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Panoptic Enterprises' FEDERAL CONTRACTS DISPATCH

DATE: June 16, 2003

SUBJECT: Department of Transportation (DOT); Participation by Disadvantaged Business Enterprises in Financial Assistance Programs

SOURCE: Federal Register, June 16, 2003, Vol. 68, No. 115 page 35542

AGENCIES: Office of the Secretary, DOT

ACTION: Final Rule

SYNOPSIS: DOT is revising its regulations for its Disadvantaged Business Enterprise (DBE) program concerning such subjects as uniform application and reporting forms; implementing a memorandum of understanding (MOU) with the Small Business Administration (SBA); and substantive amendments to provisions concerning retainage, size standard, proof of ethnicity, confidentiality, proof of economic disadvantage, DBE credit for trucking firms, and eligibility of firms owned by Alaska Native Corporations (ANCs).

EDITOR'S NOTE: DOT's DBE regulations are in Title 49 of the Code of Federal Regulations (CFR), Part 23, Participation by Disadvantaged Business Enterprise in Airport Concessions, and Part 26, Participation by Disadvantaged Business Enterprises in Department of Transportation Financial Assistance Programs. This final rule addresses 49 CFR Part 26, which is available at http://www.access.gpo.gov/nara/cfr/waisidx_02/49cfr26_02.html.

For more on the interim final rule (IFR) that corrected and clarified misleading language in the DBE regulations, see the November 15, 2000, FEDERAL CONTRACTS DISPATCH "Department of Transportation; Threshold Requirements for Participation by Disadvantaged Business Enterprises in Transportation Financial Assistance Programs."

For more on the notice of proposed rulemaking (NPRM) that addressed additional changes to the DBE regulations and is the basis of this final rule, see the May 8, 2001, FEDERAL CONTRACTS DISPATCH "Department of Transportation (DOT); Disadvantaged Business Enterprise Program."

EFFECTIVE DATE: July 16, 2003.

FOR FURTHER INFORMATION CONTACT: Robert C. Ashby, Deputy Assistant General Counsel for Regulation and Enforcement, Department of Transportation, 400 7th Street, SW, Room 10424, Washington, DC 20590; 202-366-9310; fax: 202-366-9313; TDD: 202-755-7687 (TDD); or e-mail: bob.ashby@ost.dot.gov.

SUPPLEMENTAL INFORMATION: The DBE program was instituted in 1980, and it is intended to provide contracting opportunities for small disadvantaged concerns in DOT's highway, mass transit, and airport financial assistance programs.

On February 2, 1999, DOT amended the DBE regulations to reflect statutory and other changes that had taken place since 1980, particularly the June 1995 Supreme Court decision Adarand Constructors, Inc. v. Pena, in which the court determined that race-conscious affirmative action programs are subject to strict judicial scrutiny. In addition, the final rule removed all the regulations pertaining to the DBE program from 49 CFR Part 23 except for the rules pertaining to the separate DBE program for airport concessions and placed them in a new Part 26, Participation by Disadvantaged Business Enterprises in Department of Transportation Financial Assistance Programs.

On November 15, 2000, DOT published an IFR that made changes to the DBE regulations to decrease the administrative burdens on various recipients of DOT funds, and to correct and clarify misleading language in the February 2, 1999, rule.

In addition, on May 8, 2001, DOT published a NPRM to make further changes to the DBE regulations. The proposed changes pertained to (1) the adoption of one standard reporting form to reduce the administrative burdens for recipients who receive funds from more than one DOT administration, such as the Federal Aviation Administration, the Federal Highway Administration, and Federal Transit Administration; (2) reciprocal certifications that would require recipients of DBE program funds to recognize the SBA's 8(a) and SDB certifications in place of the recipient's own application; personal net worth; the payment of "retainage"; and several other issues.

