Feds Issue New DBE Reg's — Part II

As discussed in the first of this series, the United States Department of Transportation has issued a final rule revising its Disadvantaged Business Enterprise program. The new rule, which went into effect on March 4, 1999, constitutes an attempt to preserve set-asides for disadvantaged businesses in the face of the United Supreme Court holding in Adarand Constructors, Inc. v. Peña, which required all race-based preference programs to meet a stringent set of tests in order to be constitutional.

The new regulations try to set a tone of flexibility, eliminate sanctions for the failure of recipients — such as the Oregon Department of Transportation, counties or municipalities seeking to use federal highway funds — to meet goals for DBE participation, recognize "good faith efforts" to comply, require that goals be based on demonstrable evidence of relative availability of ready, willing and able DBEs, and be evenhanded. At the same time, the new rules reflect an unmistakable undertone of distrust in the tighter standards and clearer rules they lay out in areas of traditional abuse.

Effect of Current Rules

States like Oregon with particularly refined DBE programs in place will have the opportunity to seek waivers allowing them to use their own approaches to achieve the ends desired by USDOT. According to Amanda Vallejo, the new ODOT Manager of Civil Rights, Oregon has been given a "waiver or exemption" allowing it to use its old rules through August of this year. We understand that, in the interim, ODOT will apply to USDOT for a permanent waiver so that most or all of it's current program can continue.

Because of this, at least for the next few months ODOT's current Disadvantaged Business Enterprise (DBE) Supplemental Required Contract Provisions will govern DBE relationships on ODOT projects. It remains to be seen, however, what effect the new USDOT rules will have on interpretation of the old rules. In some cases the differences between the new version and the old version may be critical — the "commercially useful function" and goal setting arenas may be particularly important.

To get a waiver, a recipient must be able to show a reasonable basis to conclude that it can achieve a level of DBE participation consistent with applicable law and USDOT program requirements through means other than those outlined in the regulations. In this regard, the regulations state that USDOT will issue a waiver or exemption only if the state agency can document "special or exceptional circumstances, not likely to be generally applicable, and not contemplated in connection with the rulemaking that established [the new Rules]," that make compliance with a specific provision of the new Rules impractical.

DBE Net Worth Limitations

Under the new rules, in order to qualify as a DBE the disadvantaged owner cannot have a personal net worth exceeding $750,000. In the case of DBE's with more than one owner, the individual net worths should be aggregated. The definition of "personal net worth" excludes the equity in the owner's primary residence as well as the value of his or her interest in the DBE itself. It does include the owner's share of assets held jointly or as community property with a spouse.

Many practitioners believe that the old ODOT and USDOT rules required the same $750,000 net worth limitation. However, the old rule was rarely enforced, except in extreme circumstances such as that of the former professional basketball player who started a construction company. In the future, one should expect more inquiry into the DBE owner's net worth. One may also expect to see "public interest" or qui tam lawsuits being filed by private citizens to force decertification of DBEs whose owners have a high net worth.

Overconcentration of DBEs

For years many subcontractors have complained that DBEs were overconcentrated in certain specialties (such as guardrail installation and traffic control), precluding non-DBE subcontractors from competing in those areas. Before drafting its new rules, the USDOT received a lot of comments, but not much guidance, from the industry on this issue. The DBEs complained that reducing concentration would penalize success. Prime contractors worried that such rules would make it harder to find DBEs. Many complained that overconcentration is really not a problem.

Regardless, the USDOT feels that addressing this issue is an important aspect of creating a "narrowly tailored" program, and have required recipients to investigate "overconcentration". A recipient that finds that DBE firms are so overconcentrated in a certain type of work as to unduly burden the opportunity of non-DBE firms to compete in that area, must devise "appropriate measures" to solve the problem. Examples of such measures include training DBEs to work outside the affected fields, varying DBE goals (presumably by excluding such work from qualifying for DBE participation — a draconian measure to be sure), and incentives.

Prompt Pay

In many parts of the country prompt payment is a real problem for every subcontractor. Because DBE subcontractors tend to be small, they are disproportionately affected. As a result, the new USDOT rules not only mandate "prompt pay" for all subcontractors, but prompt release of retainage as well. Recipients are required to include in their DBE programs a requirement for a prompt pay clause in all subcontracts. In addition, retainage will have to be paid within a given number of days from the time the subcontractor's work is satisfactorily completed, even if the prime contract is not yet completed.

These requirements should not result in wholesale changes in Oregon. The prompt payment requirements of ORS Chapter 279 already meet the new USDOT requirements. Payment of retainage is less clear. Under ORS Chapter 701 if a prime contractor pays a subcontractor retainage early, the prime contractor may demand that the owner pay the prime that retainage amount. The statute does not require the prime to pay subcontractors retainage before the project is complete, however. The new USDOT regulations will likely require such language in ODOT contracts.

This article is intended to inform the reader of general legal principles applicable to the subject area. It is not intended to provide legal advice regarding specific problems or circumstances. Readers should consult with competent counsel with regard to specific situations.

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