MIAMI – Effective May 9, 2024, the U.S. Department of Transportation (DOT) revised its rules for administering its Disadvantaged Business Enterprise (DBE) Program. The rule changes are meant to modernize the DBE Program by improving reporting and record keeping processes and promoting more DBE participation as subcontractors or suppliers of services rather than serving as vendors.

The DBE Program was established to ensure that businesses owned by socially and economically disadvantaged persons were provided an equal opportunity to participate in federally assisted projects.  In essence, the DBE Program governs the bidding and contracting on projects with federal grant monies—traditionally through a state’s department of transportation or highway administration.

The  DOT rule defines a DBE as “a for-profit small business concern— (1) that is at least 51% owned by one or more individuals who are both socially and economically disadvantaged; and (2) whose management and daily business operations are controlled by one or more of the socially and economically disadvantaged individuals who own it.” See U.S. Department of Transportation, DBE and ACDBE Final Rule: 49 CFR parts 23 and 26, April 9, 2024  The revisions to the DOT rule are quite broad; however some of the more important changes are outlined below.

Personal Net Worth of DBE Owners
Under the new rule, the new personal net worth cap for DBE owners will increase to $2.047 million, excluding retirement assets from the calculation.  Additionally, the new rule removes state marital laws and community property rules from the equation. This will assist in allowing for more potential DBE owners.

Emphasis on Material Suppliers and Manufacturers
The new rule clarifies several important terms, such as “distributor” and “manufacturer.”  The term “distributor” is now defined 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.  What constitutes a “minor modification” is still vague, but that definition will likely be clarified, at least in part, through litigation or substantive amendment to the rule.

Under the new rule, prime contractors must clearly establish pre-award procedures whether to submit a DBE supplier as a “distributor” or “regular dealer.” Prime contractors for regular dealers 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.  The material costs is a new category afforded by the rule change.  To qualify as a regular dealer, a DBE firm must maintain inventory and own or lease and operate the distribution equipment for the products it is selling.

The DBE Performance Plan
Prime contractors are now required to submit an open-ended DBE Performance Plan (DPP) when responding to a Request for Proposal on a design-build procurement.  These DPPs are designed to detail the types of work the prime contractor will solicit from DBEs to perform and include a projected timeframe in which actual subcontracts will come to fruition. Project owners are to monitor the prime contractor’s adherence to the DPP throughout the construction of the project and may make written revisions to the DPP.  As with all federally funded projects, the prime contractor must make good faith efforts to reach the DBE/small business participation goals and document its efforts towards that effort.  The DPP is designed to ensure that contractors think about DBE participation at the inception of the project.

Prompt Payment Requirements and Monitoring
Project owners are now required to included proactive monitoring and oversight mechanisms to ensure that prime contractors are complying with retainage and prompt payment requirements.  This change was predicated on the DOT’s concerns that the prior system where subcontractors would simply complain when they were not being paid was ineffective.

Additionally, the DOT intends to monitor the Commercially Useful Function (“CUF”) for every DBE that performs for credit toward a recipient’s overall goal and a contract goal.  Moreover, it intends to create race-neutral compliance guidelines for reviewing DBEs to ensure fairness.  Project owners now must keep an accounting of each contractor’s progress in attaining a contract goal through progress payments to the committed DBEs.

Changes to the Certification Process and Admission Requirements
The new rule requires a potential DBE firm to have operations in the type of business it seeks to perform prior to applying for certification.  Essentially, a DBE firm cannot be a new business or new to a particular line of business.  This change was designed to prevent certifiers from evaluating firms that have no ability to bid and manipulate the CUF requirements.  Additionally, a certifier can only extend a certification review from 60 to 30 days, allowing quicker certification decisions.

Regarding eligibility for a DBE, the new rule clarifies that ownership investment includes purchases, capital infusions, additional investments after initial ownership, and gifts. Importantly, only one tier of ownership above a subsidiary DBE is permitted to limit larger parent companies benefits from the DBE program that otherwise would not qualify.

The control requirements have been modified so that disadvantaged owners are required to be the firm’s decision maker.  Moreover, the disadvantaged owner must have present control, including control of the board of directors, and be at the head of the company’s chain of command (i.e. President of the corporation, Managing Member of the limited liability company, General Partner of the partnership, etc.).  Lastly, the firm must prove its independent viability to make decisions and is not being operated by another entity, such as its parent corporation.

The process for certification of a DBE has become more individualized so that certifiers may more accurately make individualized determinations of social and economic disadvantage and applicants have greater discretion in submitting evidence to certifiers.  The purpose behind this rule is to acknowledge that each business owner is an unique scenario and not set unfair rules that apply to large groups but do not account for individual issues.

Additionally, a DBE firm may not qualify as a DBE if it exceeds the program’s gross receipts cap—which is to be 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.

Interstate certification was also changed by the new rule.  A DBE is now to obtain certification in its Jurisdiction of Original Certification (“JOC”), which is traditionally the same as the DBE’s principal place of business.  Once the entity is certified in its JOC, it can apply for DBE certification in another state by sending correspondence explaining the request with a signed Declaration of Eligibility.  This allows for DBEs to perform work in various states, helps prime contractors/project owners to meet DBE goals in other states, and allows the DBE to grow its business into other states without the need to go through the full application process in each state.

Conclusion
Ultimately, the rule changes are meant to empower disadvantaged owners and create opportunity for their businesses to grow.  General contractors and subcontractor who work on public projects should review the new rule changes and become familiar with them to avoid any pitfalls as the new changes goes into effect.

Ralf R. Rodriguez (pictured top left) is a member at Cozen O’Connor, Miami. Daniel Alvarez is an associate at Cozen O’Connor, Miami.