In latest edition of The Wright Toolbox:
New Final Rule Updating the Disadvantages Business Enterprise Program
On April 9, 2024, the U.S. Department of Transportation (USDOT) issued a final rule that modernizes the Disadvantaged Business Enterprise (DBE) program regulations. The USDOT stated major objectives of this final rule include modernizing existing principles to: improve provisions for the benefit of program participants, reduce burdens on firms and recipients, grow firm capacity and owner wealth, and improve program integrity, visibility, and data collected by the USDOT. The new rule became effective on May 9, 2024.
Nationwide, the DBE program is implemented by 53 departments of transportation (including the District of Columbia, Puerto Rico, and U.S. Virgin Islands), and over 500 transit agencies. There are nearly 50,000 certified DBEs.
Key changes made to the DBE program includes several provisions that will have a direct impact on eligible firms and the contractors that hire them, such as:
- streamlining the DBE certification and eligibility process
- adjusting the personal net worth (PNW) cap for inflation for small business owners, including excluding retirement assets from the calculation.
- establishing flexibilities such as virtual on-site visits, to conserve certification and firm resources
- modernizing the rules for counting participation by DBE material suppliers and clarifying terminology
- making technical corrections and other updates such as expediting interstate reciprocity.
- expanding recipient reporting requirements to USDOT to gain greater knowledge of DBE characteristics, bidding/solicitation practices and utilization and overall program impact
- strengthening monitoring and prompt payment requirements
A DBE is defined under the final rule as: “Disadvantaged Business Enterprise or DBE means 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.”
Personal Net Worth
Since 2011, the personal net worth of DBE owners was capped at $1.32 million. Under the final rule personal net worth for DBE owners will now be $2.047 million and will exclude retirement assets from the calculation. The final rule also removes state marital laws and community property rules from the calculation.
Counting Material Suppliers
Under the final rule, prime contractors may count 60% of materials costs from regular dealers toward the DBE goal and can 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. The rule of counting 100% of materials costs for manufacturers towards DBE goals is unchanged. The term “distributor” is a new subset of DBE suppliers. A DBE distributor is an established business that engages in the regular sale or lease of the items specified by the contract. Distributors are permitted to drop-ship supplies from manufacturers as long as there is a distributorship agreement or responsibility for all risk of loss or damage during transportation is assumed by the DBE distributor. A manufacturer is a firm that owns or leases and operates a factory or establishment that produces, on the premises, the materials, supplies, articles, or equipment required under the contract and of the general character described by the specifications. The definition of a “manufacturer” is also updated so that a DBE that merely makes only minor modifications to existing materials is not considered to be a manufacturer.
Moreover, under the final rule, prime contractors must establish pre-award procedures to determine whether a DBE supplier to be utilized as a “distributor” or “regular dealer” has demonstrated the ability to perform as such during the contract. USDOT has created a DBE Regular Dealer/Distributor Affirmation Form for use in this process.
Monitoring Requirements
Under the final rule proactive monitoring and oversight mechanisms are required to ensure that retainage and prompt payment requirements are being met. The final rule also requires monitoring in the following areas:
- A Commercially Useful Function (CUF) review is necessary for every DBE.
- 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.
Numerous other changes have been made to the DBE program including certification requirements, interstate certification, size determinations and others. A summary table of the final rule can be accessed at: https://www.transportation.gov/DBEFinalRule.
If you have any questions regarding this matter, please do not hesitate to contact any member of the Wright, Constable & Skeen Government Contract practice group.