October 2014

Over two years ago, the Department of Transportation published notice that it intended to make changes to the federal regulations governing the DOT’s Disadvantaged Business Enterprise program.  After an extended comment period, today, October 2, 2014, the DOT issued the final DBE rule changes. These changes become effective November 3, 2014.  The changes impact five areas of the DBE program:  certification standards and procedures, goal setting, good-faith efforts and documentation, counting, and contract administration. Here is a look at some of the highlights of the changes as they impact prime contractors.

1.  Good Faith Effort Documentation.

The DOT has made changes to the DBE rules related to the submission of information regarding DBE participation.  The good news is that the changes do not go as far as the DOT intended to go when it issued its proposed rule.  Under the proposed rule change, the DOT would have required prime contractors to submit supporting documentation concerning DBE participation that was being used towards meeting or exceeding the DBE goal at the time of bidding and as a matter of bid responsiveness.  Prime contractors, major trade subcontractors, and trade organizations such as the American Road & Transportation Builders Association (ARTBA) and the AGC all loudly objected to the proposal.  Their objections appear to be at least somewhat successful.

Under the new rule, an apparent low bidder is mandated to submit DBE information to the transportation agency within seven days after bid opening.  Failure to submit this information within the seven day time period may result in the bid being rejected.  (Readers of this blog will note that the Commonwealth of Pennsylvania recently issued a similar rule on 100% state funded projects.)   However, at the description of the transportation agency, this information may be required at the time of bidding.  Bottom line: review your bid specifications carefully.

2.  Good Faith Efforts When Replacing a Terminated DBE

It has long been the rule that when terminating a DBE subcontractor, the prime contract must (a) get the permission of the transportation agency, and (b) engage in good faith efforts to subcontract the same percentage of work of the terminated DBE to other DBE firms.  The rules now extend the documentation efforts required after bid opening to replacement of terminated DBE firms.

Under the new rules, within seven days of terminating a DBE firm, the terminating contractor must submit documentation to the transportation agency of its good-faith efforts to replace the terminated DBE with a DBE.  Because the time period begins to run once approval of termination is given by the agency, contractors need to begin documenting replacement efforts well in advance of the request for termination.

3.  DBE Regular Dealers

The counting of DBE material suppliers as part of a prime contractor’s DBE goal has been an area of consternation for prime contractors ever since the DOT issued guidance in 2011 on DBE acting as a regular dealer v. brokers.  Under that guidance, a supplier qualified as a “regular dealer” of items on one project would not necessarily qualify as a regular dealer on a different project. In the guidance, the DOT provided the following example: “a firm that acts as a regular dealer on Contract #1 may act simply as a “transaction expediter” or “broker” on Contract #2. It would receive DBE credit for 60 percent of the value of the goods supplied on Contract #1 while only receiving DBE credit for its fee or commission on Contract #2.”  In other words, the DOT required prime contractors to address the regular dealer issue on a contract by contract basis.

Under the new rules, that guidance is now codified.  The significance of this is an issue of legal precedent.  Courts give greater deference to codified rules than they do agency guidance.

4.  DBE Trucking.

The counting of DBE trucking services has always received special treatment under the rules. Under the old rules, a DBE trucking firm could lease trucks from a non-DBE firm and receive credit for the value of the services leased from the non-DBE firm in an amount equal to the value of the services the DBE is self performing.  The example the old regulations gave was as follows:

“DBE Firm X uses two of its own trucks on a contract. It leases two trucks from DBE Firm Y and six trucks from non–DBE Firm Z. DBE credit would be awarded for the total value of transportation services provided by Firm X and Firm Y, and may also be awarded for the total value of transportation services provided by four of the six trucks provided by Firm Z. In all, full credit would be allowed for the participation of eight trucks. With respect to the other two trucks provided by Firm Z, DBE credit could be awarded only for the fees or commissions pertaining to those trucks Firm X receives as a result of the lease with Firm Z.”

Under the new rules, in addition to the above scenario, if the trucks are leased from a non-DBE firm but operated by employees of the DBE firm then full value for the leased transportation services may be counted to towards the goal without regard to the ration scenario.

5.  DBE Rules Administration

Many state agencies, including PennDOT, include language in a prime contractors contract that require it to administer its contract and subcontracts according to the DBE rules and that makes a failure to do so a material breach of contract.  The new rules require that all agencies adopt similar language in their prime contracts.

Prime contractors now have even more incentive to know and understand the DOT’s DBE rules.