Governments fall short on hiring diverse businesses for Minnesota public projects

Rick Harris has faced his share of rejection.

Through the past 40 years in the commercial furnishing business, private companies have declined to use his Golden Valley-based Ideal Commercial Interiors as their furniture supplier, saying they had existing relationships with other vendors and weren't looking to change.

"[They] wouldn't let me in," Harris said.

When private-sector deals fail or come infrequently, contracts with the public sector are a significant source of income for many businesses owned by women or people of color.

For roughly four decades, government agencies from Hennepin County up to the federal level have tried to even out opportunities for diverse business owners who can't compete with the budgets and resources of larger companies bidding for the same contracts.

Despite good intentions, disparities remain, and business owners like Harris said the ecosystem needs to improve.

According to a 2017 joint study conducted by Keen Independent Research for the state of Minnesota, payments made between 2011-16 showed a lack of parity across several industries for diversely owned Minnesota businesses.

Those disparities, according to business owners and government leaders, have stunted those businesses' ability to grow. And what's happening in Minnesota mirrors what's happening nationally.

"All the mentoring in the world is all for naught if it's not tied to money," said Paul Edlund, a former criminal defense attorney who acquired Minneapolis-based contracting business J. Benson Construction three years ago. "We need jobs. We need contracts to create jobs."

Government has fallen short

The U.S. federal government is the largest purchaser of goods and services in the world, spending more than $600 billion in fiscal year 2020 alone. But less than 10% of federal contracting dollars that year went to disadvantaged business enterprises (DBEs), a category of federal law under which Black-owned, Latino-owned, women-owned and other diversely owned businesses qualify, according to the White House.

In 2021, President Joe Biden announced the goal of increasing the federal government's expenditure with small, disadvantaged businesses from an average of 9.8% the past five years to 15% by 2025, bringing an additional $100 billion in spending to DBEs in that five-year span.

Across Minnesota, government departments are trying to close the gap, too, but still have far to go.

Other than a drop in 2020 during the pandemic, the Minnesota Department of Transportation's portion of contracts with DBEs increased in each of the past five years but still fell short of a targeted spending goal, according to data from the department. The average annual percentage goal in that span was 12.1%. The actual percentage for those years was 10%.

Minnesota law authorizes programs for procurement with targeted businesses groups. The statute does not mandate a specific percentage of spending for DBEs, but there are state spending goals with certified businesses.

Hennepin County, the 34th-largest U.S. county by population, has been trying to increase spending with DBEs for decades, officials said.

Since the late 1980s, county officials have launched programs aimed at decreasing disparities, Hennepin County Administrator David Hough said. That followed a 1989 U.S. Supreme Court ruling establishing that states and local governments could create programs for DBEs but only after gathering evidence to determine the government can help remedy the effects of discrimination.

Despite these kinds of programs, from 2011-16, BIPOC- and women-owned businesses received 10.6% of the county's procurement dollars when that should have been closer to 17.6%.

"In procurement, we're very focused on building a [supplier] bench, creating growth opportunities, creating new businesses and building those businesses so they're sustainable. And we do that through dollars," Hough said. "We know BIPOC- and women-owned businesses hire employees that are BIPOC and female, so building that bench and income are important."

In recent years, though, county officials have boosted efforts to make their business deals more equitable. They created a quick-pay system so contractors aren't low on cash. County employees also have quarterly meetings with stakeholder groups, where they talk about purchasing procedures and access. An annual summit for small-business owners educates them on contract opportunities while networking with larger contractors.

The county also launched Elevate Hennepin — a free program that offers mentoring, consulting and resources to small business owners — and created a funding program for contractors that have cash-flow issues, said Patricia Fitzgerald, the county's community and economic development director.

MnDOT, meanwhile, instituted a business development program that includes training, mentorship with primary contractors, micro-grants and other resources designed to help certified small business owners compete for contracts.

Why it matters

On a weekly basis, Javier Navar Payan — chief executive and owner of Efficiency Commissioning, a small Twin Cities engineering consulting business — competes with large companies for government contracts. Writing proposal forms can take a full day.

