[co-author: Christopher Wiezbicki]

On May 9, 2024, the United States Department of Transportation’s (“USDOT”) amendments to the rules governing the Disadvantaged Business Enterprise (“DBE”) and Airport Concession Disadvantaged Business Enterprise (“ACDBE”) went into effect. According to USDOT, the change to the regulations “improves program implementation in major areas” including:

• updating personal net worth and program size thresholds for inflation;
• modernizing rules for counting of material suppliers;
• adding elements intended to foster greater usage of DBEs and ACDBEs; and
• making technical corrections to commonly misinterpreted rules.

These regulatory changes will have an impact on administration of the DBE and ACDBE program at the federal, state and local levels. Contractors performing federally funded work along with DBE firms must become familiar with these changes.

A brief summary of the more significant changes include:

Retainage and Prompt Payment

USDOT is encouraging recipients (i.e., state DOTs) to establish shorter time frames for release of retainage following satisfactory completion of a DBE’s work on its portion of the overall contract. USDOT establishes a basic upper limit of thirty (30) days for payment and for return of retainage. If a recipient’s program calls for a shorter payment cycle, the shorter duration will prevail. Conversely, if a recipient’s program requires payment to be made on a cycle greater than the 30-day period, the new regulation will prevail and thereby mandate the 30-day period on any USDOT-assisted contract. Of particular note, the USDOT’s comments to the rule change urge recipients to adopt “strong enforcement mechanisms,” such as making the failure to meet these prompt payment requirements a material breach of contract, or an explicit cause for liquidated damages in a prime contract. Simply put, USDOT wants recipient program administrators to make “prompt payment and return of retainage a point of emphasis.”

Every DBE program must now include mechanisms that DOT recipients must use to monitor the general contractor’s compliance with subcontract prompt payment and release of retainage requirements. Several jurisdictions already have strong prompt payment mechanisms in place affecting the timing for the subcontractor, but with the new emphasis on enforcement mechanisms, general contractors should be on the lookout for programmatic changes within each jurisdiction they are working, and should review subcontract forms to ensure compliance with prompt payment requirements, which also includes a flow down requirement to all lower tier subcontractors.

Design-Build Contracts with DBE Goals

For those firms engaged in Design-Build projects, the new rule requires that, in the context of design-build contracts, the bidder or offeror must submit a DBE Performance Plan (“DPP”) with its proposal. This includes a commitment to meet DBE goals and to provide dollar amounts and timeframes for the type of subcontracting work the proposer will hire DBEs to perform. The recipient, in turn, must monitor the builder’s “good faith efforts” to comply with the DPP. Both can agree to revise the DPP during the duration of the construction project.

Termination of DBE Firms

USDOT emphasizes that prime contractors must obtain written consent from their contracting agency prior to terminating a DBE for cause, pursuant to 49 C.F.R. § 26.53(f). USDOT further clarified that this requirement applies both to complete terminations and partial terminations. The latter would include removing a work item or decreasing the amount of work a DBE is to perform. However, as the concept of deductive changes arising out of decrease in quantities or other means of eliminating work items has been misconstrued by certain recipients as a “termination” resulting in sanctions being levied against prime contractors, USDOT clarified that a termination is not inclusive of “change orders initiated” by the recipient that resulted in eliminating some or all of the work the DBE was to conduct.

USDOT also clarified that termination is a “separate and distinct” process from substitution. Substitution occurs after termination, and the regulations require that prime contractors, after terminating a DBE subcontractor for good cause, make good faith efforts to find a substitute DBE. Such efforts include finding another DBE to perform at least the same amount of work that the original DBE was contractually obligated to perform “to the extent needed to meet the contract goal.” 49 C.F.R. § 26.53(g). These efforts must also be documented by the contractor, and the recipient can request such documentation, which must be provided within seven (7) days. Renewed emphasis on proper documentation of good faith efforts is very important to insulate prime contractors from potential sanctions.

DBE Credit for Material Suppliers

In calculating DBE participation by DBE suppliers, the new rule changes 49 CFR § 26.55(e), the regulation that identifies how DBE participation is counted toward DBE goals.

