New Horizons for DBEs: Understanding the Latest USDOT Regulatory Changes

By: Jennifer R. Budd

When approaching a presidential election, regardless of who is in the White House, many regulations are finalized in the spring before the election. This is done to avoid the “look back” period of the Congressional Review Act, which allows the next congress and president to invalidate regulations passed later in the election year. This spring was no different, and the administration finalized many regulations, including a highly anticipated final rule from the U.S. Department of Transportation (DOT) on Disadvantaged Business Enterprises (DBE).

The new DBE rule (49 CFR 23, 49 CFR 26) arose, in part, from the Infrastructure Investment and Jobs Act of 2021 (IIJA), more colloquially known as the bi-partisan infrastructure bill. The IIJA, in addition to reauthorizing the DBE program, included many directives pertaining to administration of the DBE program. Regulations were necessary to enact the statutory directives. Further, because DBE obligations flow down to recipients of IIJA funds, such as states and municipalities, those receiving IIJA funds needed to understand how they should implement and apply the IIJA provisions applicable to DBEs.

The rule affects all those involved in the building of infrastructure and transportation projects—public owners, contractors, subcontractors, suppliers and more. Not surprisingly, it touches many aspects of the DBE program, including DBE certification, methods for contractors to satisfy DBE goals and mandates for local contracting entities. So, what are some of the most significant changes?

DBE Certification Changes

Any new DBE applicants or those seeking to re-certify must consider the rule when assessing eligibility for the DBE program.

While an enterprise must still be 51% owned and controlled by a socially and economically disadvantaged individual or group of individuals, the rule increased the personal net worth limit for the 51% owner(s) from $1.32 million to $2.047 million. A key part of the rule is that assets in retirement accounts are not included in calculating net worth. Financial and business advisors are smart to understand the requirements to assist clients in accurately meeting financial limits. DBEs must also be small business according to standards maintained by the Small Business Administration (SBA). The rule now allows enterprises to use the previous five fiscal years to show compliance with the SBA limit instead of the three years under the earlier regulations. The rule provides “notice and cure” opportunities for non-compliant DBE applicants. This will assist DBEs who may have not fully understood the regulations or erred on their application.

DBE Goal Satisfaction

All projects funded by the IIJA include a goal for DBE participation. But, the goals set by the DOT are a floor; many states and municipalities include higher goals. The rule expands ways the DBE goals can be satisfied.

The rule increases the avenues a prime contractor can take to satisfy a DBE goal by recognizing and defining DBE distributors for the first time. Materials or supplies purchased from a qualifying DBE distributor can count up to 40% of a prime contractor’s goal.

However, a prime contractor can meet no more than 50% of a DBE goal on a single contract through the use of DBE suppliers (which includes manufacturers, regular dealers, distributors or transaction facilitators). Thus, the rule encourages prime contractors to satisfy DBE goals by retaining subcontractors to perform work, not just supply material. The limit may be increased with prior approval from the relevant federal government agency administering the funding for projects that are, for example, material-intensive.

To assist contracting entities in determining how much credit should be provided to a DBE supplier, the rule includes questions and affirmations that proposed DBE suppliers should complete. States and municipalities receiving IIJA or DOT funding should include them in bid documents.

Directives to States and Municipalities

The rule also addresses some of the criticisms from prime contractors, contracting entities and DBEs about how the program works in practice such as inaccurate or incomplete DBE directories and prompt payment of DBE subcontractors.

Sections of the proposed rule pertaining to the DBE directories received a large number of comments. Prime contractors, or those contractually responsible to meet DBE goals, have long complained that accurate DBE directories are essential to timely find DBEs in various trades and locations. The DOT decided against a national directory. Instead, the rule requires states to maintain online, searchable DBE directories for contractors to find DBE firms. However, the rule only requires limited information to be included, such as “firm name, location, NAICS code(s), and website.” The DOT specifically noted in its response to comments that “the directory is not primarily about the resources, equipment, bonding, experience, or other qualifications of a firm to do particular sorts of work” but that assessing such factors is part of the due diligence placed upon prime contractors in selecting DBE subcontractors. Thus, prime contractors will still need to vet firms listed in the directories to ensure that they have the experience, capacity, financial resources, equipment and access to labor to successfully perform the work.

The rule requires states and entities to proactively monitor prime contractors’ compliance with subcontractor prompt payment requirements rather than simply rely upon late payment complaints from subcontractors. The DOT’s response to comments on the proposed rule suggested that contracting entities could include liquidated damage provisions in a prime contract regarding DBE prompt payment. This provision in the rule could set up a situation where contracting entities find themselves squarely in the middle of a dispute between a DBE subcontractor, on one hand, claiming that payment is being wrongly delayed; and on the other hand, a prime contractor claiming a contractual basis for withholding payment such as defective or delayed work.

The rule expands annual reporting requirements for states to provide the names of DBE contractors that performed work, trades performed, dollar value of contracts, number of firms listed at commitment but were replaced and the reason for replacement, and the number of firms decertified as DBEs.

Since the IIJA encourages the expanded use of design-build contracts, the rule prevents these projects from evading DBE participation obligations. Under the rule, design-builders submitting proposals on projects funded by the IIJA (or other applicable funding sources) must include a DBE performance plan. The contracting entities must monitor “good faith efforts” to comply with the plan and schedule.

Like many large-scale regulation changes, all stakeholders can likely find sections to applaud and jeer. The rule certainly does nothing to decrease the cumbersome nature of the DBE program. However, if state and municipalities can fulfill directory requirements, and accurately and timely assess goal satisfaction with the expanded methods, rancor in the bidding phase and during projects may decrease. This may lead to more certainty for all those who build the country’s infrastructure, while meeting the goal of the DBE program to “spread the wealth” of taxpayer spending.

Reprinted with permission from the August 13, 2024 edition of “The Legal Intelligencer” © 2024 ALM Media Properties, LLC. All rights reserved. Further duplication without permission is prohibited. For information, contact 877-257-3382, reprints@alm.com or visit www.almreprints.com.