Highway Contracting: Disadvantaged Business Program Meets Contract Goal,
but Refinements Are Needed (Chapter Report, 08/17/94, GAO/RCED-94-168).

The Transportation Department's Disadvantaged Business Enterprise
Programs seeks to eliminate the effects of historical discrimination by
helping small businesses owned by socially and economically
disadvantaged individuals.  Under the program funded by the Federal
Highway Administration (FHwA), the states are required to set goals and
award contracts so that not less than 10 percent of their federal-aid
highway funds goes to firms in the program.  FHwA also funds
state-provided technical and business development assistance for
Disadvantaged Business Enterprise firms through its supportive services
program.  This report evaluates (1) whether the states were meeting
their Disadvantaged Business Enterprise participation goals and how
effective FHwA's efforts were in ensuring that they did, (2) whether
FHwA effectively provided technical and business development assistance
through its supportive services program, and (3) whether "graduation"
from the program equates to business success.

--------------------------- Indexing Terms -----------------------------

 REPORTNUM:  RCED-94-168
     TITLE:  Highway Contracting: Disadvantaged Business Program Meets 
             Contract Goal, but Refinements Are Needed
      DATE:  08/17/94
   SUBJECT:  Road construction
             Small business assistance
             Minority business assistance
             Program evaluation
             Small business contracts
             State-administered programs
             Public roads or highways
             Contracting procedures
             Economic development
             Federal/state relations
IDENTIFIER:  DOT Disadvantaged Business Enterprise Program
             SBA 8(a) Program Management and Technical Assistance System
             SBA Small Business Development Center Program
             California
             Colorado
             Connecticut
             Georgia
             Michigan
             Wyoming
             Hawaii
             Iowa
             Louisiana
             Minnesota
             North Dakota
             Nebraska
             Rhode Island
             South Carolina
             South Dakota
             Washington
             West Virginia
             FHwA Federal-Aid Highway Program
             FHwA Supportive Services Program
             
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Cover
================================================================ COVER


Report to Congressional Committees

August 1994

HIGHWAY CONTRACTING -
DISADVANTAGED BUSINESS PROGRAM
MEETS CONTRACT GOAL, BUT
REFINEMENTS ARE NEEDED

GAO/RCED-94-168

FHWA's Disadvantaged Business Program


Abbreviations
=============================================================== ABBREV

  DBE - Disadvantaged Business Enterprise
  DOT - Department of Transportation
  FHWA - Federal Highway Administration
  GAO - General Accounting Office
  ISTEA - Intermodal Surface Transportation Efficiency Act of 1991
  SBA - Small Business Administration
  SBDC - Small Business Development Center
  SCORE - Service Corps of Retired Executives

Letter
=============================================================== LETTER


B-247934

August 17, 1994

The Honorable Max S.  Baucus
Chairman
The Honorable John H.  Chafee
Ranking Minority Member
Committee on Environment and Public Works
United States Senate

The Honorable Norman Y.  Mineta
Chairman
The Honorable Bud Shuster
Ranking Minority Member
Committee on Public
 Works and Transportation
House of Representatives

In response to section 1003 of the Intermodal Surface Transportation
Efficiency Act of 1991, this report addresses the effectiveness of
the Department of Transportation's Disadvantaged Business Enterprise
Program for federal-aid highways in meeting its contracting and
business development goals.  The report contains a matter for
congressional consideration aimed at reducing the duplication of
supportive services for disadvantaged business enterprises.  It also
makes recommendations to the Secretary of Transportation to improve
the agency's (1) guidance on follow-up actions when goals are not met
and (2) evaluation of the program's progress. 

This report was prepared under the direction of Kenneth M.  Mead,
Director, Transportation Issues, who may be reached on (202) 512-2834
if you or your staff have any questions.  Major contributors to the
report are listed in appendix V. 

Keith O.  Fultz
Assistant Comptroller General


EXECUTIVE SUMMARY
============================================================ Chapter 0


   PURPOSE
---------------------------------------------------------- Chapter 0:1

The Department of Transportation's (DOT) Disadvantaged Business
Enterprise (DBE) program is aimed at eliminating the effects of
historical discrimination by assisting small businesses owned and
controlled by socially and economically disadvantaged individuals. 
Under the DBE program administered by the Federal Highway
Administration (FHWA), the states are required to set goals and award
contracts so that not less than 10 percent of their federal-aid
highway funds goes to firms in the program.  FHWA also funds
state-provided technical and business development assistance for DBE
firms through its supportive services program. 

Concerned about the success of the DBE program, the Congress
required, in the Intermodal Surface Transportation Efficiency Act of
1991 (ISTEA), that GAO review the program.  GAO's objectives were,
among others, to evaluate (1) whether the states were meeting their
DBE participation goals and how effective FHWA's efforts were in
ensuring that they did, (2) whether FHWA effectively provided
technical and business development assistance through its supportive
services program, and (3) whether "graduation" from the DBE program
equates to business success.  GAO reviewed nationwide information and
evaluated DBE programs in six states. 


   BACKGROUND
---------------------------------------------------------- Chapter 0:2

The Surface Transportation Assistance Act of 1982 required that the
states spend at least 10 percent of their funds under the federal-aid
highway program contracting with firms owned and controlled by
socially and economically disadvantaged individuals, including
African Americans, Hispanics, Native Americans, and other minorities. 
The Surface Transportation and Uniform Relocation Assistance Act of
1987 replaced the 1982 act and included women-owned businesses in the
statutory definition of DBEs, allowing states to use contracts
awarded to both minority- and women-owned businesses to meet their
DBE goals.  ISTEA continued the combined 10-percent goal established
in the 1987 act for participation by minority-owned and
nonminority-women-owned businesses. 

Title 23 U.S.C.  section 140(c) authorizes the Secretary of
Transportation to conduct training programs to help disadvantaged
businesses achieve the proficiency needed to compete on an equal
basis for federal contracts.  States are encouraged--but not
required--to have a supportive services program, and federal funding
is provided without a requirement that it be matched.  In fiscal year
1993, FHWA disbursed about $7 million for state-sponsored supportive
services programs. 

The DBE program is limited to small businesses.  Generally, when a
firm's average gross annual receipts over a 3-year period exceed
$15.37 million per year, the firm is no longer considered a small
business; it thus "graduates" and may no longer participate in the
DBE program.  There is no legislative or administrative requirement
concerning the length of time firms can participate, and DOT has not
identified graduation as a goal or measurement of success of the DBE
program. 


   RESULTS IN BRIEF
---------------------------------------------------------- Chapter 0:3

FHWA and the states have done a good job providing opportunities for
disadvantaged businesses to compete for contracts in the federal-aid
highway program.  In fiscal years 1989 through 1993, the states met
or exceeded their goals for DBE participation 93 percent of the time. 
While minority business enterprises receive the majority of DBE
contract funds, in recent years the states have increasingly met
their DBE goals by contracting with women-owned businesses.  When the
states missed their DBE participation goals, FHWA's response was
neither timely nor effective, primarily because FHWA did not
establish time frames for responding to and following up on the
states' justifications.  FHWA's actions came too late to prevent some
states from missing their goals the following year. 

Although FHWA has been largely successful in providing contracting
opportunities to DBEs, its supportive services program has been of
limited effectiveness and provides services that duplicate those
available through the Small Business Administration (SBA).  While SBA
has an extensive structure of business development centers and
programs to assist small businesses, FHWA's supportive services were
either unavailable or were unavailable for lengthy periods in three
of the six states that GAO visited.  The services, when provided,
varied widely in scope and content; some state programs were very
limited.  In contrast, SBA's programs provided assistance in several
key areas that FHWA's program did not.  Given SBA's primary mission
and more extensive structure of programs and personnel to help small
businesses develop, FHWA's efforts would be better directed to
identifying assistance available from SBA and helping DBEs obtain
that assistance. 

In fiscal years 1988 through 1992, fewer than 1 percent of the DBE
firms in the six states GAO visited "graduated" from the program. 
Graduation measures only a firm's gross revenues; by itself, this
measure does not indicate a firm's expertise, success, growth, or
ability to obtain contracts on the open market.  Numerous factors
contribute to the success of a small business, and GAO found that no
consensus exists on the number of years that a firm should
participate in a program like the DBE program before becoming
successful and self-sustaining.  DOT has not used graduation or any
other performance measure to evaluate the success of individual DBE
firms or the success of the DBE program as a whole in helping small
businesses develop. 


   PRINCIPAL FINDINGS
---------------------------------------------------------- Chapter 0:4


      MOST STATES ACHIEVED THEIR
      GOALS
-------------------------------------------------------- Chapter 0:4.1

Thirty-nine of the 52 state highway agencies met their percentage
goals for DBE participation each year for fiscal years 1989 through
1993.  In fiscal year 1993, 51 of 52 state highway agencies met their
goals, with about 16 percent, or $2.2 billion, of the nearly $14
billion spent in the federal-aid highway program awarded in contracts
to DBEs.  Since the Congress changed the law in 1987 to include
businesses owned by nonminority women in the statutory definition of
DBEs, the percentage of DBE contract dollars awarded to women-owned
firms has increased from 22 to 39 percent.  When measured in constant
fiscal year 1992 dollars, contract dollar awards to women-owned
businesses increased by over 80 percent in fiscal years 1984 through
1992, while awards to minority-owned businesses declined by 33
percent. 

In fiscal years 1989 through 1993, 13 states missed their goals a
total of 19 times.  Ten states missed their goals once, one missed
its goal twice, one missed it three times, and one missed it four
times.  In 6 of these 19 instances, the state had set a goal higher
than 10 percent; in 5 instances, the state achieved DBE participation
greater than 10 percent but nevertheless missed its goal.  When the
states missed their goals, FHWA was slow in requiring and responding
to the states' justifications.  For example, when two states missed
their goals in fiscal years 1990 and 1991, FHWA did not respond to
the states' justification letters until about 8 months later.  In
each case, FHWA's response came too late to prevent the states from
missing their goals the following year.  FHWA officials attributed
the delay in responding to higher priorities in the agency. 


      EFFECTIVENESS OF FHWA'S
      SUPPORTIVE SERVICES PROGRAM
      IS LIMITED
-------------------------------------------------------- Chapter 0:4.2

One state GAO visited had no FHWA-funded supportive services program,
while another had no program for 17 months after the state delayed
renewing a service provider's expired contract.  Among the five
states GAO visited where services were available at some point, the
content of the programs varied from state to state, and some programs
were very limited.  Moreover, although experts believe that marketing
and the development of effective human resource and information
management systems are important to business success, none of the
five states' programs included training in these areas.  In contrast,
SBA programs such as the Management and Technical Assistance 7(j)
Program and the Small Business Development Center (SBDC) program
address these areas.  SBA's programs are also more widely available. 
The SBDC program in Georgia, for example, has six offices in the
Atlanta metropolitan area and 13 others in the state; in contrast,
there is one FHWA-funded supportive services program consultant in
downtown Atlanta. 

GAO has reported in the past on problems with SBA's small business
assistance programs.  For example, SBA's 7(j) program lacks objective
criteria for measuring the effectiveness of the services provided to
customers.  But SBA has begun taking steps to correct this problem,
and SBA officials believe that the services already available could
meet the training and development needs of DBE firms.  To provide
more effective services in its supportive services program, FHWA
would need to devote time and resources to improve the content and
availability of the program.  Doing so seems an unwarranted
expenditure of federal resources, as these services are already
available to DBEs through SBA. 

In commenting on a draft of this report, DOT said that the intent of
the supportive services program is to focus on the unique technical
skills that DBEs need to compete in the highway construction
industry--training the Department believes is beyond the scope of
SBA's programs.  However, FHWA's supportive services regulation does
not support DOT's comments; the regulation encourages the states to
provide a range of services, including general business management
assistance in record-keeping and other areas.  Although DOT told us
that it is encouraged by actions FHWA is taking in some states to
provide classroom training for DBEs in technical skills unique to the
highway construction industry, the training in those states is just
one part of a broader assistance program, which includes general
business management services. 


      "GRADUATION" IN THE DBE
      PROGRAM
-------------------------------------------------------- Chapter 0:4.3

In fiscal years 1988 through 1992, 44 firms "graduated" in the six
states GAO visited, representing roughly between one-tenth and
one-half of 1 percent of the firms certified as DBEs in any one
fiscal year.  Since graduation only measures a firm's gross revenues,
it can be a misleading indicator of the success of a small business. 
GAO's review of academic and business literature and discussions with
DOT and state officials found that numerous factors contribute to
such success.  Even if net revenue is considered, revenue alone does
not take into account other factors that could contribute to success,
such as the development of effective accounting and inventory
systems.  Moreover, in reviewing experts' estimates of how many years
a firm takes to become successful, GAO found no consensus on time
requirements that could be used to measure a firm's success. 