The rule change also adds a “distributor” as a new subset of DBE suppliers. Distributors are permitted to drop-ship from manufacturers if the firm has a distributorship agreement or assumes all responsibility for the materials after point of origin, allowing 40% credit for the cost of materials.

DOT recipients must establish pre-award procedures to determine whether a DBE supplier included in a pre-award commitment as a regular dealer or distributor has demonstrated the ability and intent to perform as a regular dealer or distributor during the contract. Regular dealer materials can be credited for 60% of the cost of materials towards the DBE goal, while distributors, as noted above, allow for 40% of the cost of materials to count toward goal.

The new rule also seeks to clarify the definition of “manufacturer” making it clear that a DBE that makes minor material modifications to a product is not a “manufacturer” for the purpose of meeting DBE goals.

DBE Certification

Prior to applying for certification, a DBE firm must have business operations in the type of business it seeks to conduct. However, USDOT clarifies that an applicant need not have had previous contracts for certification, and rather notes that it “expects certifiers to make the necessary judgment calls to determine when an applicant firm is sufficiently ready to participate in the program if certified.” Certifiers still have ninety (90) days to complete their review of an application, but now can only extend this review period for 30 days as opposed to 60 days.

Moreover, the new rule requires that the disadvantaged business owner maintain a certain level of control over her DBE firm. Specifically, the owner must have authority to make decisions and actually make such decisions. In other words, “[i]t comes down to whether the [owner] in fact—not just in theory or on paper—runs the show.” Control determinations are based on a three-part test that includes the following: (1) the DBE firm must show that its disadvantaged business owner receives information from subordinates; (2) the owner analyzes such information, and; (3) the owner subsequently makes independent decisions. Regarding the third factor, USDOT notes that an owner can delegate tasks, so long as she maintains the authority to revoke such a delegation. That is, everyone within the DBE firm must recognize and respect the “chain of command” within the organization.

The new rule allows for DBEs to only have one level of ownership above its operating DBE company, or a single “parent company.” The specific type of business entity the parent company exists as is not relevant, but rather need only allow the operating company’s ownership to comply with the certification requirements.

The size of a DBE is also relevant for its certification. The rule sets out that a DBE company cannot exceed the statutory gross receipts cap of $30,400,000, which will be adjusted yearly to account for inflation. This is determined on a cash basis and averaged over the previous five years.

Further, the new rule requires DBE firms to be certified in its “jurisdiction of original certification” (“JOC”), which is ordinarily its principal place of business. It must then submit a Declaration of Eligibility (“DOE”) annually. Following certification in its JOC, to become certified in another state, the DBE firm need only submit a short cover letter and a DOE. This cover letter must include a statement that the DBE firm is applying for certification in the respective state, and must include a list of all other states in which it has certification. Once certified in another state, the DBE firm must also submit an annual DOE to the respective state.

DBE Personal Net Worth Cap

The new rule provides for an increase to the personal net worth cap for DBE owners to $2,047,000. This number was determined by taking into account inflation, the most common forms of wealth (e.g., personal assets, real estate assets, life insurance policies, etc.), and the fact that business owners have a greater net worth than the overall population. This in turn, per USDOT, will allow businesses to grow, will establish a cap based on “current and relevant data,” and will make certain that the DBE program’s eligibility is not overbroad.

This number is an increase from the previous cap, which was set at $1,320,000. The owners’ personal net worth does not include community property or assets held in qualified retirement accounts, however. Future adjustments to this cap will be made every three years.

DBE Decertification During a Project

Under the previous rule, when a DBE firm was decertified while still performing a contract, the prime contractor could continue to use the DBE subcontractor and also receive credit toward the DBE goal. This continues to be in effect, but with an exception for DBE firms that lose their certification by way of a merger with or acquisition by a non-DBE firm. Under those circumstances, continued work will not count toward the contractual DBE goal.

Further, USDOT requires that the prime contractor receive written consent of the recipient (i.e., state DOTs) prior to adding work or extending a completed contract with a firm that was previously certified.

Conclusion

Contractors should be not only cognizant of the new rule in order to understand the new requirements for working with DBE firms, but also to be aware of imminent modifications to recipient DOT’s DBE programs in response to the rule changes.