The ‘Why’ and ‘How’ of Diverse Suppliers in Construction

“Supplier diversity” means a chance for success by providing a catalyst to build new relationships.
By Paula Finch
July 6, 2022

The phrase “supplier diversity” brings out a variety of reactions from construction industry professionals. It’s a phrase that entered the industry with the establishment of the federal Office of Minority Business Enterprise in 1969 and has evolved ever since. Some professionals associate supplier diversity with the excellent economic benefits that come from having a larger, more diverse pool of suppliers. Others view it as one more inconvenient contract requirement. It is simultaneously neither and both.

The theory of supplier diversity was developed in response to the recognition that the demographics of business owners did not align with the demographics of the American population. Supplier diversity programs were formed for the simple purpose of leveling the playing field for historically under-represented groups such as women and minorities. In today’s discussions about supplier diversity, the focus is almost never on why supplier diversity programs exist and more often on how to meet the goals being imposed. Before focusing on the ”how,” it is important to understand the ”why”.

It may be uncomfortable, but the reality of small business in the United States is that women- and minority-owned companies have struggled to succeed for well-documented reasons including lack of funding, lack of training and lack of opportunity. Supplier diversity programs and goals exist to incentivize under-represented group to enter into business. “Supplier diversity” means a chance for success by providing a catalyst to build new relationships with existing businesses, to develop new products and processes to improve our world. These programs look to bridge the gap and help provide funding and training.

Supplier diversity programs drive economic benefits for all by creating a broader supplier base, lower pricing and increased quality of goods. It is hard to find a construction professional who would not agree that those benefits improve business. Improved business means an improved industry. An improved industry translates to improved opportunity for communities, which ultimately improves all individuals. In the purest sense, the reaction to supplier diversity would be one of joy and hope, a rare find in the modern business world.

Now that the “why” is clear, understanding “how” to get more diverse suppliers in the construction industry starts with certification. Construction professionals may get asked by their clients and customers about how to get certified. The most common answer is to meet the ownership and control tests, but ownership and control is about more than simple math and having the right officer title.

The ownership requirement for certification in most supplier diversity programs provides for the qualified owner or owners (a U.S. citizen with a principal place of business in the United States who meets the applicable criteria, e.g., minority, woman, veteran) to hold 51% of the ownership interests in the applicant company. It is important to note that the ownership requirement is 51%, not 50.9%. Fractional shares count, but certifying agencies do not round the ownership percentage.

The control requirement is at the heart of certification. Control, in terms of certification, means governance control, management authority, operational expertise and independence. Certification applicants must meet all the components of the control test to successfully obtain certification.

Governance control is the easiest component to address if the applicant’s bylaws or operating agreement do not already vest the control in the qualifying owner(s). Ensuring that the qualifying owner cannot be outvoted and that he or she has the ability to remove board members that may otherwise hold the power to block the qualifying owner’s ability to act are key areas to review. Be wary of unanimous consent requirements. Unless all the company’s owners meet the requirements for certification, unanimous consent voting will often lead to a technical denial preventing certification.

Management authority, operational expertise and independence all focus on the actual day-to day-operation of the applicant company. The qualified owner(s) must control the day-to-day operation of the company. If he or she holds the highest defined position in the company while simultaneously working at another job, doubts about management authority may arise. The qualified owner(s) must also have experience relevant to the business. He or she does not need to be the one in the field performing the work, but having the expertise to know what is being done is key.

Spinning off a part of the business to form a new entity for certification (or forming a new entity with a related party) may meet the independence requirement so long as the resulting company can demonstrate that it can operate without reliance on a related entity owned by non-qualifying individuals. Sharing services, equipment or real estate is not fatal to a certification application, but it should be well-documented and accompanied by appropriate rental payments.

Many challenges in today’s business environment can be addressed or at least improved through supplier diversity. Understanding the “why” and “how” of these programs can result in turning confusing and inconvenient contracting requirements into clear and simple business relationships that lead to success for all.

by Paula Finch
Paula Finch is an experienced business attorney who represents closely held businesses and public companies in commercial transactions, acquisitions, negotiations, contracting and supplier diversity business opportunities and certifications.? 

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