While DOT has used the attainment of contract goals to measure the
success of efforts to provide DBEs with contracting opportunities, it
has not developed a performance measure for evaluating the success of
individual DBE firms or the success of the DBE program in helping
small businesses develop, another goal of the program. 


   MATTER FOR CONGRESSIONAL
   CONSIDERATION
---------------------------------------------------------- Chapter 0:5

The Congress may wish to consider (1) terminating FHWA's current
supportive services program because its effectiveness has been
limited and because it duplicates SBA's programs and (2) limiting any
future funding for business development assistance under the DBE
program to services that address skills that are unique to the
highway construction industry and do not duplicate services offered
by SBA. 


   RECOMMENDATIONS TO THE
   SECRETARY OF TRANSPORTATION
---------------------------------------------------------- Chapter 0:6

GAO recommends that the Secretary

  direct the Administrator, FHWA, to improve procedures for instances
     in which states do not meet agreed DBE contracting goals by
     establishing time frames for FHWA to (1) respond to the states'
     justifications and (2) follow up on directed corrective actions
     and

  in consultation with the Administrator, SBA, develop performance
     measures to evaluate the progress of the DBE program in helping
     disadvantaged firms develop into self-sustaining businesses
     capable of competing for contracts on the open market. 


   AGENCY COMMENTS AND OUR
   EVALUATION
---------------------------------------------------------- Chapter 0:7

DOT and SBA both reviewed a draft of this report, and they generally
agreed with the facts presented.  Although DOT stated that it would
consider both of GAO's recommendations, it questioned their benefit. 
DOT said that it has recently implemented an administrative deadline
for the states to provide justification for missing their goals.  The
Department also suggested that SBA might be the appropriate agency to
develop performance measures for business development activities. 
GAO continues to believe that establishing time frames for FHWA to
take action on the states' justifications would enhance FHWA's
enforcement efforts.  Furthermore, if FHWA continues to operate its
business development program, FHWA-developed performance measures
would improve this effort.  SBA stated that it would welcome the
opportunity to work with DOT to develop performance measures for the
DBE program.  DOT's and SBA's comments are reproduced in appendixes
III and IV, respectively. 

DOT disagreed with GAO's view on potentially terminating FHWA's
supportive services program.  While acknowledging that the program
has not always provided the intended services, DOT said that a
program separate from SBA's is needed to focus on the unique
technical skills that DBEs need to compete in the highly specialized
highway construction industry.  DOT and FHWA provided information on
programs in several states that the Department said may, after
further experience, become the model for a mandatory, national
supportive services program. 

GAO continues to believe that the Congress should consider
terminating FHWA's supportive services program.  GAO has incorporated
the information DOT and FHWA provided on the targeted classroom
programs into this report.  In addition, the matter for congressional
consideration has been revised to reflect GAO's belief that any
future funding for business development assistance under the DBE
program should be limited to programs that do not duplicate SBA's
programs and that are targeted to skills unique to the highway
construction industry.  Such a program would differ from the FHWA
supportive services program that exists today. 


INTRODUCTION
============================================================ Chapter 1

The Department of Transportation's (DOT) Disadvantaged Business
Enterprise (DBE) Program for federal highways was created to provide
opportunities to obtain highway construction contracts to small
businesses owned and controlled by socially and economically
disadvantaged individuals.  In fiscal year 1993, $2.2 billion of the
nearly $14 billion spent in the federal-aid highway program--about 16
percent--represented contracts awarded to DBEs.  The DBE program for
federal highways, part of a departmentwide DBE program, is
administered by the Federal Highway Administration (FHWA) through the
states.  The states are required to spend not less than 10 percent of
their federal-aid highway funds contracting with DBEs.\1


--------------------
\1 As used in this report, the term "states" refers to the 52 state
highway agencies or departments of transportation in the 50 states,
the District of Columbia, and Puerto Rico. 


   HISTORY OF THE DBE PROGRAM
---------------------------------------------------------- Chapter 1:1

In 1975, FHWA issued consolidated regulations for a DBE program to
assist minorities in obtaining federal-aid highway contracts.  DOT
subsequently established a DBE program for its other modal
administrations, such as the Federal Aviation Administration, and
issued an implementing regulation for the Department in 1980.  The
regulation required states to set separate participation goals for
minority-owned firms and women-owned firms. 

The Surface Transportation Assistance Act of 1982 provided statutory
authority for DOT's DBE program (of which FHWA's DBE program is a
part) and established a goal of awarding a minimum of 10 percent of
all federal-aid highway contract dollars to small businesses owned
and controlled by socially and economically disadvantaged
individuals.  Although the act did not include DBEs owned by
nonminority women in the 10-percent minimum goal, FHWA's regulation
kept these enterprises in the program under a separate goal.  The
Surface Transportation and Uniform Relocation Assistance Act of 1987
replaced the 1982 act and included nonminority women-owned businesses
in the statutory definition of DBEs, allowing states to use contracts
with both minority- and women-owned businesses to meet their DBE
goal.  The Intermodal Surface Transportation Efficiency Act of 1991
continued the 1987 act's combined 10-percent goal for minority-owned
and nonminority women-owned DBEs. 


   PROGRAM OBJECTIVES
---------------------------------------------------------- Chapter 1:2

The objectives of the DBE program are to ensure that DBEs have the
maximum opportunity to participate in federal-aid highway contracts
and to help these enterprises develop into self-sufficient firms
capable of competing for work in the open market.  To meet these
objectives, states are required to set an overall annual goal for the
DBE program, as well as individual goals on specific contracts. 
Overall goals are based upon the projected number and types of
contracts to be awarded, the number and types of DBEs likely to be
available, past DBE participation, and other factors.  Specific
contract goals are set on the basis of the availability of DBEs. 

States have generally obtained DBEs' participation through
subcontracts let by prime contractors.  The prime contractors are
expected to meet the state's goal by subcontracting with DBEs. 
According to industry and state officials, DBEs tend to concentrate
in specialty areas that are not capital intensive, such as
landscaping, traffic control, and construction and repair of fencing
and guardrails. 

In addition to providing contracting opportunities, the states
provide DBEs with technical and business management assistance. 
DOT's DBE regulation encourages the states to help DBEs overcome
barriers, such as the inability to obtain bonding and financing, and
to provide them with technical assistance through a supportive
services program.  To this end, the Congress authorized FHWA to spend
up to $10 million per year on supportive services, and appropriated
between $6 million and $9.6 million annually during fiscal years 1989
through 1992. 


   PROGRAM ADMINISTRATION
---------------------------------------------------------- Chapter 1:3

FHWA administers the DBE program through its headquarters Civil
Rights and Construction and Maintenance offices, 9 regional offices,
and 52 division offices--in each state, the District of Columbia, and
Puerto Rico.  FHWA headquarters offices jointly develop and recommend
program policies, instructions, and procedures; monitor the
activities of the agency's field offices and the states; and provide
technical guidance.  Regional and division offices oversee program
operations, including reviewing and approving the states' annual DBE
program plans, conducting periodic monitoring and evaluation reviews,
and providing technical guidance and advice.  Regional and division
offices are jointly responsible for verifying the states'
administration of the program.  The regional offices are responsible
for developing promotional activities, establishing and implementing
policy, and reviewing and monitoring the program, including
determining whether the states are meeting their annual goals.  The
division offices are responsible for ensuring that the states
administer their programs according to DOT's regulations, providing
day-to-day oversight of the states' contract administration, and
monitoring the achievement of individual project goals. 

The states are to administer DBE programs by determining and
certifying that program applicants meet the eligibility criteria,
reassessing annually the eligibility of certified businesses, and
publishing annually lists of the certified firms.  In addition, the
states must establish, obtain FHWA approval of, and meet overall
annual goals for program participation; establish goals for DBE
participation in individual contracts; and monitor contractors'
compliance with program requirements.  Subject to the availability of
funds, the states must also establish, monitor, and evaluate programs
to provide supportive services to DBEs. 

With regard to DBE participation, each state is required to set a
minimum goal for awarding contract dollars for federally assisted
highway work to DBEs.  The goal must be (1) approved by FHWA and (2)
a minimum of 10 percent, unless a state seeks a waiver from FHWA for
a lower percentage.  The states are to achieve their annual goal by
setting individual DBE goals for specific contracts let within the
state.  To be awarded a contract, a prime contractor generally must
commit to obtaining participation by DBE subcontractors equal to the
contract's DBE goal, or be a DBE itself. 


   PROGRAM COSTS AND BENEFITS
---------------------------------------------------------- Chapter 1:4

FHWA's administrative cost of implementing the DBE program has not
been large when compared with the administrative costs of the total
federal-aid highway program.  For example, in fiscal year 1992, FHWA
incurred approximately $1 million in costs--for administrative
salaries, training, and travel--to provide over $1.8 billion in
contract dollars to DBEs.  This amount is small compared with the
approximately $200 million FHWA spent during the same fiscal year to
provide about $13 billion to contractors through the federal-aid
highway program. 

In terms of additional contract costs, one 1986 study commissioned by
FHWA estimated that the DBE program increased total federal-aid
highway construction costs by less than 1 percent.\2 In addition, the
American Road and Transportation Builders Association--a trade
association of transportation construction contractors--conducted a
survey of its membership in 1993 about the DBE program; our analysis
of their report also showed that DBE participation increased
construction costs by less than l percent.\3

From the perspective of macroeconomic analysis, one cannot
demonstrate that a program like FHWA's results in an additional total
increase in economic activity.  The benefits of the program are
derived from the distribution of federal-aid dollars through the
program in a way that creates greater racial and gender diversity
within the highway construction industry. 


--------------------
\2 Dr.  Robert Jerrett, III, Marianne Beauregard, et al., An
Assessment of Program Impacts of the Disadvantaged Business
Enterprise (DBE) Requirement in the Federal-Aid Highway Construction
Program, FHWA contract number DTFH61-85-C-00074 (Cambridge, Mass: 
Abt Associates, Inc., Mar.  1986). 

\3 The association sent surveys to 1,483 of its members and received
290 responses.  Of the respondents, 42 were DBEs and 234 were
non-DBEs. 


   OBJECTIVES, SCOPE, AND
   METHODOLOGY
---------------------------------------------------------- Chapter 1:5

In response to concerns about whether the DBE program for federal
highways was meeting its objectives, the Congress, in section 1003 of
the Intermodal Surface Transportation Efficiency Act of 1991 (ISTEA),
asked GAO to conduct a study of the program and to address a number
of specific questions.  Appendix I contains the text of this section
of the act.  As agreed with the offices of the act's principal
sponsor and the cognizant authorizing committees, our review focused
on three questions: 

  Do the states meet their DBE participation goals, and how
     effectively does FHWA's oversight and enforcement ensure that
     they do? 

  Does FHWA effectively provide technical and business development
     assistance through its supportive services program to help small
     disadvantaged businesses develop into self-sustaining companies? 

  To what extent does "graduation" from the program measure the
     success of DBE firms and the DBE program? 

In addition, in response to specific questions in ISTEA, we examined
the various ways in which the states meet their DBE goals, including
contracts awarded to minority-owned and women-owned businesses.  We
also reviewed issues related to the process the states use to certify
disadvantaged firms for inclusion in the DBE program.  These issues
included the need for procedures to verify the performance and
financial capabilities of DBEs and opportunities for greater
uniformity and reciprocity in the states' certification processes. 

To address the issues in this report, we reviewed in detail programs
in six states--California, Colorado, Connecticut, Georgia, Michigan,
and Wyoming.  We selected these states for geographical and
programmatic diversity:  These states cover five of FHWA's nine
regions and represent a range of smaller and larger DBE programs.  In
each state, we reviewed records and interviewed cognizant state and
FHWA officials.  We also conducted work at FHWA headquarters in
Washington, D.C., where we obtained available nationwide data. 

We also gathered information from the American Road and
Transportation Builders, the Minority Business Enterprise Legal
Defense and Education Fund, the National Association of Minority
Contractors, the American Subcontractors Association, the Associated
General Contractors, the National Women's Business Enterprise
Association, the Women Construction Owners and Executives, and
highway construction contractors.  These groups included DBEs, former
DBEs, and non-DBEs. 

To determine if the administration of the DBE program ensures that
goal requirements are met, we analyzed information from the states'
quarterly reports for fiscal years 1989 through 1993 submitted to
FHWA.  In the cases in which goals were not attained, we obtained the
states' formal justifications and discussed the enforcement actions
taken with FHWA personnel. 

