On April 9, 2024, the U.S. Department of Transportation published its Final Rule to the Disadvantaged Business Enterprise (DBE) and Airport Concession DBE (ACDBE) programs. The Final Rule is the most significant overhaul to the DBE Program in a decade, and it’s set to take effect on May 9.

The changes include a substantial raise to the Personal Net Worth cap for DBE owners from $1.32 million (established in 2011) to $2.047 million. The changes also exclude retirement assets from the PNW calculation. It further removes state marital laws or community property rules from the PNW calculations. It allows USDOT to make changes to the PNW cap without future rulemaking, as well.

The Final Rule modernizes the protocols for counting material suppliers; incorporating procedural flexibilities and eliminating procedural burdens; updating the rules to give certifying agencies less-prescriptive rules, and more flexibility, in determining eligibility; revising the process for interstate certification; and correcting technicalities for commonly misunderstood rules. The revisions are vast and they substantially change how the DBE program will be administered by certifying agencies.

The DOT did not make significant changes to its process for determining whether a DBE is owned by a socially disadvantaged individual. The department will continue to use a rebuttable presumption of social disadvantage for certain races and ethnicities. USDOT has maintained this approach even though other federal programs that have used a similar rebuttable presumption have been found to be unconstitutional, and the rebuttable presumption used in the DOT DBE’s program is currently being challenged.

Certifiers of DBEs can challenge an applicant’s claim of social disadvantage if they have a reasonable basis to do so. If such a challenge is made, the applicant has the burden of proving social disadvantage. However, the DOT explained that a challenge does not require proof of a complaint of discrimination or other tangible evidence:

Applicants have to submit a personal narrative detailing the experiences that demonstrate the social and economic disadvantages they have had to contend with. While applicants bear the burden of both production and persuasion with respect to all elements of certification, certifiers must holistically evaluate all presented evidence before making a determination.

We reiterate that an owner need not have filed a complaint of discrimination as a prerequisite for claiming social disadvantage. Nor must an owner produce corroborating evidence, as such evidence may not exist. The final rule merely levels the field by removing what amounts to a higher burden than “preponderance of the evidence.” The owner still must make his case, and the certifier may disregard a claim of social disadvantage where the individual presents evidence of discriminatory conduct but does not connect that conduct to negatively impact on his own entry into or advancement in the business world. On this point, the Department is following SBA’s guidance that individuals need to provide “a complete picture, or additional facts that would make an individual’s claim of bias or discriminatory conduct more likely than not.” Like SBA, certifiers should not intend as a matter of course, to disbelieve an applicant but should continue to rely on the affidavits and sworn statements, as long as those statements clearly establish an instance of social disadvantage.

…

The rule at § 26.67(a) aligns with the Department’s surface authorization requirement to follow SBA’s definition of members of groups deemed socially disadvantaged; and § 26.67(d) retains SBA’s regulatory requirements that a person who is not socially disadvantaged must make an individual showing of disadvantage. To do so, § 26.67(d) requires an owner to identify at least one objective distinguishing feature (ODF) that resulted in racial, ethnic, cultural, or other prejudice against him personally and describe with particularity how the ODF caused personal social disadvantage. The owner may provide evidence related to the owner’s education, employment, or any other evidence the owner considers relevant.

The following is a summary of the most significant changes to the DBE/ACDBE programs:

• Requires “recipients” (state agencies that receive USDOT funds) to report additional data about DBE application rates and contract award information. Recipients would have to enroll into an online USDOT system and enter information about companies bidding on applicable contracts and subcontracts for DBEs and participation of ACDBEs.
• Clarifies DBE program definitions and aligns ACDBE program definitions with DBE program definitions.
• Eases administrative requirements and creates DBE opportunities by requiring recipients to expand DBE directory information. The information required to be included in the directory is limited to “firm name, location, NAICS code(s), and websites. The directory, which we now clarify must be an online platform, must permit the public to search and/or filter for these items in addition to the types of work a firm is seeking to perform.”
• Requires airports to take steps to eliminate obstacles for participation by small ACDBEs by replicating the DBE program’s small business element requirements.
• Requires prime contractors that are responding to a design/build procurement to submit a DBE Open Ended Performance (OEPP) with their proposals, in lieu of identifying DBEs that will be performing the work. The OEPP:

must include a commitment to meet the goal and provide details of the types of subcontracting work or services (with projected dollar amount) that the proposer will solicit DBEs to perform. The OEPP must include an estimated time frame in which actual DBE subcontracts would be executed. Once the design-build contract is awarded, the recipient must provide ongoing monitoring and oversight to evaluate whether the design-builder is using good faith efforts to comply with the OEPP and schedule.