This final rule addresses comments received in response to both the November 15, 2000, IFR and the May 8, 2001, NPRM. There were no substantive changes made to DOT's DBE regulations as a result of the November 15, 2000, IFR. However, DOT has made changes to its DBE regulations as a result of comments made on the May 8, 2001, NPRM. The substantive changes are:

• In the February 2, 1999, rule, DOT adopted the suggestion of having a single, uniform, nationwide form that all recipients must use to report to the DOT its awards or commitments and payments. DOT published a proposed format in the May 8, 2001, NPRM, and received over eighty comments concerning the format and content of the proposed uniform reporting form. The final form and its instructions are added as 49 CFR Part 26, Appendix B, Uniform Report of DBE Awards or Commitments and Payments Form. The basic formatting remains the same as in the NPRM because of its brevity and its capacity to capture the required information sought by DOT in a single page. Some terms and phrasing used in the form were changed to be consistent with that used in the elsewhere in the final rule.
  
  The Instructions Sheet that accompanies the form explains more fully what is required in each field on the form, and instructs recipients on how to derive specific numbers and percentages that are required to be provided. It is essential that recipients completing this form consult the Instructions Sheet.
  
  Finally, recipients are required to retain information relating to basic program data for three years.
  
  
• In the February 2, 1999, rule, DOT said that it planned to create a single, uniform, nationwide form that all recipients must use without modification for DBE eligibility.
  
  Subsequently, on November 23, 1999, DOT and the SBA entered into an MOU to develop common application procedures for DOT's DBE program and SBA's 8(a) and small disadvantaged business (SDB) programs because the programs share many of the same certifications requirements and apply to the same basic constituents.
  
  DOT published a proposed format for the uniform application form in the NPRM. The proposed form had been coordinated with SBA so it would be suitable for use by applicants to the DBE, 8(a), or SDB programs. DOT received over eighty comments concerning the format and content of the proposed uniform application. Several changes were made to the proposed form that DOT believes makes the form more streamlined and user-friendly, yet comprehensive enough to supply recipients with the necessary information to make determinations as to applicants' qualifications for the DBE program. The final form and its instructions are added as 49 CFR Part 26, Appendix F, Uniform Certification Application Form.
  
  Although recipients must use the uniform application form without modification, DOT recognizes that some recipients have additional statutory or regulatory requirements. Therefore, recipients, with the written consent of the operating administration (OA) (such as the Federal Highway Administration or the Federal Aviation Administration) may (1) supplement the uniform application form with a one to two page attachment containing the additional information collection requirements, and (2) require applicants to submit additional supporting documents not already listed in or required by the uniform application. Also, with written consent of the OA, a recipient may translate the forms into a second language (for example, Spanish or Chinese) to assist their applicants.
  
  
• DOT noted in the preamble to the February 2, 1999, rule that delays in payment of "retainage" by prime contractors to subcontractors have been one of the most significant barriers to the competitiveness of small subcontractors. Often, subcontractors finish all their work on a contract months (even years) before the end of the project on which the prime contractor is working, but the prime contractor does not pay them fully until after the recipient has paid retainage to the prime contractor at the end of the entire project. The February 2, 1999, rule requires prime contractors to pay retainage to subcontractors promptly after the subcontractors satisfactorily complete their work. However, prime contractors have complained that the requirement to pay subcontractors fully before the recipient pays retainage to the prime contractor is a financial hardship on them. Therefore, DOT proposed to require recipients to take one of three options:
  
  
  • Eliminate retainage entirely, neither retaining funds from prime contractors nor permitting prime contractors to hold retainage from subcontractors.
    
    
  • Not retain funds from prime contractors, but give prime contractors discretion to hold retainage from subcontractors. The recipient would require prime contractors to pay subcontractors in full after satisfactory completion of the subcontractor's work.
    
    
  • Hold retainage from prime contractors, but make incremental inspections and approvals of the prime contractor's work at various stages of the project. The recipient would pay the prime contractor the portion of the retainage based on these approvals. The prime contractor, in turn, would be required to promptly pay all retainage owed to the subcontractor for satisfactory completion of the approved work.
  
  Because the comments were split almost evenly among the three options, DOT has decided to permit recipients to choose any of the three options, but it must apply the chosen option uniformly to all contracts. DOT is defining "prompt" as no later than thirty days. The change is in 49 CFR 26.29, What prompt payment mechanisms must recipients have?
  
