The state Department of Transportation and the main contractor for the Highway 99 tunnel failed to make a good-faith effort to hire small businesses owned by minorities and women, according to a bruising report issued Friday by the Federal Highway Administration.

With the tunnel project more than one-third complete, its contractors have paid out 1 percent of the expected $91 million share earmarked for subcontracts with local “disadvantaged business enterprises,” known as DBEs, the 20-page document says.

Investigators found the contractor team imposed unnecessary bonding requirements and red tape on small trucking firms that sought to bid, while the state took a hands-off attitude.

The agency mentioned in a letter to the state that it could suspend or terminate federal funds for the tunnel or future state projects, unless problems are fixed.

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Seattle Tunnel Partners, led by Spain-based Dragados and California-based Tutor-Perini, started construction after agreeing to a DBE hiring goal of 8 percent of the winning $1.14 billion base-price bid.

Project manager Chris Dixon, of Seattle Tunnel Partners, and state transportation department administrator Linea Laird told investigators they considered the goal excessive because the specialized nature of tunnel construction favors larger or established companies, the report says.

State Transportation Secretary Lynn Peterson offered no specific solutions in an interview Friday, but said she intends to hire an independent adviser and produce a plan within 30 days.

“I recognized months ago we were going to need to step up the work on DBE participation,” she said. “Our goal will be to meet or exceed the 8 percent.” An email from Peterson on Friday said the tunnel managers have awarded $42 million in contracts to DBE firms, of which $7 million counted officially toward the goal.

The Federal Highway Administration (FHWA) launched its investigation based on a complaint filed by Elton Mason, owner of Washington State Trucking in Kirkland. He said he failed to get a contract to remove soil from the launch area in Sodo.

He told investigators small firms were hindered by a requirement to bid per load instead of per hour — which saddled truckers with the risk of traffic jams or spikes in disposal fees. Smaller companies would likely have a tougher time absorbing the costs associated with delays.

It will be tough for the project to make up lost ground.

Trucking can be done by small subcontractors, but the launch pit for tunneling machine Bertha is finished, and the north portal excavation near Seattle Center is mostly done.

Current plans are to use barges, not trucks, to remove enough soil to fill a football stadium as the drill continues for the remaining 1.6 miles
to South Lake Union.

An army of electricians, concrete masons, ventilation installers and painters will build the two-deck highway inside the tunnel, potentially creating subcontract opportunities.

Peterson has headed the transportation department since February, and recently promoted Laird to chief engineer. Seattle Tunnel Partners referred questions to the state.

Federal regulations require female and minority subcontractors, regardless of Washington state’s Initiative 200, in effect since 1998, to eliminate race and gender preferences in public projects.

The $3.1 billion Alaskan Way Viaduct replacement budget includes $787 million in federal money.

Investigators also listened to complaints by: Susan Belcher, owner of UniPro Caulking & Restoration; Ardith Lanstra-Nothdurft, owner of the Wakerobin design company; Fred Anderson, owner of Leajak Concrete Construction; Duane May, owner of Western Industries, which installs rebar; and Catherine Bassetti, a photographer who says she signed a $40,000 contract but was never called in to work.

James Hasty, owner of Allied Fuel in West Seattle, told investigators he signed a contract to deliver motor fuel, using a storage tank he would provide — then was told to rebid at a cheaper rate because contractors decided not to use the tank. The job went to a non-DBE firm.

Hasty said Friday he owns just three trucks, and couldn’t afford a demand to pump fuel directly into vehicles already on-site — which would entail sending a truck daily, without knowing in advance whether the rigs actually needed a fill.

“If I’m a small business, you can’t expect me to operate as if I’m a big player,” he said.

Seattle Tunnel Partners has a hiring-compliance manager and has recruited subcontractors and held open-house meetings, which the company pointed to as signs of good faith.

The federal report said that’s not enough.

Investigators looked at the convoluted history of how more than $20 million in trucking work in Sodo was awarded. The firm that started the work was disqualified after complaints that a woman did not actually control the company. A subsequent winning DBE bidder, OMA Construction, was pressured to reduce its bid and didn’t start until summer 2012, the report says.

Hasty, the fueling-business owner, said he’s pessimistic the investigation will give him another shot at tunnel-related work.

“It only matters if there’s going to be some impact,” he said.

Mike Lindblom: 206-515-5631 or