To assess whether FHWA's supportive services program helps
disadvantaged businesses develop into self-sustaining companies, we
reviewed federal program guidance, the content of the supportive
services programs in the six states, and program assessments by both
FHWA and the states.  We discussed our observations with federal and
state officials, supportive services consultants, and DBEs. 

In addition, we conducted an evaluation synthesis of academic and
industry literature on factors that contribute to the success of
small businesses.  We compared these factors to FHWA's supportive
services regulations and programs in the six states.  We also
contacted officials from the Small Business Administration (SBA) in
Washington and SBA's Small Business Development Centers in the six
states we visited, where we compared the content of this program with
the content of FHWA's supportive services program.  Furthermore, we
discussed the elements of success for small businesses with industry
group officials and FHWA and state officials.  We also reviewed
comments on this subject in an industry group survey and in DOT's
December 9, 1992, Notice of Proposed Rulemaking, issued to revise the
implementing regulations for the DBE program. 

We performed our work from June 1992 to March 1994 in accordance with
generally accepted government auditing standards. 


MOST STATES MEET GOALS, BUT FHWA
DOES NOT ENSURE TIMELY CORRECTION
OF PROBLEMS
============================================================ Chapter 2

Over the past 5 years, the states have done a good job of meeting the
requirements of the DBE program in terms of contract goals.  In
fiscal years 1989 through 1993, the states met their DBE
participation goals 93 percent of the time.  However, FHWA needs to
improve its oversight of the states' attainment of goals.  When the
states did not meet their goals for DBE participation, FHWA's
response was neither timely nor effective in ensuring that deviations
were properly justified and that timely corrective action was taken. 
This occurred in part because FHWA did not establish time frames for
its field offices to respond to the states' justifications or to
review corrective actions. 

The states meet their DBE goal requirements in a variety of ways. 
For example, over the last several years, the states have
increasingly met these goals with contracts to women-owned
businesses.  The states also met their goals by using mainly in-state
DBE firms; any out-of-state DBE firms were mostly from bordering
states.  Also, the firms that the states contracted with tended to be
concentrated in certain specialty areas, such as landscaping and
traffic control. 


   MOST STATES ACHIEVED THEIR
   GOALS
---------------------------------------------------------- Chapter 2:1

Each year, the states that receive federal-aid highway funds are
required to establish a DBE participation goal, reflected as a
percentage of all funds that the state will spend in federal-aid
highway contracts during the fiscal year.  This goal is subject to
FHWA's approval and must not be less than 10 percent, unless FHWA
approves a lower percentage.  Since fiscal year 1989, no state has
requested or established a goal of less than 10 percent, and some
have set higher goals.  For example, in fiscal year 1993, 12 of the
52 state highway agencies established goals above 10 percent. 

In fiscal years 1989 through 1993, 39 of the 52 state highway
agencies met their goals in each of the 5 years.  On the other hand,
13 states missed their goals a total of 19 times.  In fiscal year
1993, 51 of the 52 state highway agencies met their goals.  Table 2.1
summarizes the states' achievement of goals in fiscal years 1989
through 1993. 



                          Table 2.1
           
           States' Achievement of DBE Goals, Fiscal
                        Years 1989-93


                                Percentag          Percentag
Fiscal year             Number          e  Number          e
----------------------  ------  ---------  ------  ---------
1989                        50         96       2          4
1990                        48         92       4          8
1991                        46         88       6         12
1992                        46         88       6         12
1993                        51         98       1          2
============================================================
Total                      241         93      19          7
------------------------------------------------------------
Source:  GAO's analysis of FHWA's data. 

Among the 13 states that missed their goals, 10 missed their goal
once, California missed its goal twice, Hawaii missed its goal three
times, and North Dakota missed its goal four times.  As table 2.2
shows, in 6 of the 19 instances in which the states missed their
goals, the state had set a goal higher than 10 percent.  In five of
those cases, the states achieved DBE participation greater than 10
percent, but nevertheless missed their goal. 



                          Table 2.2
           
             Percentages Achieved by States That
             Missed Their DBE Goals, Fiscal Years
                           1989-93


State           Goal    1989    1990    1991    1992    1993
------------  ------  ------  ------  ------  ------  ------
Calif.            20    17.9            19.5
Hawaii\a          18             6.3    14.7
                  10                             7.3
Iowa              10                     9.3
La.               10             8.7
Mich.\b          15\                            13.0
                13.5
Minn.             10                     9.3
N.Dak.            10     8.0     6.6     9.3     6.5
Nebr.             10                             9.6
R.I.              10                             9.1
S.C.              10                     9.8
S.Dak.            10             9.4
Wash.             16                            12.9
W.Va.             10                                     9.7
------------------------------------------------------------
Note:  Data are shown only for years in which the states missed their
goals. 

\a Hawaii's goal was 18 percent in fiscal years 1989 through 1991 and
10 percent in fiscal years 1992 and 1993. 

\b Michigan's goal was 15 percent in fiscal years 1989 through 1992
and 13.5 percent in fiscal year 1993. 

Source:  GAO's analysis of FHWA's data. 

Appendix II shows the goals set and achieved by each state from
fiscal year 1989 through 1993. 


   WHEN PROBLEMS OCCUR, FHWA DOES
   NOT ENSURE TIMELY CORRECTION
---------------------------------------------------------- Chapter 2:2

Although the states met their goals over 90 percent of the time in
the last 5 years, when problems occur, FHWA has not been timely or
effective in ensuring that deviations from the goals are properly
justified and that corrective action is taken.  Under 49 C.F.R. 
section 23.68, if a state highway agency fails to meet its approved
goal for DBE participation, it is afforded an opportunity to explain
to the FHWA Administrator why the goal could not be achieved and why
not meeting the goal was beyond its control.  Under FHWA's guidance,
the state is to submit this justification to FHWA's field office in
time to arrive at the agency's Washington headquarters by December 1,
or 2 months after the end of the fiscal year.  If the FHWA
Administrator determines that the state's explanation does not
justify the failure to meet the approved goal, the Administrator may
direct the state to take appropriate remedial action--for example,
the Administrator may require additional efforts to recruit DBEs. 
Failure on the part of a state to take the prescribed remedial action
can result in a withholding of federal-aid highway funds for selected
projects, withholding of approval for future projects, or other such
action that the FHWA Administrator deems appropriate.  While FHWA has
periodically required remedial action, it has never withheld federal
funds from a state for failure to take such action. 

The DBE program manual instructs the FHWA division offices in each
state to monitor the states' and the prime contractors' efforts and
procedures to achieve DBE contracting goals.  While this guidance
includes a deadline for the states to submit their justifications, it
does not contain recommended time frames for FHWA to respond.  In
some cases, FHWA has been slow in requiring the states to justify
missed goals, in responding to the states' justifications, and in
monitoring prescribed corrective actions to ensure that problems were
properly resolved. 

For example, California established a 20-percent DBE participation
goal in 1989 and missed that goal.  However, the state did not submit
the required justification to FHWA, and FHWA did not follow up with
the state to obtain this justification.  FHWA officials were unable
to explain why this occurred.  Two other states that missed their
fiscal year 1991 goals also did not submit the required
justifications. 

When Hawaii missed its fiscal year 1990 goal, FHWA did not respond to
the state's justification letter until nearly 8 months later, 1 month
before the end of fiscal year 1991.  When North Dakota missed its
fiscal year 1990 goal, FHWA's response came 9 months later.  In the
case of both Hawaii and North Dakota, FHWA's action came too late to
prevent the states from missing their goals the following year. 
According to an FHWA official, the delay in responding to the states'
justifications occurred because FHWA had other, higher priorities. 

In cases in which FHWA obtained and responded to the states'
justifications, it has sometimes not effectively monitored the status
of the required corrective actions.  For example, when North Dakota
missed its fiscal year 1989 goal, the state told FHWA that the prime
contractors did not use DBE subcontractors because the work could be
done at less cost by the prime contractors or by using other,
non-DBE, subcontractors--a practice permitted under the North Dakota
highway agency's regulations.  According to regional officials,
although FHWA accepted North Dakota's justification, it found the
state's regulations to be inconsistent with the intent of the DBE
program and directed the state to change its provisions.  Although
the state revised its provisions, it did not change its practices. 
However, FHWA did not discover this until it performed a follow-up
visit to North Dakota in 1992.  FHWA officials told us that the state
has since changed its practices in response to FHWA's direction and
that it met its DBE goal in fiscal year 1993. 

When Hawaii missed its fiscal year 1990 goal, the state told FHWA
that one tunnel project accounted for 87 percent of the total
federal-aid highway contract awards in Hawaii for that year and that
few DBEs in Hawaii could do the specialized work required.  While
FHWA accepted Hawaii's justification, it instructed the state to take
whatever actions were needed--including reducing the size of
contracts and increasing subcontracting opportunities--to ensure
maximum DBE participation on the tunnel project and other federal-aid
highway projects in Hawaii.  FHWA also required the state to submit
quarterly status reports.  However, Hawaii did not take the directed
corrective actions and did not submit the quarterly progress reports. 
Again, FHWA did not respond to the state's failure to take corrective
actions until late 1992, when it visited the state after Hawaii had
missed its fiscal year 1991 and 1992 goals.  According to DOT, FHWA
has since worked closely with the state, and in fiscal year 1993,
Hawaii met its DBE goal. 


   HOW STATES MEET THEIR GOALS
---------------------------------------------------------- Chapter 2:3

In ISTEA, the Congress asked us to examine the impact of the states'
attainment of goals on the groups classified as disadvantaged, the
frequency of contracting with out-of-state DBEs, and the effect of
DBE goals on the highway construction industry.  In response, we
found that among the ways states meet DBE goal requirements is by
contracting with (1) women-owned businesses in increasing numbers,
(2) mainly in-state as opposed to out-of-state firms, and (3) firms
concentrated in certain specialty areas, such as landscaping, traffic
control, and fencing and guardrail. 


      PARTICIPATION BY WOMEN HAS
      GROWN
-------------------------------------------------------- Chapter 2:3.1

Minority business enterprises receive the majority of DBE contract
funds.  However, in recent years the states have increasingly met
their DBE goals by contracting with women-owned businesses. 

Each change in the law since FHWA's original 1980 DBE regulation has
been followed by a change in the division of total DBE contract
dollars going to minority- and women-owned businesses.  The Surface
Transportation Assistance Act of 1982 established the minimum
statutory DBE participation goal of 10 percent, but it did not
include women-owned businesses in the statutory definition of DBE,
nor could a state count contracts with women-owned businesses toward
its DBE goal.  Instead, the states were encouraged to contract with
women-owned firms under a voluntary DBE program goal and to report
such contracts to FHWA.  Following the enactment of the 1982 law, the
percentage of DBE dollar awards to women-owned businesses dropped
from 36 percent in fiscal year 1982 to 19 percent in fiscal year
1984, while the percentage of DBE dollar awards to minority
businesses increased from 64 to 81 percent. 

The division of contracts between minority- and women-owned firms
remained relatively unchanged until passage of the Surface
Transportation and Uniform Relocation Assistance Act of 1987.  This
act changed the law to include women-owned businesses in the
statutory definition of DBEs and to allow the states to use contracts
with both minority- and women-owned businesses to meet their DBE
goal.  In fiscal year 1988, the percentage of DBE contract dollars
going to women-owned businesses increased from 22 to 29 percent,
while the percentage of DBE contract dollars going to minority-owned
businesses declined from 78 to 71 percent.  In each succeeding year,
the proportion of DBE contracts awarded to women-owned businesses
increased, and the proportion of DBE contracts awarded to
minority-owned businesses decreased.  In fiscal year 1992,
minority-owned businesses received 61 percent of DBE contract
dollars, while women-owned businesses received 39 percent.  Table 2.3
shows the proportion of DBE contract dollars awarded to minority- and
women-owned businesses in fiscal years 1982 through 1992. 



                          Table 2.3
           
            Distribution of DBE Contract Awards to
             Minority-and Women-Owned Businesses,
                     Fiscal Years 1982-92


                            Minority-owned       Women-owned
Fiscal year                     businesses        businesses
----------------------  ------------------  ----------------
1982                                    64                36
1983                                    74                26
1984                                    81                19
1985                                    83                17
1986                                    80                20
1987                                    78                22
1988                                    71                29
1989                                    68                32
1990                                    65                35
1991                                    63                37
1992                                    61                39
------------------------------------------------------------
\a FHWA's data are not entirely consistent because the states have
historically not been consistent in how they counted minority women
business owners.  In a 1990 FHWA survey, 21 of the 51 state highway
agencies that responded said that they counted minority women
business owners as women, while 30 counted them as minorities.  This
inconsistency should not demonstrably affect these data.  ISTEA
required FHWA to separately account for minority and nonminority
women-owned businesses, and in fiscal year 1993, minority-owned women
businesses accounted for less than 1 percent of the total contract
dollars that went to DBEs. 

