Commercially Useful Function Regulations for Suppliers on Maryland Projects

Maryland public projects fall into one of three categories

1. Maryland public transportation projects in which federal funding makes the federal DOT commercially useful function (CUF) standards applicable.
2. Maryland state executive branch public procurement on which COMAR 21.11.03.12-1 applies.
3. Any Maryland Department of Public Works contracts using state funds, including Maryland county school projects.

Maryland public transportation projects in which federal funding makes the federal DOT commercially useful function (CUF) standards applicable.  This is the easy one, since we have a history of enforcement, at least in New York.  I think the federal regulations say it is impossible to be a DBE supplier, except for a “Regular Dealer” and a traditional non-DBE supplier is only safe selling to a DBE subcontractor that performed a portion of a construction contract with the DBE's own forces and negotiated the price, determined the quality and quantity, ordered and paid for the material.  This is discussed in the newsletter and the section of the chapter entitled “Is it Possible to be a DBE Supplier under DOT Regulations?”

 Maryland state executive branch public procurement on which COMAR 21.11.03.12-1 applies.  This would be “state” executive branch projects only and not “county.”  This would include most state projects. You can do an internet search for Maryland state executive branch for a list of those agencies http://msa.maryland.gov/msa/mdmanual/08conoff/html/01exec.html.  That COMAR regulation has similarities with the federal, stating:

(1) Commercially Useful Function.

(a) A certified MBE performs a commercially useful function when it is responsible:

(i) For execution of the work of the contract and is carrying out its responsibilities by actually performing, managing, and supervising the work involved; and

(ii) With respect to materials and supplies used on the contract, for negotiating price, determining quality and quantity, ordering the material, and installing (where applicable) and paying for the material itself. . . .

(2) A certified MBE does not perform a commercially useful function if its role is limited to that of an extra participant in a transaction, contract, or project through which funds are passed in order to obtain the appearance of MBE participation. In deciding whether a certified MBE is such an extra participant, the procurement agency may examine similar transactions, particularly those in which MBEs do not participate.

(3) A certified MBE is presumed not to perform a commercially useful function if it does not perform or exercise responsibility for at least 30 percent of the total dollar value of its contract with its own work force, or the certified MBE subcontracts a greater portion of the work of a contract than would be expected on the basis of industry practice for the type of work involved. A procurement agency may, however, upon evaluation of the work involved and industry practices, decide that the certified MBE is performing a commercially useful function.[1]

This regulation does not have the “and/or” distinction.  It says “and,” like the federal DOT regulations.  Note, however, that unlike the federal DOT regulations, this Maryland state executive branch public procurement regulations says “a procurement agency may, however, upon evaluation of the work involved and industry practices, decide that the certified MBE is performing a commercially useful function.”   I have advised clients based on this to fully disclose to the contracting officer what has transpired and exactly what will be done and simply ask in writing if this satisfies the CUF standard for this project. Contracting officers will often respond in writing that you are in compliance.

Any Maryland Department of Public Works contracts using state funds, including Maryland county school projects.  This would include a lot of county projects, but not all.  Here, the “and/or” distinction is relevant. The Maryland MBE Program Manual[2] is applicable, stating in part:

Any participating DBE/MBE must serve a commercially useful function on a contract and not function as a broker, unless certified as a broker (insurance, real estate, etc.).  A firm is considered to perform a commercially useful function when it executes a distinct element of work by actually performing, managing and supervising the work involved and/or[3] negotiating the cost of, arranging and accepting delivery of, and paying for the materials or supplies required for the work of its contract. A contractor may count toward its DBE/MBE goal 60 percent of its expenditures for materials and supplies required under the contract and obtained from a DBE/MBE regular dealer, and 100 percent of such expenditures to a DBE/MBE manufacturer. [4]

This could be read to say that a traditional non-DBE supplier is safe selling to a DBE that EITHER “executes a distinct element of work by actually performing, managing and supervising the work involved” OR is “negotiating the cost of, arranging and accepting delivery of, and paying for the materials or supplies.”  Of course, a judge might not agree with this interpretation. Also, the next sentence states  “A contractor may count toward its DBE/MBE goal 60 percent of its expenditures for materials and supplies required under the contract and obtained from a DBE/MBE regular dealer, and 100 percent of such expenditures to a DBE/MBE manufacturer.”  This MAY be saying that the ONLY way to get credit for materials is if they are from a regular dealer or a manufacturer (this is where you end up under the federal DOT regulations).

My research attorney Matt Shockley has also reminded me that we quoted the definition as it appears on page 105 of the Maryland MBE Program Manual. That is in a section called “Contractor Compliance Process”.  It appears to be the authoritative definition, as this section is all about how the use of DBEs will actually be monitored, and what the contractor has to submit each month regarding the participation of the DBEs.  However, the MBE Manual discusses the CUF in other places.

Please also note that the definition used in this article is as it appears on page 105 of the Maryland MBE Program Manual. That definition is in a section called “Contractor Compliance Process”. It appears to be the authoritative definition, as this section is all about how the use of DBEs will actually be monitored, and what the contractor has to submit each month re
garding the participation of the DBEs. However, the MBE Manual also discusses the CUF in other places.

The other places discussing CUF do not contain “and/or” distinction. Specifically:

Page 6 (“Explanation of Terms”): COMMERCIALLY USEFUL FUNCTION: Work performed by a DBE/ MBE in a particular transaction can be counted towards goals only if the Administration determines that it involves a commercially useful function. A certified business is considered to perform a commercially useful function when it is responsible for the execution of a distinct element of the work of a contract and carries out its responsibilities by actually performing, managing and supervising the work involved. That is, in light of industry practices and other relevant considerations, the DBE/MBE must have a necessary and useful role in the transaction of a kind for which there is a market outside the context of the DBE/MBE Program. The firm's role cannot be a superfluous step added in an attempt to obtain credit goals.

Page 36: With regard to the purchase of materials, the DBE/MBE must perform a commercially useful function'. A certified business is considered to perform a commercially useful function when it is responsible for execution of a distinct element of the work of a contract and carries out its responsibilities by actually performing, managing and supervising the work involved. These definitions do not have the “and/or” distinction. They both seem to say that the DBE must be responsible for the execution of a distinct element of the work of a contract and carry out its responsibilities by actually performing, managing and supervising the work involved.

These definitions do not have the “and/or” distinction. They both seem to say that the DBE must be responsible for the execution of a distinct element of the work of a contract and carry out its responsibilities by actually performing, managing and supervising the work involved.

[1] COMAR 21.11.03.12-1.

[2] See the  MBE Program Manual at http://www.mdot.maryland.gov/newMDOT/MBE/Documents/MBE%20Manual.pdf.

[3] The only difference between the Maryland MBE Manual quoted here and the Maryland Federal DBE Manual (which just restates the 49 CFR 26.55(c)(1) regulations) is this “and / or.”  In the Federal regulations there is no “or.” The four pillars appearing there after the “and / or” are mandatory and not optional for determining CUF.

[4] See Maryland MBE Program Manual (July 2014) at pages 6, 36 & 105-115.