After more than 25 years, there still seems to be confusion over what is an eligibility issue for disadvantaged business enterprises (DBEs) and what is a counting issue for prime contractors. As many contractors know, I have suggested that the DBE regulations are at best confusing and ambiguous. For example, the very things prime contractors are told they must do to have made “good faith efforts” to meet a DBE contract goal call into question the independence of the DBE firm. Because of the ambiguity of the regulations, the same actions by a prime contractor may be praised by one government representative and condemned by another. What follows is my attempt to identify what prime contractors need to know about DBE participation and eligibility determinations of DBEs based on their independence:
An exclusive or primary relationship with a non-DBE is an eligibility issue not a counting issue;
- Advance payment to a DBE also is an eligibility issue, but many government officials believe it also is a counting issue;
- Commercially useful function determinations are made in connection with DBE contractors and subcontractors and DBE truckers;
- The words “commercially useful function” do not appear in the regulations governing material suppliers. Materials supplied by DBE material suppliers are governed by rules relating to whether the DBE is a manufacturer, regular dealer or broker;
- When a DBE subcontractor furnishes and installs materials, it must negotiate price, determine quality and quantity, order the material and install (where applicable) and pay for the material itself;
- Both for eligibility and counting, there is no per-se problem with DBEs leasing equipment from prime contractors. Instead, for eligibility, the DOT must determine whether it compromises the independence of the DBE. For counting, the amount of the lease should not be counted toward the goal; and
- If a DBE is decertified after the prime contractor enters into a contract, the prime contractor can count the amount of the subcontract toward the contract goal, but the state DOT may not count the amount toward its overall goals.
Counting DBE participation is covered by 49 CFR § 26.55. Determinations of whether a DBE is eligible to be certified is done in part under 49 CFR § 26.71, which covers control necessary to be eligible.
Under section 26.71(b) only an independent business may be certified as a DBE. An independent business is one the viability of which does not depend on its relationship with another firm or firms.
In determining whether a potential DBE is an independent business, state DOTs are directed to scrutinize relationships with non-DBE firms in such areas as personnel, facilities, equipment, financial or bonding support and other resources. That includes examination of the firm’s relationships with prime contractors to determine whether a pattern of exclusive or primary dealings with a prime contractor compromises the independence of the potential DBE firm. In other words, an exclusive relationship with a prime contractor may go to whether the DBE is independent or not, but has nothing to do with whether the DBE is performing a commercially useful function. All of the determinations of independence are supposed to be done by considering the consistency of relationships between the potential DBE and non-DBE firms with normal industry practice.
Section 26.71(m) covers equipment. DOTs are directed to consider whether the firm owns equipment necessary to perform its work. However, they must not determine that a firm is not controlled by socially and economically disadvantaged individuals solely because the firm leases, rather than owns, such equipment, where leasing equipment is a normal industry practice and the lease does not involve a relationship with a prime contractor or other party that compromises the independence of the firm.
In my column next month I will address the DBE regulations governing counting DBE participation.