  
• Because there had been some cases of individuals attempting to fraudulently participate in the DBE program by falsely asserting to be a member of one of the groups benefiting from the presumption of social and economic disadvantage, the NPRM proposed amending paragraph (c) of 49 CFR 26.61, How are burdens of proof allocated in the certification process?, and paragraph (a) of 49 CFR 26.63, What rules govern group membership determinations?, to require applicants to submit signed, notarized statements that they are a member of one of the groups in paragraph (a) of 49 CFR 26.67, What rules determine social and economic disadvantage?
  
  Based on the comments received, DOT has decided to require the notarized statements and permit recipients to require that applicants document group membership. The introduction to the final rule states, "If a recipient chooses to require proof then it should do so uniformly, by requiring at least one piece of evidence from each applicant. A driver's license or a birth certificate may be adequate forms of proof of group membership. In cases where the required proof does not indicate specific races, however, such as Hispanic or Native American, the applicant only should be required to provide the same level of proof as members of other groups. For example, if a birth certificate is adequate for one group, then a single piece of evidence (but not multiple pieces of evidence) may be required from members of other groups. Such single pieces of evidence might include naturalization papers; Indian tribal roll cards; tribal voter registration certificate; a letter from a community group, educational institution, religious leader, or government agency stating that the individual is a member of the claimed group; or, a letter from the individual setting forth specific reasons for believing himself/herself to be a member of the designated group. If a recipient has a reasonable basis for doubting the validity of the asserted group membership of an applicant, then it is appropriate for the recipient to collect additional information. In such a case, the recipient must inform the applicant, in writing, of the reasons for seeking additional documentary evidence."
  
  
• Because there had been many complaints from DBEs that their business information is not provided sufficient confidentiality, particularly through state Freedom of Information Act (FOIA) requests or discovery in state or federal court proceedings, the NPRM proposed to amend paragraph (a) of 49 CFR 26.109, What are the rules governing information, confidentiality, cooperation, and intimidation or retaliation?, to prohibit the release of any DBE confidential business information to any third party without the written consent of the firm that submitted the information "notwithstanding any provision of federal or state law..." DOT has decided to adopt this change.
  
  
• Paragraph (B)(2) of Appendix E to Part 26, Individual Determinations of Social and Economic Disadvantage, required that applications by individuals must include personal financial information for the applicant's spouse to support the claim of social and economic disadvantage. However, this was inconsistent with the personal net worth provisions in 49 CFR 26.67 for applicants who are members of a group presumed to be economically and socially disadvantaged. Therefore, the NPRM proposed to remove this paragraph.
  
  The majority of respondents concurred with this change, so DOT has decided to delete the paragraph. However, DOT is "preserving the ability for recipients to request relevant information from spouses on a case-by-case basis when the recipient has a specific reason to look into the spouse's finances," says the introduction to the final rule. "For example, when there has been a transfer of assets to the spouse within the previous two years, it is appropriate to collect certain information about the spouse, because assets transferred to the spouse are attributed to the applicant for purposes of calculating PNW. We also recognize that the recipients will want to be able to investigate a spouse's finances in situations where the recipient suspects the applicant is fraudulently transferring assets over to his/her spouse in order to qualify as a disadvantaged individual or when there is an affiliation relationship between the applicant's business and a spouse's business."
  
  
• In the February 2, 1999, rule, DOT revised its regulations to count credit for the participation of DBE trucking companies only with respect to trucks that DBEs themselves owned and operated. This was intended to prevent a situation in which, for example, a DBE trucking company owned only one truck or a few trucks and leased the services of a larger number of non-DBE truckers, claiming credit for them as well. DOT made this change because it believed this practice was contrary to the general principle that DBE credit should be counted only for work that DBEs themselves perform. However, a number of people commented that this provision works an unnecessary hardship on DBE trucking companies and is difficult for recipients to administer. Some suggested allowing credit for twice the number of trucks actually owned by the DBE (that is, if a DBE owned one truck, and leased another from a non-DBEs, it could get credit for both). In the NPRM, DOT sought comments on whether this provision should be modified and, if so, how.
  
