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On April 9, the DOT issued a new final rule for its Disadvantaged Business Enterprise workforce participation plan. The program, first signed into law by President Ronald Reagan in 1983, sets goals to award at least 10% of DOT-funded projects to companies owned by minorities, women and other socially and economically disadvantaged individuals. The federal program operates at the state level, usually through state DOTs, with stipulations for how federal grant monies are spent.
Attorneys say the new final rule, which also applies to DOT’s Airport Concession DBE program, refines and adds specificity to numerous facets of the plan, including the steps for certification as a DBE.
“They've taken the existing program and they've augmented it,” said Lawrence Prosen, an attorney and member of law firm Cozen O’Connor in Washington, D.C. “They’ve provided some clarity, which overall should definitely be a plus for both prime contractors and subs.”
The changes also raise the personal net worth ceilings for owners of DBEs, address prompt payment requirements on jobs and create more stringent guidelines for actual, physical participation of DBE companies on projects.
No ‘strawman’ companies
This participation aspect stems from cases where prime contractors paid kickbacks to DBEs to use their company names on bids, but then didn’t actually utilize them on jobs once they were in place.
In other words, DBE “owners must have day-to-day and long-term control and management over the company and not merely be a strawman,” Prosen wrote in a blog post on the new final rule.
The changes mean both prime contractors, as well as subs or others who wish to participate as DBEs, will need to sharpen their pencils during the bid and application process, as well as their attention to detail when monitoring for compliance after an award is made.
“They can’t just say, ‘We’re going to meet a goal,’” said Keith Wiener, a partner who specializes in state and local government procurement law at Holland & Knight in Atlanta. “They have to specify a plan that details what DBEs they’re going to use, who they’re going to solicit to perform, and what type of time frame is going to be involved.”
Specific aspects of the final rule include:
- Streamlined certification: Companies can now be certified as a DBE just once, instead of needing to do so with each individual state.
- Higher personal net worth amount: The cap for owners of DBE companies is now $2.047 million, up from $1.32 million set in 2011. Notably, retirement assets are now excluded from this calculation, a move lawyers say should increase the pool of potential applicants.
- Virtual certification: Certifiers can use the same processes employed during COVID-19 lockdowns, including virtual on-site visits to verify eligibility.
- For design-build projects, contractors must submit an open-ended DBE Performance Plan with their bids. This means that instead of just saying they’ll employ a certain percentage of DBEs on a project, they have to outline how they plan to use them and when the subcontracts will come to fruition.
- Stronger monitoring and prompt payment requirements that provide check ins for ongoing use of DBEs throughout a project and reporting mechanisms for DBEs when they don’t get paid.
Silent on ‘rebuttable presumption’
Perhaps surprisingly, the final rule does not explicitly address the recent legal challenges to the program in the wake of the Supreme Court’s decision last summer that affirmative action programs in college admissions are unconstitutional.
Piggybacking on that ruling, a handful of lawsuits have challenged DOT’s DBE program, using the argument that it unfairly discriminates against contractors who are not part of the groups designated by it.
Similar suits were already successful in prompting changes in the Small Business Administration’s 8a program, which also designates workforce participation goals for underrepresented groups.
Previously, SBA automatically classified specific minority groups as socially disadvantaged, and thus eligible to apply for the program. After it lost a court challenge, however, the agency amended its process to include an extra certification step where applicants now have to provide a narrative to show they have actually experienced social or economic hardships.
Perhaps surprisingly, the DOT’s new final DBE rule doesn’t address this assumed qualifying aspect, the legal term for which is having a “rebuttable presumption” of disadvantage. That means an applicant is presumed to be socially or economically disadvantaged if they belong to a specified group, such as being a woman or Native American, for example.
Two-year process
DOT began its final rulemaking process in 2022, before the Supreme Court’s affirmative action ruling in 2023, so changing that aspect of the program wasn’t likely a focus from the outset. Attorneys say DOT’s silence on it now, after SBA’s loss and its own ongoing legal challenges, means the department is willing to take its chances in court.
“DOT is continuing to argue that the use of rebuttable presumption is constitutional,” said Chris Slottee, an attorney at Schwabe, Williamson & Wyatt in Anchorage, Alaska, who represents Alaska Native corporations in federal contracting and specializes in DBE law. “I wouldn’t be surprised if they have a realistic view that they have a good chance of potentially losing. But they’re not going to preemptively surrender on this issue. If the court rules against them, they can say they disagree, but they need to follow the law.”
In other words, while DOT didn’t proactively change its eligibility criteria based on the SBA’s loss, it also didn’t update its new final rule in a vacuum. Indeed, the tightening of language and criteria in the new final rule may help DOT defend the program against potential challenges.
“They’ve more narrowly tailored the program than it was previously,” said Wiener. “And that’s a potential argument the government could use in its future defense.”
The new final rule is set to take effect May 9.
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