On April 9, 2024, the U.S. Department of Transportation (USDOT) published its Final Rule for the Disadvantaged Business Enterprise (DBE) and Airport Concession DBE (ACDBE) programs. This rule marks the most significant overhaul of the DBE Program in a decade, fundamentally impacting Disadvantaged Business Enterprises (DBEs) nationwide. The Final Rule aims to enhance the program’s effectiveness and accountability, ensuring fair opportunities for DBEs in federally assisted contracts.
Below is a high-level overview of the key changes introduced by the Final Rule and summarizes the pertinent adjustments that may affect DBE companies.
Please note that the information provided is for informational purposes only and should not be construed as legal advice. For legal advice, consult with attorneys experienced in DBE certifications to navigate these new regulations effectively.
DBE Final Rule Bullet Points
Financial Adjustments
Increased Personal Net Worth Cap
- Raised from $1.32 million (2011) to $2.047 million.
- Excludes retirement assets from calculations.
- Removes state marital laws or community property rules from calculations.
- USDOT can adjust the PNW cap without future rulemaking.
Certification Process Updates
Modernized Supplier Protocols
- Revised procedures for counting material suppliers.
- Increased procedural flexibility for certifying agencies.
- Updated interstate certification process for expedited handling.
Eligibility Determination
- Maintains rebuttable presumption of socially and economically disadvantaged owner (SEDO) for certain races/ethnicities.
- Applicants must submit personal narratives to prove social disadvantage.
- Certification requires demonstrating the impact of social disadvantage on business entry and advancement.
Reporting and Compliance
Enhanced Data Reporting
- State agencies (recipients of USDOT funds) must report DBE application rates and contract awards.
- Enrollment in an online USDOT system for tracking bids and participation is required.
Prompt Payment Requirements
- Strong enforcement mechanisms for prompt payment and retainage returns.
- Non-compliance could result in material breach of contract or liquidated damages.
New Definitions and Administrative Easing
Updated Definitions and Administrative Easing
- Clarifies DBE and ACDBE program definitions.
- Requires online DBE directories with specific firm details.
- Airports must eliminate obstacles for small ACDBEs, aligning with DBE program requirements.
Ownership and Control Requirements
Ownership Investment Clarifications
- Includes post-initial ownership investments in eligibility determination.
- Requires DBE owner to have paid at least 15% of the investment value at certification application.
Control and Independence
- Socially and economically disadvantaged owner (SEDO) must “run the show” with ultimate decision-making power.
- Firm must prove independent viability despite relationships with other firms.
Additional Revisions
New Subset for DBE Suppliers
- Introduces “distributor” category for DBE suppliers.
- Allows 40% credit for distributor materials.
Flexibility in Certification
- Permits virtual on-site interviews, certification, decertification hearings, and alternative notarization methods.
Summary of Key Changes
These changes aim to enhance the effectiveness and accountability of the DBE program, ensuring fair opportunities for DBEs in federally assisted contracts. The rulemaking and its changes are quite broad. Below are a few highlights of alterations in the DOT DBE Program:
Personal Net Worth of DBE Owners
Under the previous regulations, the personal net worth of DBE owners was capped at $1.32 million. The new personal net worth cap for DBE owners will be $2.047 million, excluding retirement assets from the calculation. Additionally, the new rule removes state marital laws and community property rules from the equation. DBE owners should keep this change in mind when making personal finance decisions moving forward so that they may continue to qualify for and participate in the DBE Program as their net worth grows.
Modernizes Rules for Counting Material Suppliers
Under the prior rule, distributors or wholesalers/resellers were counted at 60% of the value of their goods sold towards small business participation. The new rule updates how DOT counts participation by DBE material suppliers and clarifies some terminology, including the terms “distributor” and “manufacturer.” The term “distributor” is defined in the rule as a new subset of DBE suppliers. Distributors are permitted to drop-ship supplies from manufacturers provided that the firm has a distributorship agreement or assumes all responsibility for the materials after point of origin, allowing a 40% credit for the materials cost. The definition of a “manufacturer” is now updated such that a DBE that makes only minor modifications to existing materials is not a manufacturer for DBE goal attainment purposes.
Under the new rule, prime contractors must establish pre-award procedures to determine whether a DBE supplier they submit as a “distributor” or “regular dealer” has demonstrated the ability to perform as such during the contract.
For regular dealers, prime contractors may count 60% of materials costs toward the DBE goal, while they may count 40% of the materials costs toward the DBE goal for distributors. For a DBE firm to qualify as a regular dealer, it must maintain inventory and own or lease and operate the distribution equipment for the products it is selling. For DBE manufacturers, the rule of 100% counting of materials costs by prime contractors towards DBE goals is unchanged.
Adds a DBE Performance Plan requirement for Design-Build Projects
The new rule requires prime contractors responding to a Request for Proposal on a design-build procurement to submit an open-ended DBE Performance Plan (DPP) with its proposal. In general, these DPPs are required to detail the types of work the prime will solicit DBEs to perform and a projected period in which actual subcontracts will come to fruition. Recipients are to monitor the prime’s adherence to the DPP throughout the life of the contract to evaluate good faith efforts, and parties may agree to make written revisions to the DPP throughout the life of the project. As with other programs, the contractor must make good faith efforts to reach the DBE/small business participation goals and document its efforts towards that effort. The DPP intends to “force” the contractor to think upfront about DBE participation and provide the agency/owner with a first glimpse at the plan and how it will be achieved.
