The U.S. Department of Transportation (DOT) operates a program known as the Disadvantaged Business Enterprise (DBE) to remedy ongoing discrimination and the continuing effects of past discrimination in federally-assisted highway, transit, airport, and highway safety financial assistance transportation contracting markets nationwide.
Each year, DOT’s Operating Administrations distribute funds to finance state and local government construction projects. Each state that receives federal-aid highway and federal transit funds is required to comply with DBE regulations.
According to the DOT, the primary remedial goal and objective of the DBE program is to level the playing field by providing small businesses owned and controlled by socially and economically disadvantaged individuals a fair opportunity to compete for federally funded transportation contracts.
The program began in 1980 as a minority and women’s business enterprise program established under the authority of Title VI of the Civil Rights Act of 1964 and has achieved continued support in subsequent Congressional authorizations (most recently the “Fixing America’s Surface Transportation Act” or the ‘‘FAST-ACT,’’ (P.L. 114-94, December 4, 2015)).
Importance of Program:
The Ohio Department of Transportation set goals for Fiscal Years 17, 18, and 19 to award 15.6% of federally-funded highway construction and design contracts (e.g. major highway reconstruction, geotechnical design, environmental consulting) and 6.75% of federally-funded transit contracts to DBEs. Certification as a DBE provides an opportunity for socially and economically disadvantaged individuals to compete for DOT projects.
Summary of Qualification Standards (49 CFR Part 26):
The following general qualification standards apply to any person or firm applying to become a DBE through the Uniform Certification Program. A small and for-profit business owned and controlled by socially and economically disadvantaged individuals must receive DBE certification from the relevant state—generally through the state Uniform Certification Program.
Ownership (49 CFR §26.69) – The firm must be a minimum of 51% owned by a socially and economically disadvantaged individual(s). In the case of a corporation, such individuals must own at least 51 percent of each class of voting stock outstanding and 51 percent of the aggregate of all stock outstanding. In the case of a partnership, 51 percent of each class of partnership interest must be owned by socially and economically disadvantaged individuals. Such ownership must be reflected in the firm’s partnership agreement. In the case of a limited liability company, at least 51 percent of each class of member interest must be owned by socially and economically disadvantaged individuals.
Disadvantaged Individuals – DOT presumes women, Black Americans, Hispanic Americans, Native Americans, Asian-Pacific Americans, Subcontinent Asian-Pacific Americans, or other minorities found to be disadvantaged by the SBA. Persons who are not members of one of the above and own and control their business may also be eligible if they establish their “social” and “economic” disadvantage. For example, DOT recognizes that people with disabilities have disproportionately low incomes and high rates of unemployment and that many may be socially and economically disadvantaged. Therefore, a determination of whether an individual with a disability meets DBE eligibility criteria is made on a case-by-case basis. (See Appendix E to 49 CFR Part 26).
Control (49 CFR §26.71) – A disadvantaged owner seeking certification must possess the power to direct or cause the direction of the management and policies of the firm. The owner must also have an overall understanding of, and managerial and technical competence and experience directly related to, the type of business in which the firm is engaged.
Ownership Must be Real, Substantial, and Continuing (49 CFR §26.69) – The firm’s ownership by socially and economically disadvantaged individuals, including their contribution of capital or expertise to acquire their ownership interests, must be real, substantial, and continuing, going beyond pro forma ownership of the firm as reflected in ownership documents. Proof of contribution of capital should be submitted at the time of the application. When the contribution of capital is through a loan, there must be documentation of the value of assets used as collateral for the loan.
The disadvantaged owners must enjoy the customary incidents of ownership, and share in the risks and be entitled to the profits and loss commensurate with their ownership interests, as demonstrated by the substance, not merely the form, of arrangements. Any terms or practices that give a non-disadvantaged individual or firm a priority or superior right to a firm’s profits, compared to the disadvantaged owner(s), are grounds for denial.
Example 1: Insufficient contributions include a promise to contribute capital, an unsecured note payable to the firm or an owner who is not a disadvantaged individual, mere participation in a firm’s activities as an employee, or capitalization not commensurate with the value for the firm.
Example 2: An individual pays $100 to acquire a majority interest in a firm worth $1 million. The individual’s contribution to capital would not be viewed as substantial. A 51% disadvantaged owner and a non-disadvantaged 49% owner contribute $100 and $10,000, respectively, to acquire a firm grossing $1 million. This may be indicative of a pro forma arrangement that does not meet the requirements.
Example 3: The disadvantaged owner of a DBE applicant firm spends $250 to file articles of incorporation and obtains a $100,000 loan, but makes only nominal or sporadic payments to repay the loan. This type of contribution is not of a continuing nature.
Size (49 CFR §26.65) – A firm, including its affiliates, must be an existing small business as defined by the Small Business Administration Standards (see 13 CFR part 121 for the appropriate type of work the firm seeks to perform in DOT-assisted contracts, including the primary industry classification of the applicant).
Annual Gross Receipts (as defined by SBA regulations) (49 CFR §26.65) – must not exceed an average of $22,410,000 (adjusted annually) in gross receipts in the previous three fiscal years.
Personal Net Worth (49 CFR §26.67) – Each individual owner of a firm applying to participate as a DBE, whose ownership and control are relied upon for DBE certification, must certify that he or she has a personal net worth that does not exceed $1.32 million. Excluded from the Personal Net Worth calculation is the individual’s ownership interest in the applicant firm, and their equity interest in their primary residence.
See Appendix G of 49 CFR 26 – Personal Net Worth Statement Form with instructions (https://www.transportation.gov/sites/dot.gov/files/docs/mission/civil-rights/disadvantaged-business-enterprise/56646/pnw-statement.pdf.)
Independence – the firm’s viability must not depend on its relationship with another firm or firms. However, there are examples provided whereby a subsidiary may qualify (see 49 CFR §26.73).
Burden of Proof Allocation (49 CFR §26.61)– Applicants carry the initial burden of proof regarding their eligibility and must demonstrate that they meet all requirements concerning group membership or individual disadvantage, business size, ownership, and control.
Annual Eligibility – DBE firms are required to declare their eligibility on an annual basis. If a firm is denied certification, a 12-month waiting period applies for reapplication. If the personal net worth of a majority owner(s) exceeds the $1.32 million cap at any time after the firm is certified, the firm is no longer eligible and it becomes the owner’s duty to notify the certifying agency in writing of said loss of qualification.
The qualifications supplied above are general in nature and not exhaustive of the considerations in gaining DBE status. A number of additional resources are available online.[i] Please contact any of the attorneys at Critchfield with questions regarding DBE qualifications.
[i]49 CFR Part 26: https://www.law.cornell.edu/cfr/text/49/part-26.