Minnesota has failed for three years to meet federal requirements for a program designed to steer millions of dollars in state transportation projects to minority- and women-owned businesses.

The program has been so plagued by mismanagement and weak oversight that some firms were awarded multimillion dollar contracts for which they might not have otherwise qualified.

In one case, nearly $1.6 million for buying materials on the Union Depot project in St. Paul was funneled through a minority- or women-owned firm to a non-minority-owned contractor. In another case on the same project, nearly $2 million was improperly credited to a non-minority-owned firm.

The findings and others, included in an internal audit of the Disadvantaged Business Enterprise (DBE) program, have led to a shake-up in the Minnesota Department of Transportation's Office of Civil Rights and may result in additional investigations.

"This is absolutely a wake-up call," said state Sen. Scott Dibble, DFL-Minneapolis, chairman of the Transportation and Public Safety Committee. Given the gravity of the issues raised by MnDOT's internal audit, Dibble said he may ask the Legislative Auditor's Office to conduct its own independent review.

Transportation department officials said they are moving quickly to address the shortcomings cited in the audit of the DBE program.

"This is a high priority for Commissioner [Charles] Zelle and the agency. We need to ensure that all contractors have an opportunity to work on MnDOT projects," MnDOT spokesman Kevin Gutknecht said in an e-mail. "MnDOT fully supports diversity and believes that a diverse workforce, internally and externally on MnDOT projects provides a stronger and better outcome and better projects."

The 30-year-old DBE program has long been plagued with fraud and oversight problems at both the federal and state levels. In 2010 and 2011 alone, U.S. Department of Transportation fraud investigations led to $88 million in recoveries, restitutions and fines, along with 10 federal indictments and eight criminal convictions.

Locally, it's also been a source of long-standing, and often costly, frustration for large contractors and DBE contractors alike, said state Rep. Michael Beard, R-Shakopee, who described the program as a "very twitchy, explosive and sensitive subject." Those problems, and clashes over how the program is run, are why he and former state Sen. Joe Gimse, R-Willmar, sought the audit last year.

Federal funds on the line

The DBE program is designed to put firms owned by minorities and women in a better position to compete for public works contracts by requiring states to set minimum goals for their participation. Each state is responsible for seeing that DBE contracting goals are met, that DBE firms are properly certified as eligible for the program and that the pool of DBE-eligible firms is expanded. If those goals are not met, it can mean a loss of potentially millions of federal transportation dollars.

Among the audit's most serious findings, MnDOT, despite its reports to the contrary, never met its DBE participation goals for 2010, 2011 and 2012, which had been set at 8.76 percent. The audit could not substantiate the percentage of construction dollars given to DBE firms, and when documents and calculation were requested, "for some reason the information or calculations were not retained. An attempt to recalculate the rates proved unsuccessful."

The audit also found that MnDOT's Office of Civil Rights was not properly monitoring DBE subcontractors. The audit "found several examples of potential wrongdoing in this area," chiefly, that contracted work that was to be completed by DBEs was never completed by DBEs, yet was included in the participation rate.

The audit also found that MnDOT has failed to increase the number of DBE firms eligible to bid on state projects, and that those firms that are eligible are not participating in bidding.

In one instance, when it was clear that the prime contractor on the Lafayette Bridge was falling short of its DBE participation goal, state officials lowered the target from 12 percent to 6.3 percent. "Our concern is this represents a major change in opinion with little or no documentation," the audit says.

The official who approved that change, Mary Prescott, then-director of the Office of Civil Rights, has since been reassigned to a different job within MnDOT. Gutknecht said that a new acting director was named and the office was moved under the chief counsel to ensure better oversight.

MnDOT has also responded to other concerns raised in the audit, Gutknect said, including a new system to better protect private data, and better record-keeping procedures. But larger issues remain, which is why a follow-up review to gauge that progress is likely.

Low bidders lose out

Contractors have long complained that the DBE goals are arbitrary and too difficult to meet, and can result in higher costs for taxpayers.

C.S. McCrossan Construction Inc. in Maple Grove was the low bidder by nearly $6 million on a $52.3 million contract for the new St. Croix bridge but MnDOT officials determined the company hadn't made clear it would comply with the goal of 16.7 percent participation by DBE firms in the project.

The company disputed that decision and sued. The case was settled last month.

Charlie McCrossan, who runs the business with his son, Tom, said firms like his struggle to comply with the demands of the program laid down by MnDOT, especially when the agency shifts the rules as he said it did in the case of the St. Croix bridge bid. The loss of a potential contract was disappointing, he said, but the state's wasting of so much money is inexplicable.

The audit points to confusion and lack of direction on the part of those overseeing the DBE program, which only fuels his exasperation. "In a word, they're dysfunctional," McCrossan said.

MnDOT says the rules are clear.

"The DBE program and requirements are not new and have not substantially changed over the last 10 years" Gutknecht said in an e-mail.

The bridge contract is not the first low bid rejected over DBE issues, but it is the largest.

Over the past three years, MnDOT, the Metropolitan Council and the Metropolitan Airports Commission awarded 20 contracts to firms that didn't submit the lowest bids but met requirements for giving work to women or minorities certified as disadvantaged. Those 20 contracts cost a total of $1.8 million more than the lowest bids of other contractors for the work.

One successful contractor won a job even though he charged 11 percent more — $380,000 — than the low bidder.

Gutknecht points out that the "DBE program is not a low-bid program. Instead, it is focused on increasing the amount of minority- and women-owned business participation on federally funded contracts, so long as the additional cost is not excessive or unreasonable."

For Gilbert Odonkor, whose Yaw Construction Group on the north side of Minneapolis is a DBE-certified firm, the program is his lifeblood.

"One would ask, 'Is this program necessary?' " said Odonkor, an immigrant from Ghana who started his business in 2006. "Absolutely. After all these years, you would think that there wouldn't be a need for such programs."

Odonkor, who also is president of the National Association of Minority Contractors' Midwest chapter, agrees with McCrossan that there are frustratingly few minority contractors to choose from in the marketplace.

But inserting needed fairness into the construction bidding marketplace is why the DBE program needs to be strengthened, Odonkor said. From his perspective, the failure to quantify progress and compliance are damaging to firms like his.

"We want to grow our business outside the program," he said, adding: "We don't want the program to be the defining confines of our business. We want to be able to operate as a mainstream business."

Until that time comes, though, Odonkor relies on a well-run DBE program. He fears the audit, and the problems it revealed, won't be taken seriously.

"Without those goals, we don't get called to the table," he said. "And that's wrong."

Frustration on all sides

Beard, the Republican from Shakopee who asked for the audit, said it came after hearing a litany of complaints from MnDOT, prime contractors like McCrossan and minority-owned contractors like Odonkor."Frustration is what I hear from all sides," he said.

Correcting mistakes of the past by inflicting an unfair system on businesses brings inherent problems, he said. It's hard for businesses and MnDOT alike.

"In essence, we're fighting discrimination with discrimination," he said. "It's an incredibly difficult situation."

But failing to comply with federal DBE guidelines could potentially put millions of transportation dollars the state receives each year in jeopardy, Dibble says. So lawmakers are watching closely to see that recommendations in the audit are complied with.

"It's not just about liability and exposure," he said. "It's the right thing to do."

Staff writer Pat Doyle contributed to this report. Jim Anderson • 651-925-5039 Twitter: @StribJAnderson