Source:  GAO's analysis of FHWA's data. 

As measured in constant fiscal year 1992 dollars, the amount of money
going to the DBE program has declined slightly since fiscal year
1984.  In total, DBE contract dollars totaled $2.1 billion in fiscal
year 1984 and $1.9 billion in fiscal year 1992, in constant fiscal
year 1992 dollars.  However, as figure 2.1 shows, contract dollar
awards to women-owned businesses increased by over 80 percent during
that period, from $394 million to $722 million, in constant fiscal
year 1992 dollars, while contract dollar awards to minority-owned
businesses declined 33 percent, from $1.7 billion to $1.1 billion. 

   Figure 2.1:  Percentage Change
   in Contract Dollar Awards to
   Minority- and Women-Owned
   Businesses Since Fiscal Year
   1984, in Constant Fiscal Year
   1992 Dollars

   (See figure in printed
   edition.)

Note:  Dollars are converted to constant FY 1992 dollars. 


      MOST DBE CONTRACTS ARE WITH
      IN-STATE FIRMS
-------------------------------------------------------- Chapter 2:3.2

In the six states we visited, in-state DBE firms received 80 percent
or more of the DBE contract dollars awarded by the state highway
agencies in fiscal year 1992.  This percentage ranged from a high of
over 99 percent in California to a low of 80 percent in Wyoming. 

We found that in many cases in which the states did contract with
out-of-state firms, the contracts were with firms from bordering
states.  For example, the firms receiving the majority of Wyoming's
out-of-state contracts were from Billings, Montana, about 50 miles
from the Wyoming border.  Eleven of the 12 DBE contracts awarded to
out-of-state firms in Michigan went to firms based in Wisconsin for
work performed in Michigan's Upper Peninsula.  The Upper Peninsula
borders Wisconsin, but that border is over 400 miles from Lansing,
Michigan's capital, and over 500 miles from Detroit, its largest
city.  According to state officials, the prime contractors use
out-of-state DBE firms because they have established regular working
relationships with them.  In addition, FHWA regulations prohibit
discrimination in the selection of firms for federal-aid highway
contracts based on their state of origin. 

Figure 2.2 shows the percentage of contracts and related dollar
values awarded to out-of-state DBEs in fiscal year 1992 by each of
the six states we visited. 

   Figure 2.2:  States' DBE
   Contract Dollar Awards to
   In-State and Out-of-State
   Firms, Fiscal Year 1992

   (See figure in printed
   edition.)

Source:  GAO's analysis of states' data. 


      DBES CONCENTRATE IN
      SPECIALTY AREAS
-------------------------------------------------------- Chapter 2:3.3

In the states we visited, DBE firms tended to concentrate in
specialty areas that are not capital intensive, such as landscaping,
traffic control, and fencing and guardrail construction.  In the four
states that were able to provide information, we found that DBEs
received contracts in excess of 10 percent--sometimes well in excess
of 10 percent--of the federal-aid contract dollars awarded for this
type of work in fiscal year 1992. 

For example, with one exception, DBEs received 26 percent or more of
the contract dollars awarded in each of these three areas in all four
states.  In each state, DBEs received 49 percent or more of the
contract dollars awarded in at least two of the three areas.  DBEs
received 86 percent of the landscaping and 90 percent of the fencing
and guardrail contract dollars in one state and 100 percent of the
traffic control contract dollars in another.  Figure 2.3 shows the
contract awards for work in these specialty areas in the four states. 

   Figure 2.3:  Specialty Contract
   Dollar Awards to DBEs and
   Non-DBEs in Four States, Fiscal
   Year 1992

   (See figure in printed
   edition.)

Source:  GAO's analysis of states' data. 

As figure 2.3 shows, non-DBEs also received significant portions of
the landscaping, traffic control, and fencing and guardrail contracts
in the states.  Even with DBE concentration, non-DBEs received a
majority of contract dollars in at least one area in three of the
four states. 


   CONCLUSIONS
---------------------------------------------------------- Chapter 2:4

FHWA and the states have done a good job providing opportunities for
disadvantaged businesses to compete for contracts in the federal-aid
highway program.  Providing these opportunities is among the highest
priority of DOT's DBE program. 

However, when the states' efforts to provide DBE participation
opportunities fell short, FHWA's oversight and enforcement actions
have, on occasion, been neither timely nor effective.  Because the
states' overall record in meeting DBE goals has been good, FHWA has
not assigned high priority to quickly resolving problems when goals
were not met.  As a result, the problems continued in some cases, and
the states missed their goals in subsequent years.  This has
contributed to reduced opportunities for DBE firms to compete for
federal-aid highway contracts as required by law. 

New oversight procedures do not appear warranted.  FHWA's guidance
already provides a deadline for the states to submit justifications,
and federal regulations contain comprehensive procedures for FHWA to
review and approve the states' goal submissions, to deal with
exceptions on a case-by-case basis, to obtain corrective action when
needed, and to apply sanctions when corrective actions are deemed
ineffective.  But the effectiveness of these procedures would be
enhanced if they contained explicit time frames for FHWA to act on
the states' justifications and to review and monitor progress when
corrective actions are directed.  An articulated sequence of timed
monitoring actions would provide both state and FHWA managers with
the means to expeditiously resolve problems in achieving goals when
they occur. 


   RECOMMENDATION TO THE SECRETARY
   OF TRANSPORTATION
---------------------------------------------------------- Chapter 2:5

We recommend that the Secretary direct the Administrator, FHWA, to
issue additional guidance to the states and to FHWA field offices on
procedures for following up when the states do not meet agreed DBE
contracting goals.  In particular, this guidance should contain
explicit time frames for FHWA to (1) respond to the states'
justifications and (2) follow up on directed corrective actions. 


   AGENCY COMMENTS AND OUR
   EVALUATION
---------------------------------------------------------- Chapter 2:6

In commenting on a draft of this report, DOT said it was pleased that
we recognized FHWA's and the states' achievements in providing
opportunities for DBEs to participate in the federal-aid highway
program.  However, DOT believed that our discussion of these
accomplishments was unduly negative in places and could better
recognize the program's accomplishments.  DOT stated that it would
consider our recommendation, although it thought that enforcement
time frames might not offer significant benefits or comport with the
President's initiative to eliminate excessive regulation.  DOT stated
that FHWA's current oversight approach of cooperation rather than
confrontation with the states was sufficient to maintain compliance
with the program's requirements.  We agree that DOT and the states
have done a good job of providing opportunities for disadvantaged
businesses to compete for contracts in the federal-aid highway
program.  We have examined and in some cases revised the language in
our draft report to ensure that this conclusion is clearly conveyed. 
However, as we report, problems have occurred in cases in which the
states did not meet their goals.  We agree with DOT that a
cooperative rather than confrontational approach to oversight is
best.  We believe our recommendation could improve FHWA's enforcement
record with modest additional effort, without confrontation, and
without the need for additional or excessive regulations. 

DOT commented that the significance of our analysis on women-owned
and minority-owned business participation in the program was not
clear since both groups have been considered DBEs since passage of
the Surface Transportation and Uniform Relocation Assistance Act of
1987.  DOT suggested that we delete all references to women-owned and
minority-owned businesses from the report.  We agree that women-owned
business and minority-owned business are both DBEs.  The Congress
directed us, in ISTEA, to provide information on the impact of DBE
goals on the groups classified as disadvantaged (see app.  I).  FHWA
requires the states to report annually on the number of DBE contracts
and dollars committed to firms owned and controlled by minorities, by
nonminority women, and by minority women.  We used these data to
present our analysis. 

Appendix III contains the full text of DOT's comments. 


EFFECTIVENESS OF FHWA'S DBE
BUSINESS DEVELOPMENT TRAINING
EFFORTS IS LIMITED
============================================================ Chapter 3

In addition to providing DBEs with the opportunity to develop by
awarding highway construction contracts, FHWA also provides DBEs with
business development training and assistance through its supportive
services program.  However, the effectiveness of this program has
been limited.  Services were either not available or were unavailable
during recent periods in three of the six states that we visited. 
When services were provided, they varied widely in content and
sometimes did not cover key areas of concern such as human resource
management, marketing, and information management.  The states we
visited did not objectively evaluate the success of their supportive
services programs, and FHWA's oversight was limited.  As a result,
FHWA and the states were not able to demonstrate whether the services
being provided were contributing to the success and self-sufficiency
of the DBEs being served. 

FHWA's supportive services program duplicates but is less
comprehensive than services provided through the Small Business
Administration (SBA).  Although not specifically targeted to highway
construction firms, SBA's assistance is more widely available than
the program FHWA sponsors and provides assistance in several areas
that FHWA's program does not.  To provide more effective services,
FHWA would need to devote time and resources to improving the content
and availability of its supportive services program.  Doing so seems
an unwarranted expenditure of federal resources, as these services
are already available to DBEs through SBA.  DOT stated that it is
considering developing a more focused supportive services program
concentrating on the technical skills specific to highway
construction. 


   MANY FACTORS INFLUENCE BUSINESS
   SUCCESS
---------------------------------------------------------- Chapter 3:1

According to business development experts, success in business is
generally defined by such attributes as revenues, sales,
profitability, and growth.  While no formula exists for developing a
successful business, business development experts in industry,
academia, and private and public programs say that factors that
influence success include (1) the state of the economy, (2) the
availability of business opportunities, and (3) a firm's experience,
expertise, and access to capital. 

Government budget and fiscal policies designed to promote economic
growth can create a climate conducive to success for small
disadvantaged businesses.  Furthermore, the government enhances
business opportunities for disadvantaged businesses through programs
such as DOT's DBE program and SBA's section 8(a) program--under which
SBA enters into contracts with other federal agencies and
subcontracts work to disadvantaged firms certified to participate in
the program.  Both programs seek to foster the development of
disadvantaged business by providing government contracting
opportunities.  DOT and several SBA programs also attempt to maximize
a firm's experience, expertise, and access to capital through
business development and technical assistance.  According to our
review of leading academic and business literature, the factors that
can maximize a firm's experience and expertise include

  access to financial markets, such as lines of credit and bonding;

  well-developed financial management and accounting systems;

  effective information management;

  effective administrative management, including strong human
     resource management and effective inventory controls;

  core business management, such as marketing knowledge and
     strategies that create demand for services and products,
     technical abilities, and general business management; and

  a business plan that addresses short- and long-term goals and
     organizes, plans, and adapts to changes when the economy is
     unhealthy. 


      FHWA'S BUSINESS DEVELOPMENT
      TRAINING PROGRAM
-------------------------------------------------------- Chapter 3:1.1

Title 23 U.S.C.  section 140(c) authorizes the Secretary of
Transportation to conduct training and assistance programs so
disadvantaged businesses may achieve proficiency to compete for
federal contracts.  FHWA is the only DOT agency that offers a formal
supportive services program to DBEs--the Department's DBE programs
for aviation and transit do not have formal supportive services
programs.  FHWA disbursed about $7 million to the states for
supportive services in fiscal year 1993. 

The states that receive federal highway money are encouraged, but not
required, to have supportive services programs.  FHWA provides funds
for such programs, but the states are not required to match these
funds.  Under FHWA's supportive services regulation, the states have
wide latitude in designing their programs.  For example, the states
may use the supportive services funds to establish an in-house
business development program or to contract for one.  They are,
however, prohibited from using supportive services program funds to
pay for training of state employees.  FHWA's supportive services
regulation encourages the states to provide a range of services,
including

  services related to the certification of DBEs to increase
     participation and to ensure that only bona fide disadvantaged
     businesses are certified;

  estimating, bidding, and technical assistance services to assist
     DBEs in achieving proficiency in the technical skills required
     in the highway construction field;

  services to develop and improve immediate and long-term business
     management, record-keeping, and financial accounting
     capabilities;

  services to help DBEs obtain bonding and financial assistance; and

  other services that contribute to the long-term development,
     increased opportunities, and eventual self-sufficiency of DBEs. 

FHWA further directs the states to develop a detailed work statement
delineating the objectives, content, and accomplishments of the
services provided, subject to FHWA's approval.  The states are
expected to monitor their supportive services program to ensure that
they enhance the opportunities for DBEs to participate in the
federal-aid highway program and contribute to the growth and eventual
self-sufficiency of firms.  Furthermore, the states or their
contractors are required to submit quarterly reports containing
sufficient narrative information to allow FHWA to evaluate both
progress and problems in the services being provided. 