Recipients are required to monitor the prime’s compliance with the OEPP and evaluate good-faith efforts.

• Adds “distributor” as a new subset of DBE suppliers, which is permitted to “drop-ship from manufacturers” if the DBE firm has a distributorship agreement, or assumes responsibility for the materials after the point of origin. This will allow for a 40% credit for the cost of such distributor materials.
• Requires pre-award procedures to be established by a recipient to determine whether a DBE supplier can be counted toward DBE goals and comply with the rule’s commercially useful function requirements. Those procedures include “requir[ing] recipients to look in detail at how a DBE supplier would provide supplies and materials to the contract to provide more certainty whether the contractor would be entitled to count 60 percent of the cost of supplies toward goal attainment during contract performance. The recipient would do so by asking a series of questions with respect to the role of a proposed DBE supplier.”
• Establishes requirements for prompt payment of DBEs, including proactive monitoring and oversight of prime contractors’ compliance with prompt and retainage payment requirements. USDOT’s comments state:

adopting strong enforcement mechanisms is critical to making prompt payment and retainage return requirements work. For example, making failure to meet these requirements a material breach of contract, or an explicit cause for liquidated damages in the prime contract, are among many possible measures for this purpose. Letting failure to comply go unnoticed, or to be without consequences, is not an acceptable option.

• Implements flexibility in the certification process by allowing virtual on-site interviews, virtual certification, decertification hearings, and alternative notarization methods (all guidance from COVID-19).
• Raises the PNW cap from $1.32 to $2.047 million and excludes retirement assets from the calculation. It also removes state marital laws or community property rules from the calculation. It includes “household contents” of a primary residence but excludes half if the DBE owner lives with a spouse. Motor vehicles of any type belong to the person who is the primary operator. Finally, USDOT gave itself flexibility to adjust the PNW cap in the future without rulemaking, with the use of Federal Reserve data.
• One of the arguably more controversial changes requires a firm to “have operations in the type of business it seeks to perform before it applies for certification.” Commenters who opposed this new requirement argued that it would “create a disincentive to entrepreneurship in non-traditional types of work.” In response, USDOT maintained the operations requirements and stated that certifying agencies “should not be involved in what amounts to certifying a business plan.”
• Implements less burdensome and expedited interstate certification process by allowing a DBE certified in one state to submit a written request to be certified in another, and provide evidence of certification and a declaration of eligibility to the other state. The other state must then certify the DBE firm within 10 days. Only after the firm has been certified, may the other state’s certification agency initiate a certification review and a determination of whether the DBE firm is eligible. That state agency must then notify any other states where the firm is certified and explain why it found reasonable cause for decertification. Those other states must respond within 30 days to concur or not. Only after receiving all responses from the other states may the state that initiated decertification issue a notice of intent to decertify.
• Amends ownership requirements for DBE certification eligibility by clarifying that ownership investment includes those investments made after initial ownership, removes the marital property provisions, and establishes special rules for when an individual borrower finances the investment. The change requires the DBE owner/borrower to have paid, on a net basis, at least 15% of the total value of the investment by the time the firm applies for certification. See 49 C.F.R. 26.70.
• Only permits one level of ownership above the company seeking certification. The DOT explained that “there could be a subsidiary and its parent company, but there could not be a ‘grandparent’ company above both of them.”
• Revises control requirements for certification eligibility by requiring the disadvantaged majority owner to “run the show,” meaning that they must
  • • be the ultimate decision maker
    • be able to make governance decisions without concurrence or consent from non-disadvantaged individuals
    • hold the highest officer position in the company
    • have present control of the board of directors
    • have an overall understanding of the firm’s operations to the extent necessary to make managerial decisions
    • demonstrate a chain of command within the company

The disadvantaged majority owner must also independently make major decisions that affect the firm’s prospects after receiving information from non-decision makers and critically analyzing it based on the owner’s knowledge.