With fewer than a dozen employees, he doesn't have a full marketing or design department to create enticing graphics and illustrations for proposals.

"And that's OK," he said. "We're all for the challenge. We never look for a handout."

But when government departments appreciate the work his small firm can do and keep his team in mind for future contracts they know he can handle, he appreciates it.

While his firm consults for large corporations, government contracts account for roughly 30% of his company's revenue.

"The only thing I ask as a minority-owned business is the opportunity," Navar Payan said. "Give us a shot."

At the very least, government contract opportunities for diversely owned businesses should reflect the city, county, state and country's population, Harris said.

In Hennepin County, people who identify as Black — or are mixed-race including Black — represent 16% of the county's population but only 2% of business owners as of 2017. Women represent nearly half the county's population but 27% of business owners. By race, white-owned companies account for more than 90% of businesses in the county.

If the representation of Black-owned businesses and female-owned businesses reached parity with white-owned and male-owned businesses, there would be 11,000 more female-owned companies and 4,600 more Black-owned companies, county data shows.

Per the White House Council of Economic Advisers, disparities in business ownership in America account for 20% percent of the wealth gap between average white and Black households.

With the Minnesota Department of Administration, the 2017 disparity study showed businesses owned by women and people of color combined received 11% of the department's procurement spending, below the expected 22%.

Removing barriers

Minnesota's 2017 disparity study showed success in Minnesota depends on relationships with other individuals, including customers, suppliers, bankers, prime contractors and subcontractors, depending on the type of business.

People of color and female interviewees reported unequal access to these relationships, stereotyping and other unequal treatment based on their race or gender.

"To win in this game, relationships are huge," Harris said. "Your name has to be known. You have to get certification, but that's not the end of it. It doesn't mean work will automatically come. You have to gain trust and network."

Most small and undersized companies lack relationships with larger, private companies that have a certain network of suppliers they constantly use, said Alex Tittle, a diversity and inclusion leader who previously served as equity program consultant at Minnesota Sports Facilities Authority, the organization that led the construction of U.S. Bank Stadium.

Edlund, on the board of directors of the Associated General Contractors of Minnesota, said most of his company's work is with the private sector, mainly other Black business owners and aspiring commercial developers. Sometimes, his phone only rings when primary contractors need a diverse partner to meet both their own and government-required diversity goals on projects.

"In the private side, there's a shortage of spend with Black-owned businesses," Edlund said. "There's more talk and self-congratulations and networking events than actual business deals."

Harris, whose business helped construct U.S. Bank Stadium, co-founded the Minnesota Minority Goods and Services Association in 2018 to educate buyers and company executives about the barriers diverse business owners face as well as inefficiencies in the contracting system.

"Companies shouldn't feel like they're lowering their standards by working with minority-owned businesses," Harris said. "The fear is the vendor is not going to perform."

One of those barriers is the long and laborious process of becoming a certified DBE, Harris, Edlund and Navar Payan said. Entities use certification programs to verify and authenticate a company's claim of being disadvantaged or diversely owned.

There's also a need for departments to create contracting opportunities that are not too small — meaning the contract doesn't help the business grow — but not outside the business' capacity to complete.

The low-bid nature of contracts with the public sector can also be an issue for BIPOC- and women-owned businesses, Harris said.

"[Minorities] are bidding against each other," Harris said. "Your competition can get better prices or bid lower than you because they can afford to. ... Meanwhile, you bid low to compete, and now you're not profitable, selling yourself to get the work."

A month after the murder of George Floyd, county officials declared racism a public health crisis. His death drove county officials to accelerate diversity spending goals.

"I think the county really considers its purchasing power as a lever to end racism in our community, and I think our county board has been behind that effort," said Yvonne Forsythe, the county's director of purchasing and contract services.

Said Fitzgerald: "We knew we had to be intentional and thoughtful and design our partnerships in order to not replicate the patterns we were seeing at the federal level, where a lot of funding was not being equitably distributed."

Every contract moving forward in the county has to have an equity lens, Forsythe said.

"That's our goal," she said, "to ensure that every request for a contract that comes through our door from another department in Hennepin County is viewed as, 'How can we make this an equitable purchase?'"