   SUPPORTIVE SERVICES PROGRAM IS
   LIMITED
---------------------------------------------------------- Chapter 3:2

Our examination of the supportive services programs in six states
revealed that, while some of the programs provide some useful
services, the overall effectiveness of FHWA's program is limited.  We
found that (1) services were not available or were unavailable for
lengthy periods in three of the six states we visited; (2) services,
when provided, varied widely in content and sometimes did not cover
key areas of concern; (3) the states did not have procedures for
evaluating whether or to what extent the supportive services being
offered were contributing to the growth and eventual self-sufficiency
of the DBEs being served; and (4) FHWA's oversight of the supportive
services programs was limited. 

Supportive services were not available or were unavailable for
lengthy periods in three of the six states we visited.  One state,
Connecticut, did not have a supportive services program that provided
business development training and assistance directly to DBEs. 
Connecticut officials said that they did not have such a program
because of severe budget constraints.  But Connecticut did receive
supportive services funding, which it used to pay state employees
involved in certifying firms for the DBE program.  The FHWA Assistant
Division Administrator who oversees Connecticut allowed this practice
based on his interpretation of FHWA's supportive services
regulations.\1

Georgia did not have a supportive services program during a recent
17-month period.  In March 1992, the state's contract with a
supportive services consultant expired; the state did not execute a
new contract until August 1993.  In fiscal year 1992, Colorado did
not have a supportive services program that provided business
development training and assistance directly to DBEs.  During this
period, Colorado's department of transportation continued to issue a
periodic newsletter to DBEs apprising them of state contracting
opportunities and training offered by state and private agencies. 
Colorado executed a supportive services contract for technical and
business assistance to DBEs in fiscal year 1993. 

Where services were available, the content varied between states and
sometimes did not cover some important areas.  For example, although
experts believe that marketing and developing effective human
resource and information management systems is important to business
success, these areas are not included in FHWA's regulation as
important areas of training.  Moreover, none of the five states'
programs included training in these areas.  FHWA's regulation does
stress the importance of developing a firm's business management and
financial accounting capabilities; however, one of the five states
that had a supportive services program provided no training in
establishing and maintaining financial accounting systems.  Two of
the five states provided no training in developing a strategic
business plan. 

None of the states we visited had developed or used objective
criteria for evaluating whether or to what extent the services were
helping DBEs develop and move toward self-sufficiency.  The progress
reports we reviewed generally described the assistance given and the
numbers of firms and individuals served, but did not contain
sufficient information to evaluate whether or to what extent the
services provided were contributing to the growth and eventual
self-sufficiency of the DBEs being served.  While both FHWA and state
officials generally believed that the assistance was beneficial to
the DBEs, the officials could not demonstrate the extent to which the
supportive services were helping DBEs develop. 

FHWA field offices did not have formal procedures in place for
monitoring and evaluating the states' supportive services programs. 
In some states, FHWA's monitoring was generally limited to reviewing
the states' progress reports; in other states, FHWA conducted site
visits--including reviews of clients' files and/or extensive
interviews with service providers.  However, these assessments did
not evaluate whether the services being provided were contributing to
the development and eventual self-sufficiency of the DBEs. 


--------------------
\1 We asked DOT, when it was reviewing a draft of this report, to
comment on Connecticut's use of supportive services funds.  According
to a DOT official, the Department was reviewing this question and the
review was not completed in time for a response to be included in
this report. 


   FHWA'S SUPPORTIVE SERVICES ARE
   LESS COMPREHENSIVE THAN
   SERVICES ALREADY AVAILABLE
   THROUGH SBA
---------------------------------------------------------- Chapter 3:3

The training and assistance provided through SBA's business
development programs are more comprehensive and more widely available
than those in FHWA's supportive services program.  SBA's business
development assistance is available through such programs as the
Management and Technical Assistance 7(j) Program, the Small Business
Development Center Program (SBDC), and the Service Corps of Retired
Executives Program (SCORE).  These programs provide services similar
to those outlined in FHWA's regulation: 

  The 7(j) program provides management and technical assistance to
     eligible small business clients.  These services include, among
     others, record-keeping and financial accounting assistance;
     production, engineering, and technical advice; marketing
     analyses; and specialized management training. 

  The SBDC works with small business owners to provide counseling,
     training, and research assistance in areas such as marketing,
     production, organization, and engineering and technical studies. 

  SCORE is a volunteer program in which retired business executives
     share management and technical expertise with current and
     prospective owners and managers of small businesses. 

These SBA programs provide more training and technical assistance
essential to helping small businesses develop than FHWA's supportive
services program.  For example, SBDC assistance is designed to
provide services in a number of areas not covered by FHWA's program,
such as marketing, cash flow management, personnel administration
skills, and incorporating technological innovations into work
processes.  The SBDC and SCORE programs, in addition to providing
training similar to that of the 7(j) program, also provide one-on-one
counseling and individualized services tailored to the needs of the
local community and clients.  Our 1989 report on SBDCs found that a
majority of clients were satisfied with the assistance they received,
would use the centers again if needed, and would recommend them to
others.\2

The funding level and resources available to SBA give it the ability
to provide more extensive program coverage and benefits than FHWA's
supportive services can offer.  For example, the SCORE program has
about 14,000 retired business executives who volunteer their time at
more than 700 locations throughout the United States.  In fiscal year
1992, SBA provided $60.5 million of the roughly $134 million budget
for the SBDC program; in comparison, FHWA provided $7 million to the
states for supportive services.  The SBDC program is far more
accessible to small businesses, with 975 centers and subcenters
around the United States; the FHWA program has one or two offices per
state.  Georgia, for example, has 6 SBDC offices in the Atlanta
metropolitan area and 13 others in the state, compared with one
consultant's office in downtown Atlanta for the FHWA-funded
supportive services program. 

The SBDC program also includes a designated staff of business
development experts to oversee the program and ensure that centers
provide the appropriate type of assistance.  This staff is required
to perform frequent monitoring visits as well as formal on-site
reviews of each center at least once every 2 years.  In contrast,
FHWA personnel overseeing the DBE program are primarily highway
engineers or civil rights officers.  In many cases, the officials
assigned to review the states' DBE activities did so as an ancillary
duty.  The personnel descriptions we reviewed for FHWA officials
assigned to oversee DBE supportive services did not mention
responsibilities for business development oversight or require
specific knowledge or expertise in this area. 

SBA officials associated with the SBDC, SCORE and 7(j) programs told
us that the services they provide can meet the needs of the firms in
FHWA's DBE program.  These officials stated that the advantage of
seeking SBA's assistance is that the network of programs and
personnel allows the agency to tailor assistance toward the program
or mix of programs best suited to the needs of the applicant firms,
recognizing that, for example, a new firm has very different needs
than an established one.  Furthermore, SCORE and SBDC stated that
about 40 percent of their client firms are women-owned businesses,
while about 15 percent are minority-owned firms.  Neither SBA nor DOT
had information on how many DBE firms already receive SBA assistance;
however, in one state the SBDC is the highway agency's supportive
services contractor. 

SBA programs have not been without their problems.  For example,
during SBA's fiscal year 1993 appropriations hearings, congressional
concerns were raised about potential fraud and a lack of SBA
oversight of the SBDC program.  We reported in September 1993 that
the effectiveness of the 7(j) program was in doubt because SBA lacked
objective criteria for evaluating the services provided to its
customers.\3 SBA managers relied primarily on reports describing the
content of the assistance provided, not unlike the reports we
reviewed on FHWA's supportive services programs.  SBA has begun
taking steps to correct problems in its programs.  For example, in
November 1992, SBA headquarters directed its 10 regional offices to
provide monthly information on the types of 7(j) assistance being
provided, and in July 1993, SBA entered into a contract to develop
performance criteria for assessing the effectiveness of assistance
under the 7(j) program. 


--------------------
\2 Small Business:  Development Centers Meet Counseling Needs of Most
Clients (GAO/RCED 90-38BR, Nov.  22, 1989). 

\3 Small Business:  Problems Continue With SBA's Minority Business
Development Program (GAO/RCED-93-145, Sept.  17, 1993). 


   DOT IS STUDYING SUPPORTIVE
   SERVICES PROGRAMS IN SEVERAL
   STATES
---------------------------------------------------------- Chapter 3:4

In commenting on a draft of this report, DOT said that the intent of
the supportive services program is to focus on the unique technical
skills that DBEs need to compete in the highly specialized highway
construction industry, such as estimating costs, calculating
quantities of construction materials, and reading construction plans. 
DOT told us that while the supportive services program has not always
provided the intended services, the Department is encouraged by
actions FHWA is taking in the southeastern United States in
developing classroom training for DBEs. 

According to DOT and FHWA, DBEs attend classroom sessions each year
at area universities in several states.  According to information
provided by FHWA, the curricula for these sessions vary between
states and include topics such as plan reading, cost estimation,
bidding strategies and procedures, and project scheduling and
planning.  Two states include bid simulations, in which participants
prepare a bid proposal and a mock contract award is made.  These
programs also include general business management and accounting
training, as well as instruction in the laws governing contacts,
labor relations, equal opportunity, payroll, and sexual harassment. 

In August 1993, FHWA awarded a contract to Kentucky State University
to develop a curriculum for a uniform classroom program in FHWA's
southeast region.  The intent is to harmonize the curriculum between
the states that currently offer the program and to expand it to the
states that do not.  This contract was funded with supportive
services program funds.  According to DOT, these programs may, after
further experience, be used as a national model.  In addition, DOT is
considering including a provision in the revised DBE regulation that
would allow FHWA to mandate this program on a state-by-state basis. 


   CONCLUSIONS
---------------------------------------------------------- Chapter 3:5

FHWA's supportive services program is limited in its effectiveness in
helping DBEs achieve proficiency in competing for federal highway
construction contracts.  In addition, it duplicates but is less
comprehensive than the services already offered by SBA.  Although DOT
said that the intent of the supportive services program is to focus
on the unique technical skills that DBEs need to compete in the
highway construction industry, the program FHWA has in place today
does not have this focus.  The states have wide latitude in designing
programs, and FHWA's supportive services regulation encourages them
to provide a range of services, including general business management
services, that are similar to SBA's programs.  Furthermore, SBA's
business development programs are more comprehensive and more widely
available than FHWA's supportive service program. 

To provide more effective services, FHWA would need to ensure that
services are available to firms in every state, that these services
cover key areas of concern, and that the programs are properly
evaluated.  But the time, effort, and money needed to accomplish
these ends would compete for scarce resources with other priorities
within FHWA and DOT.  Given that the outcome of such an effort might
be to attain a level of availability and content of supportive
services comparable to services already available to DBEs through
SBA, we believe that such an effort would be an unwarranted and
duplicative expenditure of federal resources. 

SBA's primary mission is the development of small businesses.  To
accomplish that mission, SBA has an extensive nationwide structure of
programs, centers, and people.  Although SBA has problems, it is
better equipped by design to provide the technical assistance and
training needed to help develop disadvantaged businesses than FHWA
is.  Coordination with SBA would help FHWA determine what areas, if
any, SBA assistance does not cover.  This information could then be
incorporated into FHWA's ongoing development of a more focused
technical assistance program.  If FHWA determines that a more
focused, leaner technical assistance program for DBEs is warranted,
it may want to request funding from the Congress.  But we see no need
to continue a supportive services program that provides services
similar to SBA's and does not meet the developmental needs of firms
in the DBE program. 


   MATTER FOR CONGRESSIONAL
   CONSIDERATION
---------------------------------------------------------- Chapter 3:6

Because FHWA's supportive services program has been limited in
effectiveness and duplicative of SBA's program, the Congress may wish
to consider terminating the program and limiting any future funding
for business development assistance under the DBE program to services
that address unique highway construction skill needs and do not
duplicate services offered by SBA. 


   AGENCY COMMENTS AND OUR
   EVALUATION
---------------------------------------------------------- Chapter 3:7

In commenting on a draft of this report, DOT stated that--while it is
sensitive to the goal of reducing duplication between FHWA's and
SBA's programs--it disagreed with our matter for congressional
consideration on terminating FHWA's supportive services program. 
While acknowledging that the program has not always provided the
intended services, DOT stated that because the intent of the
supportive services program is to focus on the unique technical
skills that DBEs need to compete in the highly specialized highway
construction industry, certain services are beyond the scope of SBA's
business development training and assistance programs.  DOT and FHWA
provided information on programs in several southeastern states that
DOT said may, after further experience, become the model for a
national supportive services program.  DOT said that it is
considering regulatory revisions to mandate such a program on a
state-by-state basis.  The full text of DOT's comments is reproduced
in appendix III. 

