resigned as mayor. He was replaced by interim Mayor Kim Janey, a Black woman who is the first person of color to hold Boston’s highest office.

Janey’s administration still has to deal with the complaint, which details Boston’s checkered past with MWBE participation, including the demise of the last city-run MWBE program in 2003. The now-defunct effort required city departments to make efforts to contract a minimum of 15% of their businesses with minority-owned businesses and at least 5% with women-owned businesses.

A White-owned firm challenged Boston’s contracting requirements in a 2001 federal civil complaint, and the city asked a federal judge to conduct a study regarding the program, according to a former official. The city commissioned the study, analyzing MWBE participation in 2003 which found 98% of contracts went to White, male-owned firms, the Bay State Banner reported. 

But city officials deemed the 2003 report inconclusive, and Mayor Thomas Menino, who died in 2014, subsequently disbanded the office after the judge ruled in favor of the White-owned contractor.

Disparities have persisted since, and the BBC study’s interviews with MWBEs in Boston give clues as to why. Speaking anonymously, the owners said they have had trouble networking with White-owned businesses, have been told they don’t have enough experience or expertise, and in some cases they said they have been subjected to stereotyping, and racist and sexist remarks from potential White partners.

“I find that if there's a contract, if I'm getting close, there are so many different ways that they make sure you don't get that contract, but not in upfront legal ways,” one MBE-certified construction company owner told the researchers. “To be honest, most minorities like myself don't have the resources or the time to fight for those contracts.”

Star power couldn’t help former NFL lineman-turned-developer Gosder Cherilus advance his MBE and secure a joint venture, let alone become a primary developer on a project. The former Boston College star grew up in nearby Somerville and had a large local network, but failed to make inroads on larger projects during and after his playing career, he said.

“A lot of people were saying, ‘Oh we love what you’re doing, we love your company, but we don’t know you, or we don’t have anything for you,’” Cherilus told Bisnow earlier this year. “When on paper there is a contract that says 20% goes to a minority-owned company, and you didn’t have a minority-owned partner at the time, how can you hold on to these contracts?”

Cherilus eventually partnered with fellow BC alum and Boston Global Investors Vice President John Hynes IV on 10 World Trade, a planned 600K SF lab and office tower in the Seaport. The pair attributes their successful bid to the Massachusetts Port Authority’s proposal scoring system, which factors diversity as 25% of a bid’s score. Idowu and state government officials have lauded the quasi-public agency’s scoring as a model to other entities seeking to increase MWBE participation.

In the wake of the report and lawsuit, local leaders are making more concerted efforts to incorporate MWBE participation in city contracts. Janey introduced an equity goals pilot program and hired the city’s first director of strategic planning geared toward boosting equity efforts across city departments.

“There are barriers that just don’t need to exist,” Idowu said. “All of these things are made by people, and therefore they are things that we can reverse and change, but we just keep pretending these things came from God and they must be with us forever.”

‘Just Scrambling For The Basics’

When UrbanCore Development President and CEO Michael Johnson started his career in Atlanta in the late 1970s, Delta Air Lines was trying to expand the airport on city-owned land. 

Mayor Maynard Jackson insisted that unless there was 25% minority participation in the contracts and the design services, there would be no expansion. At first, the airline balked, but Jackson stood his ground and eventually the program was a success, helping to spur MWBE programs in other parts of the country. 

The story of Jackson and minority business enterprises is well enough known that in 2018, Delta began showing a documentary about the subject, Maynard, which lauds him for his role in expanding Hartsfield-Jackson Atlanta International Airport.

"Some of my colleagues went out and helped to establish those programs in different cities around the country," Johnson said. "They help minority contractors, subcontractors, suppliers, and design and consulting services."

Houston’s Office of Business Opportunity was established in 1984 as part of the city of Houston’s affirmative action arm, in recognition of the fact that people of color and women had limited representation and inclusion in city contracting, said Murray, who leads the office. 

Houston uses a specific methodology to set spending goals with MWBEs, based on factors such as the availability of those businesses in certain sectors and existing opportunities in contracts. Murray said the city is committed to spending 34% of construction dollars with MWBEs each year, 24% of special services dollars and 11% of commodity dollars.

