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M E M O R A N D U M

To: Clients and Friends

From: Cordell M. Parvin

Subject: New USDOT DBE Regulations

Date: February 15, 1999

TOP TEN DBE ISSUES FOR PRIME CONTRACTORS

1. The USDOT has given the states broad discretion in establishing their DBE programs, including the opportunity to request a "waiver" of the regulations on goal setting, good faith efforts and counting. In essence, state DOTs could fashion their own program, with the help of the contracting industry. Quotas and set-asides are specifically excluded. The DBE goal of 10% is an aspirational goal. It does not require a state DOT or a contractor to have 10%DBE participation or any other percentage.
2. Guidance and interpretations of the regulations are binding only if over the signature of the Secretary of Transportation and only if there is included a statement that the USDOT General Counsel has reviewed the document and approved it as consistent with the language and intent of 49 CFR Part 26.
3. Section 26.29 establishes a prompt payment provision that could create problems both in subcontractor relations and cash flow. Under that section, state DOTs must establish a prime contract clause which requires prime contractors to pay subcontractors within a specified number of days from receipt of payment from the DOT. The clause must also require prime contractors to pay retainage within a specified number of days after the subcontractor's work is satisfactorily completed. There is no requirement that the DOTs must release retainage for that work. The DOT may also require that subcontracts include an Alternative Dispute Resolution provision for disputes or may provide a clause in the prime contract that prime contractors will not be paid for work done by subcontractors unless and until the prime contractor insures that subcontractors are promptly paid. DBE credit may not be given until the prime contractor pays the DBE.
4. State DOTs will be required to address overconcentration of DBEs in specialty subcontracting fields. The measures may include the use of incentives, technical assistance, business development programs and mentor/protégé programs. Business development and mentor/protégé programs could become prevalent.
5. State DOTs must set DBE goals based on demonstrable evidence of the availability of "ready, willing and able" DBE firms. Legitimate disparity studies can be used as one means of making such a determination.
6. State DOTs must meet the maximum feasible portion of their overall goal by using race-neutral means, (without using DBE Contract goals). This is a new, important requirement. The balance of the goal can be done by DBE Contract goals.
7. Good Faith Efforts must be taken seriously by State DOTs. In other words, they can no longer state that contracts will be awarded on the basis of Good Faith Efforts and then ignore such efforts. Additional cost is not in itself reason for rejecting a DBEs subcontract quote. However, prime contractors need not accept excessive or unreasonable DBE quotes. There is no definition of excessive or unreasonable. Prime contractors must still use Good Faith Efforts to replace a DBE whose contract is terminated.
8. The counting rules have changed, particularly in the area of trucking. When a DBE subcontracts any portion of the work to a non-DBE, that portion does not count toward the Contract DBE goal. Materials and supplies obtained by the DBE do count toward the DBE Goal, but the DBE MUST negotiate the price, determine quantity and quality, order the materials, install the materials and pay for them. A DBE trucker must own and operate at least one fully licensed, insured, and operational truck used on the contract. DBE credit is given for trucks owned, insured and operated by the DBE using drivers it employs. When a DBE leases trucks from a non-DBE, credit is only given for the amount of the fee or commission kept by the DBE. The DBE must have exclusive use and control of such trucks and the leased trucks must display the name and identification number of the DBE.
9. If a DBE firm is decertified after entering into a subcontract, the prime contractor may still count the firm's participation towards the DBE goal. If the firm is decertified before execution of a subcontract, then the prime contractor will be required to replace the firm.
10. Prime contractors may be subject to debarment and/or criminal prosecution for using or attempting to use on the basis of false, fraudulent or deceitful statements a firm that does not meet the DBE requirements. While this section in the new regulations does not expressly cover commercially useful function, most of the problems faced by prime contractors since inception of the DBE program have resulted from the federal government coming in after the fact and challenging DBE participation. Prime contractors would be well served by having DBE Compliance Manuals for their managers.