After carefully reviewing DOT's position, we continue to believe that
the Congress should consider terminating FHWA's existing supportive
services program.  We have incorporated the information DOT and FHWA
provided about the classroom programs in the southeast into the
report and have revised our matter for congressional consideration to
recognize that DOT is considering modeling a national, mandatory
program on these programs sometime in the future.  We continue to
have two concerns about the Department's position.  First, we are not
convinced that the technical skills required to estimate costs, order
materials, and undertake other activities are wholly unique and
specific to the highway construction industry.  While certain
technical skills are no doubt unique, DOT has not yet coordinated
with SBA to determine which SBA programs would and which would not
meet the needs of DBE firms.  Second, while DOT said that supportive
services are "intended to be focused" on the specific technical
skills unique to the highway construction industry, this does not
describe the program FHWA has in place today.  In its comments, DOT
envisions a leaner, more focused, and substantially different
supportive services program.  We believe that after DOT works with
SBA, it will be in a better position to assess what areas, if any,
SBA programs do not cover and to incorporate that knowledge into a
more focused and targeted program. 

In its comments, SBA did not directly address our matter for
congressional consideration on the supportive services program.  SBA
did note, however, that it has long administered management and
technical assistance programs for socially and economically
disadvantaged small businesses owners.  SBA's comments are reproduced
in appendix IV. 


CERTIFICATION IN AND GRADUATION
FROM THE DBE PROGRAM
============================================================ Chapter 4

To participate in the DBE program, a firm must be certified by the
state it wants to do business in.  With guidance from FHWA and DOT,
each state is expected to examine whether applicant firms are small
businesses owned and controlled by disadvantaged individuals.  The
states generally do not assess whether a firm has the financial or
performance capabilities to do highway construction or related work. 
Insufficient evidence exists to suggest that changes to the DBE
certification process are needed to require applicant firms to
demonstrate performance and financial capabilities before being
certified. 

While each state has its own certification process, some states have
entered into agreements with other states to use the same application
forms or to generally accept each other's certifications.  More
widespread use of such agreements has been suggested to reduce time
and paperwork burdens on small businesses applying for the DBE
program and on the states reviewing such applications.  However, the
effectiveness of greater reciprocity in the states' certification
processes will be diminished until the problems in the quality and
consistency of federal eligibility guidance described in our
September 1992 report are resolved.\1

FHWA's guidelines state that a DBE firm must be annually recertified
by the state.  Provided the firm is recertified, there is no limit on
the amount of time it may remain in the program.  By definition, a
DBE firm "graduates" when its average gross revenues over a 3-year
period exceed the ceiling established by law for small business
assistance.  If its revenues later fall below the ceiling, it may
reapply for the program.  Few DBEs graduate from the program;
however, graduation only measures a firm's average gross revenues and
is not a reliable indication of the success of either individual DBE
firms or the DBE program as a whole.  DOT has not used graduation, or
established any other mechanism, to measure the success of the DBE
program in developing small businesses capable of obtaining contracts
on the open market. 


--------------------
\1 Highway Contracting:  Disadvantaged Business Eligibility Guidance
and Oversight Are Ineffective (GAO/RCED-92-148, Sept.  1, 1992). 


   PERFORMANCE AND FINANCIAL
   CAPABILITIES
---------------------------------------------------------- Chapter 4:1

Most states do not require DBEs to demonstrate specific job-related
performance and financial capabilities before entering the program. 
Historically, determining the performance and financial capability of
subcontractors has been the prime contractor's responsibility and, as
such, an inherent risk in undertaking a highway construction
contract.  Typically, if a subcontractor could not complete its work,
the prime contractor either found another subcontractor or completed
the work itself.  When using a DBE subcontractor, however, a prime
contractor--which has DBE goals contained in its contract with the
state--must usually try to secure another DBE subcontractor rather
than completing the unfinished work itself. 

Two of the six states we visited required DBEs to demonstrate
specific job-related performance and financial capabilities before
entering the program.  Connecticut and Michigan required DBEs to
demonstrate that they had qualified personnel, ample work experience,
and sufficient financial resources to complete work in particular
specialty areas.  These states listed disadvantaged firms in their
DBE directories by those specialty areas--such as landscaping and
traffic control--that the state had determined the firm was capable
of performing in. 

Federal laws and regulations are currently silent on the states'
responsibility in assessing DBE performance and financial
capabilities.  However, the preamble to DOT's proposed DBE regulation
says that if the states prequalify DBEs for performance and financial
capabilities, then they must similarly assess all contractors doing
business in the state.  Officials in both Connecticut and Michigan
told us that they expect to be challenged on their certification
procedures if and when DOT's new regulation becomes effective. 

Our discussions with FHWA, state, and industry officials in the six
states that we visited provided a variety of views on whether the
states should require DBEs to meet performance and financial
capability criteria before receiving DOT contracts.  DBEs that we
interviewed also took both sides of the issue.  On the one hand, it
was argued that requiring a firm to meet a prequalification
requirement would provide a means of assessing the firm's financial
status and its ability to perform work in particular areas.  State
and industry officials in one state believed that this would prevent
DBEs from taking on too much work and getting overextended, thus
minimizing the risk that they could not perform all the work
contracted for.  Furthermore, it was argued that requiring DBEs to
meet performance and financial requirements would allow prime
contractors to obtain higher levels of bonding, thereby reducing the
risk to the prime contractor and to the project as a whole. 

On the other hand, officials argued that requiring DBEs to meet
performance and financial capability criteria would place an
inequitable and undue burden on them, since they would have to
prepare additional paperwork and incur additional costs not being
required of other subcontractors.  Numerous officials contended that
performance problems with DBEs are no more common than performance
problems with other subcontractors and that an additional
certification process for performance and financial capability is not
necessary.  Finally, it was argued that performance and financial
capability requirements ultimately do not provide assurance that a
contractor can and will complete a contract. 

Performance and financial capability requirements similar to
Michigan's and Connecticut's will probably not be permitted under
DOT's proposed new regulation; thus, either permitting or requiring
the states to set criteria might require action by the Congress or
DOT.  In our discussions with FHWA and state officials in the six
states that we visited, we found no evidence that performance
problems with DBEs are any more common or severe than performance
problems with other, non-DBE subcontractors. 


   UNIFORM CERTIFICATION AND
   RECIPROCITY
---------------------------------------------------------- Chapter 4:2

Until steps are taken to improve the quality and consistency of
federal guidance on DBE eligibility, the value of increased
reciprocity among the states' DBE certification processes is
questionable.  The states use two different types of coordinated
certification arrangements.  Uniform certification occurs when the
states use the same application form and require the same information
from applicants.\2 Reciprocity occurs when the states accept each
other's eligibility certifications.  Since many DBEs seek
certification in more than one state, the goal of both uniform
certification and reciprocity is to reduce the administrative burden
and paperwork for both DBEs and the states.  At the time of our
review, states in two of FHWA's nine regions had uniform
certification agreements, while states in two regions had a modified
reciprocity agreement, in which the states used their own discretion
in honoring other states' certifications.  No state had both types of
agreement. 

In ISTEA, the Congress asked us to examine whether the certification
process should be uniform and permit state-to-state reciprocity. 
Since 1988, state agencies have received thousands of new DBE
applications each year.  For each application, the states must
determine whether the applicant meets the eligibility standards
contained in federal law and regulations.  To interpret and apply
these standards, the states rely on more specific and detailed
eligibility guidance provided by FHWA and DOT. 

The states do not apply this eligibility guidance in the same way. 
As we reported in September 1992, DOT and FHWA have issued
eligibility guidance to the states that is confusing and sometimes
conflicting.\3 As a result, interpretations of key eligibility
criteria vary among the states.  For example, our report found that
DOT had issued conflicting guidance on the criteria a disadvantaged
owner must meet to demonstrate that he or she controls a firm. 
Certification officials in two states told us that, according to
their interpretation of that guidance, disadvantaged owners could not
rely on the expertise of nondisadvantaged employees to manage a
firm's critical operations.  However officials in six other states
said that owners could rely on such employees.  Officials in one
state used both interpretations.  We recommended that DOT develop a
uniform order or instruction delineating federal eligibility policy
and designate a lead office for developing, updating, and
coordinating the dissemination of policy and implementing guidance. 

DOT recognized the problems with the federal eligibility guidance
and, in response to our September 1992 report, stated it would take
several steps to improve its consistency and quality.  These steps
included providing more explicit eligibility guidance as part of the
Department's revised DBE regulation and establishing an
intradepartmental DBE council to review and clear all guidance to the
states.  As of February 1994, DOT had not issued its revised
regulation, and the proposed DBE council was not in place.  Until
these steps are taken, the value of increased uniform certification
and reciprocity among the states--while a laudable goal--will be
diminished. 


--------------------
\2 In its proposed DBE regulation, DOT also uses the term "uniform
certification" to refer to a coordinated intradepartmental
certification process.  For example, under such a system, FHWA would
accept DBEs certified by airport or transit authorities under the
Federal Aviation Administration's and the Federal Transit
Administration's DBE programs, respectively.  This report does not
address that issue. 

\3 Highway Contracting:  Disadvantaged Business Eligibility Guidance
and Oversight Are Ineffective (GAO/RCED-92-148, Sept.  1, 1992). 


   GRADUATION DOES NOT EQUATE TO
   SUCCESS
---------------------------------------------------------- Chapter 4:3

Although few firms graduate from the DBE program, graduation is not a
good measure of either the success of individual DBE firms or of the
DBE program as a whole.  The DBE program has no limit on the time
firms may remain in the program, and DOT has not used graduation as a
measure of the program's success.  DOT has used the attainment of
contract goals to measure the success of the DBE program in meeting
its goal of providing contracting opportunities to disadvantaged
firms.  However, it has not developed an alternative performance
measure for evaluating the success of individual DBE firms or the
success of the DBE program as a whole in helping small businesses
develop, another goal of the program. 

When a firm's average gross annual receipts over a 3-year period
exceed $15.37 million per year, it is no longer classified by law as
a small business for the purpose of government assistance and is thus
no longer eligible to participate in the DBE program.  Some firms
have lower thresholds because the revenues they receive for their
work are lower.  For example, in the DBE program architectural and
engineering firms (used in the planning and design phases of highway
construction projects) are limited to $2.5 million in average gross
revenues over a 3-year period.  If the average gross annual receipts
of a DBE firm that has graduated subsequently fall below its
applicable limit, the firm may reapply for DBE certification. 


      GRADUATION IS NOT A GOOD
      MEASURE OF SUCCESS
-------------------------------------------------------- Chapter 4:3.1

The term "graduation," as used in the DBE program, is a misnomer.  In
common parlance, graduation conveys successful movement from one
stage of experience, proficiency, or prestige to a higher level.  In
the DBE program, graduation conveys movement only in the size of the
firm.  Viewing graduation in the traditional sense of the term
implies that DBE firms have moved beyond the developmental
environment of the DBE program to a new level of success and
self-sufficiency.  Therefore, a link would exist between the time
spent in the program, revenue growth, and the eventual success and
self-sufficiency of a disadvantaged business.  We found several
problems with this view: 

  Growth in a firm's gross receipts may not necessarily equate to
     success.  For example, a firm could see growth in its revenues
     overtaken by growth in its liabilities or debt.  A DBE firm
     could also enter the program with average gross revenues already
     near the limit and graduate with only a modest increase in
     business. 

  Business, industry, and academic literature we reviewed and experts
     we consulted said that neither a firm's revenues nor the time
     the firm has spent in a government assistance program like
     FHWA's DBE program is indicative of its overall business success
     or of its ability to be successful over the long term. 

  Graduation only measures a firm's average gross revenues and does
     not take into account other financial and management factors
     that contribute to the success of a business, such as access to
     capital, the firm's expertise, appropriate investment in human
     resources, and the development of effective financial and
     information management systems. 

  There may not be a causal relationship between participation in the
     DBE program and a firm's subsequent growth.  For example, one
     graduated firm we examined never sought or received highway
     construction contracts while certified in the DBE program.  The
     firm obtained DBE status so that it could compete for Department
     of Defense contracts.  Another DBE firm graduated because it
     merged with another firm. 


      FEW FIRMS GRADUATE
-------------------------------------------------------- Chapter 4:3.2

In ISTEA, the Congress asked us to determine the extent to which
firms graduate from the DBE program, how many graduated DBE firms had
been in the program for 3 years or more, whether the graduation of
any DBEs could have been accelerated, and the extent to which DBE
firms continued to receive highway construction contracts after
leaving the program. 

