Understanding the Disadvantaged Business Enterprise Program

Both the Department of Transportation (DOT) and the Department of Justice (DOJ) are taking an increasingly strenuous enforcement approach to the disadvantaged business enterprise (DBE) compliance requirements contained in 49 Code of Federal Regulations (CFR) Part 26. This has created an environment of increased opportunity for some organizations and increased risk of noncompliance for others. 

Companies positioned to take advantage of the opportunity stand to gain, while companies that don’t fully understand the rules are at significant financial, legal and business risk. Contractors must understand the program’s key requirements, the responsibilities it places on contractors and the consequences for failing to comply—plus some ways prime contractors and subcontractors can put compliance to work for their advantage.

What is a DBE?

According to 49 CFR Part 26, DBE is defined as a for-profit small business with two characteristics:

1. It’s at least 51 percent owned by one or more individuals who are both socially and economically disadvantaged or, in the case of a corporation, 51 percent of the stock is owned by one or more such individuals.
2. Its management and daily business operations are controlled by one or more of the socially and economically disadvantaged individuals who own it.

The statute authorizing the DBE program states that no less than 10 percent of authorized DOT contract funds are to be expended with DBEs. Negotiated contracts that are subject to these requirements include contract clauses pertaining to the prime contractor’s responsibilities for performing verification and documentation activities to meet the agreed-on DBE participation goal.

What Are the Key Requirements?

The prime contractor is responsible for documenting its efforts to meet the requirements as well as evidence that it meets them at both the prime contract level and the subcontractor level. Before the contract is awarded, the prime contractor must have documentation that supports:

• DBE solicitation: documentation of the prime contractor’s efforts to solicit DBEs during the bidding process
• Reasons for rejection: documentation of the reasons a DBE was rejected in favor of a non-DBE
• Commercially useful function: verification that the DBE can perform all the tasks necessary under the subcontract

After the contract is awarded, the prime contractor must also provide documentation that supports the following:

• DBE verification: documentation of efforts to verify that the DBE qualifies for DBE credit on the project
• Commercially useful function: ongoing documentation that verifies the DBE is performing all tasks required under the subcontract
• Ongoing good-faith efforts: ongoing documentation of efforts to solicit additional DBE participation even if the goal has been reached
• Reporting of progress against goal: documentation of the processes used to count DBE goal attainment for reporting to the project owner

What Are the Risks of misunderstanding?

A report by the DOT Office of Inspector General (OIG) indicates that DBE cases represent 29 percent of active procurement and grant fraud investigations. This is a significant increase over prior levels, and it indicates that many thousands of man-hours are being expended in the investigation of these cases. Noncompliance comes in two forms: contract noncompliance and criminal noncompliance. In cases of contract noncompliance, companies are likely to receive stiff fines. Companies may be accused of criminal noncompliance if individuals (or the company as a whole) are believed to have knowingly committed DBE fraud.

As a prime contractor, you must make the case to the agency funding the project that your company has robust systems for verifying and documenting DBE subcontracting compliance. If your company is awarded a contract with a DBE participation goal but fails to provide the agreed-on DBE credit, this can impact the accomplishment of the state agency’s goal, and the agency could in turn be considered deficient in how they administer their programs. Therefore, your ability to win future work can be impaired if you fail to deliver the DBE goal. For subcontractors, the loss of opportunity occurs if you lack the requisite DBE certification to perform a project or if you cannot show the prime contractor that your firm is fully able to perform the required scope of work. To achieve the required DBE subcontractor participation, prime contractors with inadequate systems may have to make decisions that adversely impact their bottom line quality of their work. The following scenarios demonstrate how poor systems for DBE compliance can place prime contractors in situations that decrease their profitability and have other negative consequences:

• Contractors that could self-perform certain work at higher quality and lower cost instead must subcontract that work to a DBE subcontractor to meet their goal.
• In cases with multiple subcontract bidders, contractors have to pay a cost premium to a DBE subcontractor even if a non-DBE was available at lower cost.

Contractors with better systems to identify DBE subcontractors may be able to avoid being placed in these types of situations.

What Are the Opportunities?

Once a company has a negative reputation for DBE compliance—either due to the imposition of fines or other enforcement actions—it can be very difficult to win new work that involves DOT funds. Due to the intense scrutiny in this area, prime contractors with robust controls for DBE compliance and a proven track record in this area have a significant competitive advantage over firms that don’t, in both bidding and building work. A prime contractor who is able to use previous DBE subcontractors or understands how to best source DBEs will lead to a more competitive bid. That contractor will also be able to communicate their controls and past experience in a proposal, which could ultimately lead to winning or losing a job. Having the right controls in place during the construction phase will help eliminate excessive or duplicated man-hours while insuring the project is in compliance. 

In many areas across the U.S., prime contractors have found it difficult to identify DBE subcontractors to perform certain work. Therefore, becoming certified as a DBE can provide a significant competitive advantage—particularly if your firm is certified in an area that’s in demand. This advantage can translate into increased work and higher margins. Prime contractors are required to verify that the DBE subcontractor they plan to use has a North American Industry Classification System (NAICS) code compatible with the scope of work to be performed. If the subcontractor isn’t certified in the needed NAICS code, the prime contractor won’t be able to claim DBE credit for the work and won’t likely award it to the subcontractor. Therefore, understanding the rules and obtaining certifications in desirable NAICS codes provides a significant competitive advantage. 

Additional opportunities exist for subcontractors that reach out to prime contractors to inform them of their DBE status. Having a list of preapproved and vetted DBE subcontractors is important to prime contractors—and as a DBE subcontractor, you want to make sure you’re on the list.