• Clarifies that the firm must prove that it is independently viable, notwithstanding a relationship with another firm from which it receives or shares essential resources. The DOT explained that:

The regulation does not prohibit relationships with other firms, including relationships that may create affiliation. Nor does the regulation prohibit a firm from providing services only to one business, or only a few businesses. That scenario might arise in a locale that has a limited number of potential customers. However, the DBE must not be used as a conduit or pass-through to obtain DBE credit. In any case, where an applicant has relationships with other firms, the applicant must demonstrate that it is independently viable, notwithstanding relationships with another DBE or non-DBE firm.

A pattern of regular dealings with a single or small number of firms does not necessarily compromise a firm’s independence. Importantly, the changes removed the control provisions relating to constraints on family businesses, licenses, and equipment, outside employment, and disadvantaged owner’s remuneration. Under the revised rules, the firm may still be certified if the license holder is someone other than the disadvantaged owner as long as they meet all the “running the show” requirements of § 26.71.

• Replaces the six “ability to accumulate substantial wealth” factors with the “reasonable person standard” when a recipient is attempting to rebut the presumption of economic disadvantage. It requires recipients to make a “judgment call” about whether an owner can be reasonably considered economically disadvantaged. This is USDOT’s attempt to help certifying agencies make individualized determinations of social and economic disadvantage and allow applicants to have discretion about what evidence to provide. Under the prior rule, certifying agencies had treated the six factors as strict regulatory criteria and not as the guidelines they were intended to be. The DOT explained:

By giving certifiers the ability to make judgment calls, we believe that we place them in the best position to achieve this objective, without needing to engage with factors that, while intended as suggestions, were too often taken as strict regulatory criteria. Retaining and/or revising some or all of the existing factors, as some commenters suggested, will not solve the problem and might inadvertently create additional complexity. We understand commenters’ concern about decisions on this matter becoming too subjective. That is why, and consistent with prior final rules, certifiers must articulate, in writing, a detailed explanation and not simply make a conclusory statement.

• 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. DBEs must still also be under the statutory cap for FHWA or FTA contracts, which is measured by the DBE’s revenue over the past three years. The statutory cap for those types of contracts is currently $30.4 million and will be adjusted annually by DOT.
• Requires ACDBEs that are party to joint ventures to include the proportionate income of that joint venture in the gross recipe calculation.
• Reduces the time to appeal an adverse certification decision to USDOT from 90 days to 45 days. It further changes the reapplication clock from the time that the applicant receives the denial to the date the certifying agency sends the decision, and allows USDOT, at its discretion, to summarily dismiss an appeal.
• Specifies which members representing the DBE may attend the informal hearing and that only the disadvantaged owner may testify about control.
• Requires a 45-day deadline for decertification hearings to occur from the date that the firm requests a hearing, and requires a final decision to be issued within 30 days.
• Clarifies how DBE participation is counted on projects after a DBE is decertified or rendered ineligible. DBEs can be counted in one of two ways:

(1) prime contractors may add work or extend a completed subcontract with a decertified firm only if it obtains prior, written consent from the recipient, and

(2) continued credit toward a contract goal is disallowed if the DBE’s ineligibility after the subcontract is signed is the result of a purchase by, or a merger with, a non-DBE firm (in which case the prime contractor would be required to use good faith efforts to replace the DBE if additional credit is needed to meet the contract goal).” https://www.transportation.gov/dbe-rulemaking/summarypage.

• Amends the summary suspension rules to provide additional procedural due process protections, including notice and appeal rights.

The DOT has published a summary of the final rule, a presentation on the revised regulations, and a list of the new deadlines and timelines, as well as implementation guidance.

For better or worse, the Final Rule will certainly affect any firms that are currently certified or are looking to become certified in the near future. Any company that has questions about these changes (especially if already certified) should consult with an attorney who has experience in handling certifications and decertification under the DBE Program.

This article summarizes aspects of the law and does not constitute legal advice. For legal advice for ‎your situation, you should contact an attorney.