From fiscal years 1988 through 1992, fewer than 1 percent of DBE
firms graduated from the DBE program in the six states that we
visited.  Most had been in the program 3 years or more. 
Participation in the DBE program is fluid--each year hundreds of new
firms are certified, and many are not granted recertification.  Our
examination of FHWA's survey data on certification for the six states
showed substantial changes in the certified firms each year.  In each
year, the number of graduated firms represented roughly between
one-tenth and one-half of 1 percent of the firms that were certified
during that fiscal year.  Table 4.1 shows the number of firms that
had graduated in each fiscal year. 



                          Table 4.1
           
           DBE Graduates in the Six States, Fiscal
                        Years 1988-92

                              Total number
                              of certified      Total number
Fiscal year                           DBEs      of graduates
------------------------  ----------------  ----------------
1988                                 2,282                 5
1989                                 3,385                 4
1990                                 2,799                 9
1991                                 3,698                 9
1992                                 4,717                17
------------------------------------------------------------
In total, 44 firms graduated; 34 firms had been in the program at
least 3 years, and 10 had been in the program less than 3 years.  A
substantial number of the DBEs that graduated should have graduated
earlier.  Thirty of the firms--two-thirds of the graduates--could
have graduated 1 to 4 years sooner than they did.  State officials
attributed these discrepancies to reciprocity agreements and
misapplication of size limits.  For example, some firms were
certified because they had been certified in another state.  However,
financial information was slow to come from the other states, and
state officials said that the firms that should have graduated
subsequently did, when information became available.  Also, officials
in one state said that size limits were applied incorrectly when
state analysts used outdated standards.  These officials said this
problem occurred because FHWA had not apprised them of regulatory
changes to those limits. 

In fiscal year 1992, 2,270 DBE firms in the six states had been in
the program for at least 3 years and had not graduated.  We reviewed
10 randomly selected files in each state and found that one firm that
should have graduated did not. 

DBE graduates in the states we visited continued to receive contracts
from the states for highway construction work after they graduated. 
Among the 44 graduates, at least 20 received contracts from the state
while they were in the program.\4 Fourteen firms continued to receive
contracts after they had graduated. 

FHWA has been required to report the number of firms that have
graduated--that is, exceeded the size standards--since fiscal year
1988.  However, we found these data to be generally unreliable in the
six states that we visited.  State officials told us that the data on
the number of graduates were constructed largely from memory, and our
review of state DBE records revealed significant discrepancies
between reported and confirmed number of graduates.  As a result, we
based the information on graduates presented in this report on our
review of records in the six states visited. 


--------------------
\4 It should not be assumed that the other 24 certified DBE firms did
not receive contracts.  DBEs are sometimes certified in more than one
state, and some of these 24 firms received contracts from other
states while in the program. 


      DBE PROGRAM HAS NO
      PERFORMANCE MEASURES FOR
      SUCCESS
-------------------------------------------------------- Chapter 4:3.3

The DBE program has no limit on the time a firm can remain in the
program, and DOT has not articulated graduation as either a goal of
the DBE program or as a measurement of its success.  DOT has used the
attainment of contract goals to measure the success of the DBE
program in meeting its goal of providing contracting opportunities to
disadvantaged firms.  However, it has not developed an alternative
performance measure for evaluating the success of individual DBE
firms or the success of the DBE program as a whole in helping small
businesses develop, another goal of the program. 

Recognizing that the DBE program has no graduation requirements or
time limits for participation, the Congress asked us in ISTEA to
examine the number of years that disadvantaged businesses take to
become successful and the number of years that they should
appropriately be included in the DBE program.  Our examination of
academic and industry literature and our discussions with state and
federal officials found no consensus on these questions.  Most
representatives from industry groups, states, and DBE and non-DBE
highway contractors responded that a small business takes 5 to 15
years to become successful.  DOT received similar estimates in the
comments that it received on its proposed DBE regulation.  Many
people noted that the first 5 years of a business's existence are the
most critical to survival; one academic expert noted that most
businesses that fail do so in the first 3 years.  We did not find
quantifiable data that showed a difference in the time it takes to
become successful between disadvantaged and nondisadvantaged small
businesses. 

We also found no consensus in academic and industry literature on the
role and benefit of governmental assistance programs like FHWA's DBE
program.  Consequently, a "right" amount of time for disadvantaged
firms to participate in a developmental program such as the DBE
program does not appear to be readily definable. 


   CONCLUSIONS
---------------------------------------------------------- Chapter 4:4

DOT's position is that the states will be prohibited from formally
determining whether DBEs possess the performance and financial
capabilities to do highway construction work unless such a
determination is made for all contractors and subcontractors.  We
believe that DOT's position is appropriate.  State prequalification
requirements tend to shift the burden of determining a
subcontractor's capability from the prime contractor to the state. 
We found no demonstrated need to shift that burden as a matter of
national policy.  Most federal, state, and contractor officials we
spoke to asserted that DBEs' performance was no better or worse on
federal-aid highway projects than subcontractors' performance
overall. 

Greater uniformity and reciprocity in the states' certification
processes could reduce paperwork and mitigate the administrative
burden on both the states and the firms.  This is a laudable goal. 
But without clear federal guidance, the problem of inconsistent
application by the states of DBE eligibility criteria noted in our
earlier report would only be compounded.  We believe that greater use
of reciprocal agreements between the states is possible, but not
until DOT revises its DBE eligibility criteria and enacts the
corrections outlined in our September 1992 report. 

While assisting the development of disadvantaged firms is an
important goal of the DBE program, no reliable performance measures
exist for measuring whether the program is meeting that goal.  Some
have tended to use graduation to measure success because it is one of
the few quantifiable indicators of movement available in the DBE
program.  Just as DOT uses the attainment of contract goals to
measure the success of efforts to provide DBEs with contracting
opportunities, performance measures that evaluate the progress of
efforts to help DBE firms develop could assist DOT and the Congress
in assessing whether the DBE program is meeting its goal of assisting
disadvantaged business in their development.  Such measures could be
constructed in conjunction with SBA and, while difficult to create,
could include a firm's financial health--considering not only average
gross revenues but also liabilities.  Another measure could be an
assessment of how well a firm has accomplished the types of
activities that contribute to the success of a business, such as
gaining access to financial markets, developing a business plan, and
creating effective financial, inventory, and accounting systems. 
Nevertheless, even if a quantifiable means of assessing the
accomplishments of the DBE program is created, different firms will
take different periods of time to develop.  Therefore, a time limit
on participation in the DBE program would likely be nothing more than
an arbitrary selection of the number of years a firm is allowed to
participate in the program. 


   RECOMMENDATION TO THE SECRETARY
   OF TRANSPORTATION
---------------------------------------------------------- Chapter 4:5

We recommend that the Secretary of Transportation, in consultation
with the Administrator, SBA, develop performance measures for
evaluating the progress of the DBE program in helping disadvantaged
firms develop into self-sustaining businesses capable of competing
for contracts on the open market. 


   AGENCY COMMENTS AND OUR
   EVALUATION
---------------------------------------------------------- Chapter 4:6

In commenting on our draft report, DOT stated that while it would
consider adopting our recommendation, it might be more appropriate
for SBA to develop performance measures.  DOT pointed out that
performance measures already exist for assessing whether the DBE
program meets its congressional mandate of expending no less than 10
percent of federal-aid highway funds with DBEs.  We agree that
providing DBEs with contracting opportunities is an important goal of
the program.  But DOT has also articulated that helping DBE firms
develop is a program goal.  In its comments, DOT stated that one
purpose of its business development activities is to assist DBE firms
in moving beyond the low-capital, low-technology fields that have
traditionally been the areas of largest DBE participation.  To our
knowledge, DOT has not previously articulated this as a desired
outcome of the program.  We believe it is important for DOT to
clearly identify both the business development goals of the DBE
program and the factors that could be used to measure its success. 

DOT took issue with our use of the term "graduation" in this chapter. 
While DOT stated that it recognized that the Congress used the term
in ISTEA (see app.  I), it also said that graduation does not exist
in the DBE program.  According to DOT, exceeding the size standards
causes a firm to become ineligible, much like a firm's acquisition by
a nondisadvantaged individual would cause it to become ineligible. 
We agree that DOT does not use "graduation" as a measurement tool in
the DBE program and believe that our report gives proper perspective
to the confusion surrounding the term and to the limitations of its
use.  However, we would note that since fiscal year 1988, FHWA has
required the states, as part of their annual reports on DBE
certifications, to report the number of firms that have "graduated."
In its instructions to the states, FHWA said that this "refers to
firms which have left the program because they have exceeded the size
standard."

SBA, in its comments, stated that it would welcome the opportunity to
work with DOT to explore ways to accurately measure the success of
the DBE program in helping disadvantaged firms develop into
self-sustaining businesses.  DOT's and SBA's comments are reproduced
in appendixes III and IV, respectively. 


SECTION IN THE INTERMODAL SURFACE
TRANSPORTATION EFFICIENCY ACT OF
1991 MANDATING GAO'S STUDY
=========================================================== Appendix I

The following is the text of the section in the Intermodal Surface
Transportation Efficiency Act of 1991 mandating GAO's study.  Page
numbers refer to the pages in this report where the information
requested is presented. 

Title I, Section 1003, (b), (5): 

(5) Study. 

(A) In General.  The Comptroller General shall conduct a study of the
disadvantaged business enterprise program of the Federal Highway
Administration (hereinafter in the paragraph referred to as the
"program"). 

(B) Contents.  The Study under this paragraph shall include the
following: 

(i) Graduation.  A determination of

(I) the percentage of disadvantaged business enterprises which have
enrolled in the program and graduated after a period of 3 years;

(II) the number of disadvantaged business enterprises which have
enrolled in the program and not graduated after a period of 3 years;

(III) whether or not the graduation date of any of the disadvantaged
business enterprises described in subclause (II) should have been
accelerated;

(See pp.  43 and 44.)

(IV) since the program has no graduation time requirements, how many
years would appear reasonable for disadvantaged business enterprises
to participate in the program;

(V) the length of time the average small nondisadvantaged business
enterprise takes to be successful in the highway construction field
as compared to the average disadvantaged business enterprise; and

(See pp.  44 and 45.)

(VI) to what degree are disadvantaged business enterprises awarded
contracts once they are no longer participating in the disadvantaged
business program. 

(See pp.  43 and 44.)

(ii) Out-of-State Contracting.  A determination of which State
transportation programs meet the requirement of the program for 10
percent participation by disadvantaged business enterprises by
contracting with contractors located in another State and a
determination to what degree prime contractors use out-of-state
disadvantaged business enterprises even when disadvantaged business
enterprises exist within the State to meet the 10 percent
participation goal and reasons why this occurs. 

(See pp.  22 and 23.)

(iii) Program Adjustments.  A determination concerning whether or not
adjustments in the program could be made with respect to Federal and
State participation in training programs and with respect to meeting
capital needs and bonding requirements. 

(iv) Success Rate.  Recommendations concerning whether or not
adjustments described in clause (III) would continue to encourage
minority participation in the program and improve the success rate of
the disadvantaged business enterprises. 

(See pp.  28-37.)

(v) Performance and Financial Capabilities.  Recommendations for
additions and revisions to criteria used to determine the performance
and financial capabilities of disadvantaged business enterprises
enrolled in the program. 

(See pp.  38-40.)

(vi) Enforcement Mechanisms.  A determination of whether the current
enforcement mechanisms are sufficient to ensure compliance with the
disadvantaged business enterprise participation requirements. 

(See pp.  18-20.)

(vii) Additional Costs.  A determination of additional costs incurred
by the Federal Highway Administration in meeting the requirement of
the program for 10 percent participation by disadvantaged business
enterprises as well as a determination of benefits of the program. 

(See pp.  12 and 13.)

(viii) Effect on Industry.  A determination of how the program is
being implemented by the construction industry and the effects of the
program on all segments of the industry. 

(See pp.  24 and 25.)

(ix) Certification.  An analysis of the certification process for
Federal-aid highway and transit programs, including a determination
as to whether the process should be uniform and permit State-to-State
reciprocity and how certification criteria and procedures are being
implemented by the States. 

(See pp.  40 and 41.)

(x) Goals.  A determination of how the Federal goal is being
implemented by the States, including the waiver process, and the
impact of the goal on those individuals presumed to be socially and
economically disadvantaged. 

(See pp.  16-18 and 20-22.)