“The market doesn't automatically correct itself,” Murray said. “There's so many historical reasons why MWBEs are in the position that they're in, just scrambling for the basics at this point.”

To effectively introduce or raise MWBE spending goals, municipal leadership has to make it a priority, Memphis Director of Business Diversity and Compliance Joann Massey said. Before Memphis Mayor Jim Strickland took office in 2016, she said, the city’s overall MWBE contract spending hovered at less than 10%. 

Memphis’ population identified as 64.1% Black in 2019, according to the U.S. Census Bureau. MWBE programs had been introduced in Memphis in the mid-1990s, but were not given enough resources or executed with intentionality, Massey said.

When Strickland became mayor, that changed. Massey was hired to oversee business diversity and contract compliance, and new MWBE spending goals were introduced across the city. Now, Memphis has an overall goal of spending 24% with MWBE firms, more than doubling over the past five years.

“We compare ourselves to cities like Chicago, New York, Atlanta, who are all doing 30-plus, and we consider that overall goal of 24% being a pretty attainable and decent goal,” Massey said. “In fact, we're right within reach. And so like any good city, when we get there, our next goal would then be to push higher.”

Memphis has also made efforts to remove less obvious barriers. A disparity study commissioned by Strickland in 2016 found that one major reason for low MWBE participation in government contracts was that it was taking anywhere from six to nine months for contractors to get paid. 

In response, Strickland introduced a policy in 2018 that required the city to pay its prime contractors within 15 days of completing a job. Those prime contractors are also required to pay their subcontractors, often MWBEs, within a set time frame and report those payments to the city.

Massey said that before, some MWBEs abstained from bidding on government contracts because if they didn’t get paid on time, it could put them out of business. By simply ensuring timely payment, more businesses are lining up to engage with the city of Memphis.

“Not only do we see them getting paid quicker, but we also see small businesses being more readily willing to do business with the city,” Massey said.

“I will say that the program is working,” she added. “But you have to look at it like a masterpiece. A masterpiece isn't created when the sculptor just hits it one time with a big hammer. It takes them chipping away at the material in order to create their masterpiece. I consider these programs from a local and national level to be chipping away.”

‘It Always Begins, And Frankly, Ends With Capital’

While individual individuals of color and minority-owned businesses have benefited from MWBE programs, they have limited ability to address some of the bigger financing issues that hold MWBEs back.

One of the major obstacles to a MWBE becoming a prime contractor is access to enough bonding. In simple terms, a construction bond is similar to an insurance policy, where it protects investors against disruptions or financial loss if a contractor is unable to complete a project, or does not meet the project’s full requirements.

The city of Memphis’ disparity study in 2016 found that the vast majority of barriers for a subcontractor to become a prime contractor came down to financing. Aside from bonding, that included being qualified for various types of insurance, access to capital via loans, and enough existing income or cash flow to buy inventory and pay staff while waiting for government payments to come through.

Memphis has made efforts to speed up the payment cycle, which is paying off. But not all cities have the same aggressive stance, and long waits pose a risk to businesses that simply don’t have the existing financial resources to wait months for reimbursement.

“The payment process can be a bit protracted. For some businesses, being able to float their payroll for long periods of time ... is really challenging,” Murray said.

In some cases, minority communities also lack generational wealth, which is often the source of seed money that allows White-owned businesses to get started. Hamilton said that minority communities, and particularly Black communities, tend to be underbanked — that is, they rely on cash and alternative financial services. This often comes down to a lack of access or lack of existing bank relationships.

“Better-capitalized businesses have better relationships with banks,” said Hamilton, an economist who was appointed to the newly formed New York City Racial Justice Committee in March. “It always begins, and frankly, ends with capital.”

Curtis, who leads her own development firm, Curtis Development, said addressing racial and economic justice is messy and uncomfortable, but to make real movement on these issues, cities need to seriously look at what is working.

“The current system doesn't always do that. All too often, it keeps things the way they are,” Curtis said. "If we want to make real movement, it's really important to really dig into how to bring more minorities into the fold, to get more people in the business."