FINALIZED CHANGES TO FEDERAL DBE PROGRAM

By Henry L. Goldberg

After a long period for public comment, final changes were made to the federal government's Disadvantaged Business Enterprise (DBE) program, effective November 3, 2014. The following discusses the key DBE program changes with a particular emphasis on required "good faith efforts" (GFE) and DBE size, ownership and control modifications.

1. Limited Time Frame for Submission of DBE Participation Documentation
(Utilization Plan)

The new rule contains an important change to the time frame within which GFE documentation containing specific information about DBE participation (i.e., "utilization plans"), must be submitted. Prior to the change, the Federal rule required only that all DBE participation documentation must be submitted before contract award. Now, a bidder will be allowed only up to seven calendar days after bid opening to submit its required utilization plan. Effective January 1, 2017, the submission time frame will be shortened still further to a maximum of five calendar days from bid opening.

2. Applicable NAICS Code For The Work To Be Performed by Each Certified DBE

The new rule requires contractors to provide information in bids showing that each DBE contractor included in the DBE Utilization Plan is certified in the North American Industry Classification System (NAICS) code for the work it will be performing.

3. Removal Of A DBE Now Requires Documented GFE To Find A Replacement DBE

Changes to the rule state that the GFEs made by a contractor to obtain a replacement DBE should be documented and submitted upon request to the applicable agency within seven days of such request, unless the time period to respond is extended by the agency. The agency is required to provide the contractor with a written determination stating whether or not good faith efforts were demonstrated.

4. Certain Listed Possible Consequences for Breach of DBE Rules Must Now Be Included in Prime Contracts and Subcontracts

The DBE rules previously required provisions to be included in prime contracts and subcontracts that failure to follow the new DBE requirements is a material breach of contract which could result in termination["or such other remedy as the 'recipient' (i.e., the agency receiving the federal funds) deems appropriate"]. The new rule augments the required contract language to specifically list, certain possible remedies for a breach to include, but not be limited to: "(1) Withholding monthly progress payments; (2) Assessing sanctions; (3) Liquidated damages; and /or (4) Disqualifying the contractor from future bidding as non-responsible."

5. In certain instances, copies of Subcontractor Quotes and, upon request, Subcontracts Must Now Be Provided As Part of GFE Documentation if a Bidder selects a Non-DBE over a DBE

An apparent successful bidder that will not meet a contract DBE goal must now provide, in its GFE documentation, copies of quotes received in instances where a non-DBE's quote was chosen over a DBE for subcontract work. The rule change further requires that, upon an agencies' request, a bidder must also make its subcontracts available for review to ensure compliance with the DBE rules.

6. Additional Clarification As to the Evaluation of Possible GFE Activities Added to Appendix A - "Guidance on Good Faith Efforts"

According to the preamble explaining the final rule changes, revisions were made to the Appendix A Guidance in part to clarify and reinforce the GFE obligations of bidders. Added examples of GFE include conducting market research to identify small business contractors and suppliers and offering flexible delivery schedules and work timeframes to encourage and facilitate DBE participation. The Appendix A Guidance revisions also add examples of certain activities that may not constitute good faith efforts. The revisions now explicitly note that rejecting a DBE just because it was not the low bidder is not a sufficient GFE. Likewise, the Guidance states that a contractor's inability to find a replacement DBE at the original DBE's price does not by itself constitute a good faith effort to replace the prior DBE. Additionally, the Guidance explains that a bidder's desire to self-perform contract work does not relieve it of the responsibility to make good faith efforts, including in instances where a DBE is being replaced.

7. DBE Business Size Standards Have Been Increased

In a positive move, the average annual gross receipts cap for a small business to participate in the DBE program was changed from $22.41 million to $23.98 million, to allow for inflation.

8. Rules Governing DBE Ownership and Non-DBE Involvement

The new rules contain clarifying language related to the nature of a DBE owner's share of the business. The requirement that the DBE owner must "share in the risk and profits commensurate with their ownership interests" has been changed to require that the DBE owner "share in the risks and be entitled to the profits and loss commensurate with their ownership interests". Language reflecting the concept of business loss was added because certifying agencies apparently incorrectly interpreted the prior language to mean that a DBE owner must be the highest paid individual in the business. The rule was also changed with respect to profits to be clear that "[a]ny 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 of DBE certification."

9. Rules Governing Control of a DBE

The rule changes emphasize that business control is considered essential to the integrity of the DBE program to ensure that program's benefits truly reach disadvantage parties. With that in mind, a change was made to the rules which now state that there is a "presumption of control" to a non-disadvantaged owner who remains involved with a prospective DBE company after transferring the company to a disadvantaged person. While the presumption is rebuttable, the disadvantaged individual will have to demonstrate his/her control by "clear and convincing evidence."

G&C COMMENTARY

There can be little doubt that the changes evidence a continued desire by the federal government to ensure that DBE's are owned and controlled by disadvantaged individuals and will not merely operate as a "pass-through" for the benefit of a non-DBE individual or entity. These changes also reflect the push to ensure that good faith efforts to meet DBE goals are being made, and demonstrated, with a focus on the structure of the DBE Utilization Plan, process and documentation of GFEs, to obtain that result. The rules are not solely a "tightening of the requirements" exercise. In some instances, the modifications to the rules reflect the input of the contracting community. For example, the increase in the maximum "small business" annual gross receipts cap was certainly a change sought by the industry. Now more than ever, contractors must be focused on the rules and govern their day to day actions by putting in place the necessary recordkeeping, best practices and safeguards, regarding DBEs, while instituting a culture that is essential, to ensure compliance with DBE program requirements. Henry L. Goldberg is the Managing Partner of Goldberg & Connolly and may be reached at (516) 764-2800 or hlgoldberg@goldbergconnolly.com. For more information about Goldberg & Connolly, please visit www.goldbergconnolly.com. This article has been prepared for informational purposes only. It is not a substitute for legal advice addressed to particular circumstances. You should not take or refrain from taking any legal action based upon the information contained herein without first seeking professional, individualized counsel based upon your own circumstances. The hiring of a lawyer is an important decision that should not be based solely upon advertisements. Before you decide, ask us to send you written information about our qualifications and experience.