LAW: The Contractor's Side

New DBE regulations raise issues

Article December 28, 2000
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As readers are undoubtably aware, on Feb. 2, the U.S. Department of Transportation (U.S. DOT) issued its final rule on the Disadvantaged Business Enterprise (DBE) program, which became effective on March 4. I believe U.S. DOT has clearly attempted to avoid the recent court decisions, finding its DBE program to be unconstitutional as a result of not being “narrowly tailored.”

All parties are potentially affected by a waiver provision, under which state DOTs could fashion their own DBE program, presumably with the assistance of the contracting industry. A recipient can apply for a waiver under Section 26.15 of any provision of Subpart B or C of the regulation, including, but not limited to, any provisions regarding administrative requirements, overall goals, contract goals or good faith efforts. Program waivers are for the purpose of authorizing the recipients to operate a DBE program that achieves the objectives of the regulations means that may differ from one or more of the requirements of the regulations.

There are two areas that will be of great interest to prime contractors. First, Section 26.29 which establishes a prompt payment provision that could create problems both in subcontractor relations and cash flow. Under that section, state DOTs must establish a prime contract clause which requires prime contractors to pay subcontractors within a specified number of days from receipt of payment from the DOT. In addition, the clause must require prime contractors to pay retainage within a specified number of days after the subcontractor’s work is satisfactorily completed. Section 26.29 also permits the DOT to require that subcontracts include an alternative dispute resolution provision for disputes that may arise between a subcontractor and a prime contractor.

A second issue that will be of interest to prime contractors is how they will meet contract DBE goals. As explained below, there should be fewer contracts that require DBE subcontractor participation. In addition, state DOTs should be required under the new regulations to actually recognize good faith efforts. Beyond that, state DOTs may be required to address overconcentration of DBEs in specialty subcontracting fields. The measures they use may include varying the use of contact goals to ensure that non-DBEs are not unfairly prevented from competing for subcontracts. These measures may provide hope for non-DBE specialty subcontractors, while at the same time impacting how prime contractors will meet DBE contract goals.

The counting provisions also will affect prime contractors’ ability to meet DBE goals. When a DBE subcontracts any portion of the work to a non-DBE, that portion does not count toward the contract DBE goal. If prime contractors expect to count materials and supplies toward the DBE goal, the DBE must negotiate the price, determine quantity and quality, order the materials, install the materials and pay for them. Trucking rules also have been changed. When a DBE leases trucks from a non-DBE, credit will only be given for the amount of the fee or commission kept by the DBE. Credit for the hauling itself will only be given for the trucks owned, insured and operated by the DBE using drivers it employs.

There are two major issues that will affect DBE contractors’ certification. First, the new regulations make clear that for purposes of determining whether a DBE firm is a small business, the state DOT or recipient must base its determination on the Standard Industrial Classification code which best describes the DBE business. Under the classification system, many DBEs will not be judged by the $16.6 million annual volume size standard. Second, under the new regulations a DBE owner’s net worth, excluding the value of their ownership interest in the DBE firm and the equity in his or her primary residence, may not exceed $750,000. DBE applicants will have to submit a statement of personal net worth and supporting documentation to the recipient with their applications. I am certain that most business owners do not wish to have government officials reviewing the business owners most intimate financial information.

There are many new requirements placed upon state DOTs and other recipients. The first requirement is that under Section 26.21(b)(1), recipients must submit their new DBE program conforming to the new regulation by Aug. 31. Second, as explained above, under Section 26.33 recipients may be required to address “overconcentration” so as to avoid unduly burdening non-DBE firms. Third, an operating administration, such as FHWA, may direct a recipient to establish a DBE business development program to assist firms in the ability to compete successfully in the marketplace outside the DBE program. Fourth, U.S. DOT has established more stringent requirements on how recipients establish overall DBE goals. Recipients cannot simply rely upon the national DBE goal of 10% but must go through a process to set DBE goals based on their own situation. Finally, under the new regulations recipients will have to meet the maximum feasible portion of their overall DBE goal by a race-neutral, or non-contract DBE goal, means. Each time a recipient submits its overall goal for review, it must also submit its projection of the portion of the goal it expects to meet through race-neutral means.

On paper, the new DBE regulations appear to address many of the legal points made by courts in finding the “old” DBE program unconstitutional. I believe the new regulations will change the focus of future lawsuits from the federal regulations to how the state DOTs are implementing the new program.

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