Strengthens Prompt Payment Requirements and Monitoring
Recipients now are required to include proactive monitoring and oversight mechanisms to ensure that prime contractors are complying with retainage and subcontractor prompt payment requirements. This comes because of what the DOT perceived as being a failure of the prior system in which subcontractors would simply complain when they were not being paid.
The new rule also requires monitoring in the following areas by recipients of DOT funds:
A Commercially Useful Function (CUF) review is necessary for every DBE that performs for credit toward a recipient’s overall goal and a contract goal – the CUF was a requirement from the prior program that each small business must provide something that is commercially useful for the project and not merely be a pass-through entity,
Race-neutral compliance guidelines for reviewing DBEs, and
Recipients must keep an accounting of each contractor’s progress in attaining a contract goal through progress payments to the committed DBEs. This running tally requirement permits recipients to intervene if they observe a prime contractor falling short of a contract goal.
Changes to the Certification Process and Admission Requirements
The new rule also requires a potential DBE firm to have operations in the type of business it seeks to perform prior to applying for certification – in effect, it cannot be a new business or new to a given business line. DOT is making this change in the hopes of preventing certifiers from evaluating firms that have no ability to bid (and, in effect, helps meet the CUF requirement). The new rule also reduces the time a certifier can extend a certification review from 60 to 30 days, allowing quicker certification decisions.
As for eligibility, the new rule clarifies that ownership investment includes purchases, capital infusions, additional investments after initial ownership, and gifts. It also permits only one tier of ownership above a subsidiary DBE. Additionally, the control requirements have been altered such that the disadvantaged owners are required to “run the show,” be the firm’s ultimate decision maker, have present control, including control of the board of directors, have an overall understanding of the operations of the firm to make managerial decisions and be at the head of the company’s chain of command. The disadvantaged majority owner also must have decision-making power, and the firm must prove its independent viability, separate from and apart from any relationship with another entity. In other words, the owners must have day-to-day and long-term control and management over the company.
The process for certification of a DBE has also become more individualized because of this new rule in that it provides less prescriptive rules so that certifiers may more accurately make individualized determinations of social and economic disadvantage. Additionally, applicants have greater discretion regarding what evidence to provide.
Business size also plays a role in both certification and maintaining one’s certification as a DBE which now aligns the DBE program with the SBA rule making the 5-year (in lieu of 3-year) average calculation of gross receipts to determine business size for individual NAICS codes. A DBE firm may not qualify as a DBE if it exceeds the program’s gross receipts cap, computed on a cash basis, and averaged over the preceding five years. The rule sets this annual cap at $30.40 million, but it will be adjusted for inflation on a yearly basis under the new rule.
Another aspect of certification within the new rule is interstate certification. The new rule dictates that a DBE is to obtain certification in what is known as its Jurisdiction of Original Certification (JOC), which is typically where its principal place of business is located. Once it is certified in its JOC, it can apply for DBE certification in another state by simply sending a short cover letter with a signed Declaration of Eligibility. This will allow for DBEs to perform work in multiple states, obtain DBE benefits, and help prime contractors/recipients to meet DBE goals without the need to go through the full application process in each separate state, greatly streamlining the process and, perhaps most critically, giving the DBE a consistent review process, as under the current regime, each state certifies (with some reciprocity depending upon the state) and there is an inherent level of subjectivity, such that one state could certify a company as a DBE while another might not. Prior to pursuing a DBE certification in another state, it is recommended the DBE firm contact each state’s Department of Transportation to verify their procedure before proceeding with the application process.
Conclusion
The U.S. DOT Final Rule brings several significant changes that impact DBE companies positively. By enhancing certification standards, improving monitoring and compliance, increasing data accuracy, holding prime contractors accountable, expanding opportunities, and supporting small DBEs, the rule aims to ensure that the DBE program more effectively fulfills its mission of fostering an inclusive and equitable business environment in the transportation industry.
The information included in this newsletter is not a comprehensive description of the Final Rule. For all the details, read the full text of the Final Rule in the Federal Register, the official publication of the United States federal government, posted on April 9, 2024: https://www.federalregister.gov/documents/2024/04/09/2024-05583/disadvantaged-business-enterprise-and-airport-concession-disadvantaged-business-enterprise-program
You can also access USDOT Final Rule Summary on their official website: https://www.transportation.gov/dbe-rulemaking/summarypage
The bottom line: For companies currently certified or seeking certification, understanding these changes is crucial. Government contractors should review the new rulemaking to understand the new monitoring, eligibility, and certification requirements of these new DBE rules.
Please note that the information provided is for informational purposes only and should not be construed as legal advice. For legal advice, consult with attorneys experienced in DBE certifications to navigate these new regulations effectively.
For more information, contact Mary Zimmerman at maryz@iastate.edu or 515-450-1278.