(C) Report.  Not later than 12 months after the date of the enactment
of this Act, the Comptroller General shall transmit to the Committee
on Environment and Public Works of the Senate and the Committee on
Public Works and Transportation of the House of Representatives a
report on the results of the study conducted under this paragraph. 


STATES' DBE GOALS AND GOAL
ACHIEVEMENTS, FISCAL YEARS 1989-93
========================================================== Appendix II


State                                 Goal  Actual   Diff.     Goal  Actual  Diff.   Goal  Actual  Diff.   Goal  Actual  Diff.   Goal  Actual   Diff.
----------------------------------  ------  ------  ------  -------  ------  -----  -----  ------  -----  -----  ------  -----  -----  ------  ------
Alaska                                  12    15.2               12    14.3            12    14.4            12    15.1            10    16.1
Ala.                                    10    10.8               10    13.7            10    10.6            10    21.5            10    13.9
Ark.                                    10    11.2               10    11.2            10    10.5            10    13.2            10    11.4
Ariz.                                   10    12.2               10    11.6            10    13.7            10    12.2            10    10.3
Calif.                                  20    17.9    -2.1       20    20.3            20    19.5   -0.5     20    20.3            20    22.8
Colo.                                   10    14.7               10    11.1            10    12.3            10    14.5            10    14.9
Conn.                                   10    12.5               10    11.2            10      11            10    17.7            11    17.3
D.C.                                    37    68.9               37    42.0            37    48.7            37    69.9            10    21.0
Del.                                    10    18.4               10    12.6            10    11.3            10    14.0            10    15.2
Fla.                                    10    15.5               10    15.3            10    12.7            10    14.6            10    15.1
Ga.                                     10    10.6               10    11.2            10    11.8            10    12.0            10    11.4
Hawaii                                  18    24.0               18     6.3      -     18    14.7   -3.3     10     7.3   -2.7     10    25.4
                                                                              11.7
Iowa                                    10    11.8               10    11.0            10     9.3   -0.7     10    10.2            10    10.7
Idaho                                   10    27.2               10    11.5            10    16.7            10    13.6            10    11.3
Ill.                                    10    13.1               10    11.2            10    13.6            10    11.7            10    12.7
Ind.                                    10    11.9               10    13.5            10    13.3            10    12.3            10    14.2
Kans.                                   10    10.1               10    11.1            10    12.5            10    10.9            10    11.8
Ky.                                     10    14.6               10    11.6            11    14.4            11    13.6          11.5    12.5
La.                                     10    10.9               10     8.7   -1.3     10    10.0            10    13.4            10    14.8
Mass.                                   11    14.5               11    16.8            11    14.6            11    12.0            11    11.6
Md.                                     13    14.4               13    13.4            13    14.9            10    13.8            13    14.6
Maine                                   10    10.6               10    12.9            10    12.4            10    10.5            10    10.1
Mich.                                   15    16.4               15    16.3            15    18.1            15    13.0   -2.0   13.5    15.3
Minn.                                   10    10.2               10    10.7            10     9.3   -0.7     10    11.1            10    11.9
Mo.                                     10    15.7               10    12.1            10    11.1            10    12.8            10    12.6
Miss.                                   10    13.6               10    14.2            10    16.8            10    12.5            10    14.0
Mont.                                   10    11.7               10    17.9            10    14.5            10    18.0            10    17.9
N.C.                                    10    10.9               10    10.0            10    11.2            10    11.1            10    12.1
N.Dak.                                  10     8.0    -2.0       10     6.6   -3.4     10     9.3   -0.7     10     6.5   -3.5     10    11.9
Nebr.                                   10    11.4               10    10.0            10    10.5            10     9.6   -0.4     10    11.7
N.H.                                    10    11.2               10    17.8            10    12.7            10    11.6            10    19.4
N.J.                                    10    15.0               10    12.7            10    15.4            10    16.5            10    12.1
N.Mex.                                  11    20.8               11    12.3            11    15.6            11    15.9            11    17.8
Nev.                                    10    15.4               10    36.4            10    28.7            10    11.1            10    11.3
N.Y.                                    17    17.9               17    17.9            17    19.2            17    19.9            14    18.4
Ohio                                    10    20.9               10    12.8            10    15.8            10    15.4            10    10.5
Okla.                                   10    27.1               10    20.7            10    22.6            10    18.6            10    18.8
Oreg.                                   12    12.8               12    13.3            12    14.0            12    13.4            12    12.9
Pa.                                     10    13.4               10    11.6            10    11.7            10    13.1            10    14.5
P.R.                                    40    45.6               40    49.4            30    58.1            30    94.9            60   113.2
R.I.                                    10    14.2               10    15.1            10    11.4            10     9.1   -0.9     10    13.6
S.C.                                    10    14.2               10    11.4            10     9.8   -0.2     10    10.6            10    11.5
S.Dak.                                  10    10.6               10     9.4   -0.6     10    11.1            10    11.7            10      11
Tenn.                                   10    14.2               10    10.0            10    11.6            10    10.6            10    10.4
Tex.                                    10    11.7               10    12.8            10    12.6            10    12.8            10    38.3
Utah                                    10    11.9               10    15.1            10    11.7            10    12.2            10    12.5
Va.                                     12    13.6               12    15.7            12    16.1            12    15.9            12    16.1
Vt.                                     13    18.3               13    26.2            10    18.8            10    16.8            10    17.9
Wash.                                   16    17.3               16    21.6            16    20.3            16    12.9   -3.1     16    17.3
Wisc.                                   10    13.9               10    13.3            10    12.4            10    10.8            10    10.8
W.Va.                                   10    11.5               10    11.8            10    11.5            10    12.1            10     9.7    -0.3
Wyo.                                    10    11.2               10    11.1            10    12.2            10    11.5            10    11.9
-----------------------------------------------------------------------------------------------------------------------------------------------------
Note:  Differences are shown only when the goals were not attained. 

Source:  GAO's analysis of FHWA's data. 




(See figure in printed edition.)Appendix III
COMMENTS FROM THE DEPARTMENT OF
TRANSPORTATION
========================================================== Appendix II



(See figure in printed edition.)



(See figure in printed edition.)



(See figure in printed edition.)



(See figure in printed edition.)



(See figure in printed edition.)



(See figure in printed edition.)

See comment 10. 

See comment 11. 

See comment 12

See comment 13. 


The following are GAO's comments on the Department of
Transportation's letter (DOT) dated May 27, 1994. 

1.  We agree that most of the states meet the statutory participation
goals of the DBE program and that FHWA and the states have done a
good job of providing opportunities for disadvantaged businesses to
compete for contracts in the federal-aid highway program.  We have
examined and in some cases revised the language in our draft report
to ensure that this conclusion is clearly conveyed. 

2.  Our draft and final reports reflect the instances in which the
states that missed their goals had established (and sometimes
attained) goals in excess of 10 percent.  However, it is important to
note that a state's DBE goal is not 10 percent; rather, it is
whatever the state and FHWA agree upon.  As DOT points out in its
"General and Technical Comments," a state's DBE goal can be 10
percent, more than 10 percent, or even less than 10 percent, with
FHWA's approval.  Often, goals exceeding 10 percent are established
and approved because the higher percentage is warranted on the basis
of the state's DBE population.  When this occurs, these goals must be
met. 

3.  For the two cases DOT discusses, we have revised the final report
to reflect the fact that the Hawaii and North Dakota achieved their
goals in fiscal year 1993.  (See also comment 1.)

4.  We continue to believe that FHWA was slow in requiring states to
justify why they had missed goals, in responding to the states'
justifications, and in monitoring prescribed corrective actions to
ensure that problems were properly resolved in a number of cases in
which the states missed their goals.  We believe that additional
action is needed to prevent such problems from recurring, and we
believe that our recommendation is consistent with FHWA's approach of
cooperative oversight. 

5.  We have incorporated the information that DOT and FHWA provided
on the classroom programs in the southeast into our final report and
have revised our matter for congressional consideration to recognize
the fact that DOT is considering a national, mandatory program
modeled on these programs.  We continue to have two concerns about
the Department's position.  First, we are not convinced that the
technical skills required to estimate costs, order materials, and
undertake other activities are wholly unique and specific to the
highway construction industry.  While certain technical skills are no
doubt unique, DOT has not yet coordinated with SBA to determine which
SBA programs would and which would not meet the needs of DBE firms. 
Second, while DOT says that the supportive services are "intended to
be focused" on the specific technical skills unique to the highway
construction industry, the program FHWA has in place today does not
reflect that focus.  States have wide latitude in designing programs,
and FHWA's regulation on supportive services encourages them to
provide a range of services, including general management assistance
for record keeping and accounting, certification assistance, and
other assistance.  DOT's comments envision a more targeted and
focused supportive services program than the one that is in place
today.  We believe that after DOT works with SBA, it will be in a
better position to assess what areas, if any, SBA programs do not
cover and to incorporate that knowledge into a more focused and
targeted program.  At that time, it may wish to propose funding to
the Congress for such a program. 

6.  According to information that FHWA provided after we received
these comments, the states with an Entrepreneurial Development
Program are North Carolina, South Carolina, Kentucky, and Tennessee. 
We requested the work statements that supportive services providers
are required to submit annually to FHWA.  According to the statements
for Kentucky, North Carolina, South Carolina, and Tennessee, the
Entrepreneurial Development Program was one part of a larger and
broader supportive services program that also provided general
business management assistance. 

7.  Our report points out that the term "graduation" is a misnomer,
and we believe that our report gives proper perspective to the
confusion surrounding the term and to the limitations of its use in
measuring business success.  We recognize that DOT does not view
graduation as a measure of success, and we have added language to the
Executive Summary to clearly convey this.  As to whether graduation
exists in the DBE program, we note that since fiscal year 1988, FHWA
has required the states to report on the number of firms that have
"graduated" as part of the states' required annual reports on their
DBE certifications.  In its instructions to the states, FHWA says
that this "refers to firms which have left the program because they
have exceeded the size standard."

8.  We modified the language of the report to reflect the existing
requirement for the states to report by December 1.  However, we
remain concerned that the corrective action process is significantly
slowed by instances in which FHWA did not require or respond quickly
to the states' justifications.  We believe our recommendation could
improve FHWA's enforcement record with modest additional effort,
without confrontation, and without the need for additional or
excessive regulations. 

9.  While providing contracting opportunities is an important goal of
the DBE program, DOT has also articulated the development of
disadvantaged businesses as a program goal.  Therefore, we support
DOT's consideration of performance measures for evaluating the
progress of the DBEs' development.  We believe this activity would be
beneficial if undertaken in concert with SBA officials who are
undertaking similar projects to develop performance measures for
existing SBA programs. 

10.  We have made changes to the final report to conform with DOT's
suggested technical corrections. 

11.  We believe that the information DOT cites is adequately
presented in the body of the report and would confuse the issue if
repeated in the chart.  Our analysis of contract activity in constant
dollars was made to eliminate any distortions created by changes in
funding levels.  As the report states, when the effects of inflation
are removed, constant dollar funding for the DBE program was actually
less in fiscal year 1992 than it was in fiscal year 1984.  The report
also fully recognizes the fact that legislative changes made in 1987
were followed by large increases in the proportion of contracts going
to women-owned businesses. 

12.  We agree that women-owned businesses and minority-owned
businesses are both DBEs.  The Congress directed us, in ISTEA, to
provide information on the impact of DBE goals on the groups
classified as disadvantaged (see app.  I).  FHWA requires the states
to report annually on the number of DBE contracts and dollars
committed to firms owned and controlled by minorities, by nonminority
women, and by minority women.  We used these data to present our
analysis. 

13.  We have added language to the final report to convey that state
participation in supportive services programs is not mandatory. 




(See figure in printed edition.)Appendix IV
COMMENTS FROM THE SMALL BUSINESS
ADMINISTRATION
========================================================== Appendix II


MAJOR CONTRIBUTORS TO THIS REPORT
=========================================================== Appendix V


   RESOURCES, COMMUNITY, AND
   ECONOMIC DEVELOPMENT DIVISION,
   TRANSPORTATION ISSUES
--------------------------------------------------------- Appendix V:1

Gary L.  Jones, Assistant Director
Steve Cohen, Assignment Manager
Ray Bush, Regional Management Representative
Katherine Chenault, Evaluator-in-Charge
Kirk Kiester, Evaluator
Mike Duvall, Evaluator
Cindy Hooten, Evaluator
Pam Scott, Reports Analyst
Kelly S.  Ervin, Social Science Analyst


   OFFICE OF THE GENERAL COUNSEL
--------------------------------------------------------- Appendix V:2

Michael Burros, Senior Attorney