  Again, opinion was divided. DOT has decided to adopt the following approach: "Recipients may count for DBE credit the dollar volume attributable to no more than twice the number of trucks on a contract owned by a DBE firm or leased from another DBE firm, but is not required to do so. For example, if DBE Firm X owned two trucks, leased two others from another DBE firm, and leased six others from a non-DBE firm, the DBE credit authorized for Firm X's participation would be equivalent to the dollar volume of work attributable to eight trucks (four trucks owned by or leased from DBEs, multiplied by two). DBE credit for the remaining two non-DBE trucks leased for the contract would be limited to the fees or commissions received by the DBE firm pertaining to those two trucks." The change is made to paragraph (d)(5) of 49 CFR 26.55, How is DBE participation counted toward goals?

DOT decided not to implement the following proposals in the NPRM when preparing this final rule:

• Applicants must have a personal net worth that does not exceed $750,000. The DBE regulations require that applicants document compliance with this requirement by completing a two page form supported by two years of personal and business tax returns. The May 8, 2001, NPRM would have allowed applicants to submit a signed, notarized statement from a certified public accountant (CPA) attesting that the CPA has examined the applicant's personal net worth and determined that his or her personal net worth does not exceed $750,000. However, a majority of the respondents were concerned that this proposed alternative, while appearing more efficient, would open the door to, and increase the potential for, fraud and abuse by reducing the level of scrutiny with which a recipient could exercise over the applications submitted and in making the ultimate eligibility determinations. Therefore, DOT is not implementing this proposal.
  
  
• One of the purposes of the DBE rule is to make it possible for small firms to grow. To be able to perform prime contracts, companies often need to be larger and have more resources than they had as subcontractors, but if they grow beyond the limits of the SBA size standards applicable to their subcontracting field, then recipients may decertify them because they are no longer small businesses. While DOT did not propose any changes to its regulations to address this concern, it sought comments on whether it should address this situation further in its regulations.
  
  Several respondents noted questions that would be raised by the suggested changes, including how often size standards should be checked, how it should be measured, and by whom. Therefore, DOT decided not to make any changes at this time.

In addition, this final rule makes the following additional change that was not addressed or proposed in either the IFR or the NPRM:

• Paragraph (h) of 49 CFR 26.73, What are other rules affecting certification?, contained DOT's interpretation that Alaska Native Corporations (ANCs) and firms owned by Indian tribes and Native Hawaiian Organizations must meet the DBE rule's eligibility standards concerning size and control. However, Section 702 of the Department of Defense Appropriations Act for Fiscal Year 2001 (Public Law 107-117) amended 43 U.S.C. 1626(e) (a provision of the Alaska Native Claims Settlement Act), to say that:
  

  "Any entity (i.e., a subsidiary, partnership, or joint venture of an ANC) that satisfies subsection (e)(2) of this section (which establishes ownership and control criteria for ANC-related entities) that has been certified under Section 8 of Public Law 85-536 (i.e., is certified by the Small Business Administration under the 8(a) or small disadvantaged business programs) is a Disadvantaged Business Enterprise for the purposes of Public Law 105-178 (i.e., TEA-21 [the Transportation Equity Act for the 21st Century])."

  Based on this language, an entity meeting criteria to be an ANC-owned firm must be certified as a DBE even if it does not meet size, ownership, and control criteria otherwise applicable to DBEs. For example, an ANC-related entity could exceed SBA small business size standards or have its daily business operations controlled by a non-disadvantaged individual and still be certified if it met the Section 702 criteria.
  
  Therefore, DOT is deleting references to ANC-related entities from 49 CFR 26.73(h) and creating a new 49 CFR 26.73(i) which specifies the certification criteria for ANC-related entities consistent with 43 U.S.C. 1626(e). "Because these certification criteria differ from those applicable to all other DBE applicants, recipients would not use the new DOT Uniform Application Form for ANC-related entities," says DOT in the introduction to this final rule. "Recipients instead would collect (and applicants would have to provide) sufficient documentation that an ANC-related entity meets the new criteria including information sufficient to allow the recipients to administer their DBE programs with respect to ANC-related entities. If an ANC-related entity did not meet all the requirements (e.g., it had not been certified by SBA), then its certification would continue to be processed under Sec. 26.73(h), in the same manner as Indian Tribal firms."

FOR FURTHER INFORMATION CONTACT: Panoptic Enterprises at 703-451-5953 or by e-mail to Panoptic@FedGovContracts.com.

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