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Rule2024-05583

Disadvantaged Business Enterprise and Airport Concession Disadvantaged Business Enterprise Program Implementation Modifications

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Published

April 9, 2024

Effective

May 9, 2024

Issuing agencies

Transportation Department

Abstract

The U.S. Department of Transportation (DOT or Department) is amending its Disadvantaged Business Enterprise (DBE) and Airport Concession Disadvantaged Business Enterprise (ACDBE) program regulations. The DBE and ACDBE programs are designed to allow small businesses owned and controlled by socially and economically disadvantaged individuals to compete fairly for DOT funded contracts let by State and local transportation agencies and in airport concession opportunities. The final rule improves program implementation in major areas, including by updating the personal net worth and program size thresholds for inflation; modernizing rules for counting of material suppliers; incorporating procedural flexibilities enacted during the coronavirus (COVID-19) pandemic; adding elements to foster greater usage of DBEs and ACDBEs with concurrent, proactive monitoring and oversight; updating certification provisions with less prescriptive rules that give certifiers flexibility when determining eligibility; revising the interstate certification process to provide for reciprocity among certifiers; and making technical corrections to commonly misinterpreted rules.

Full Text

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[Federal Register Volume 89, Number 69 (Tuesday, April 9, 2024)]
[Rules and Regulations]
[Pages 24898-24979]
From the Federal Register Online via the Government Publishing Office [<a href="http://www.gpo.gov">www.gpo.gov</a>]
[FR Doc No: 2024-05583]

[[Page 24897]]

Vol. 89

Tuesday,

No. 69

April 9, 2024

Part II

Department of Transportation

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49 CFR Parts 23 and 26

Disadvantaged Business Enterprise and Airport Concession Disadvantaged
Business Enterprise Program Implementation Modifications; Final Rule

Federal Register / Vol. 89 , No. 69 / Tuesday, April 9, 2024 / Rules
and Regulations

[[Page 24898]]

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DEPARTMENT OF TRANSPORTATION

Office of the Secretary

49 CFR Parts 23 and 26

[Docket No. DOT-OST-2022-0051]
RIN 2105-AE98

Disadvantaged Business Enterprise and Airport Concession
Disadvantaged Business Enterprise Program Implementation Modifications

AGENCY: Office of the Secretary (OST), U.S. Department of
Transportation (DOT or the Department).

ACTION: Final rule.

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SUMMARY: The U.S. Department of Transportation (DOT or Department) is
amending its Disadvantaged Business Enterprise (DBE) and Airport
Concession Disadvantaged Business Enterprise (ACDBE) program
regulations. The DBE and ACDBE programs are designed to allow small
businesses owned and controlled by socially and economically
disadvantaged individuals to compete fairly for DOT funded contracts
let by State and local transportation agencies and in airport
concession opportunities. The final rule improves program
implementation in major areas, including by updating the personal net
worth and program size thresholds for inflation; modernizing rules for
counting of material suppliers; incorporating procedural flexibilities
enacted during the coronavirus (COVID-19) pandemic; adding elements to
foster greater usage of DBEs and ACDBEs with concurrent, proactive
monitoring and oversight; updating certification provisions with less
prescriptive rules that give certifiers flexibility when determining
eligibility; revising the interstate certification process to provide
for reciprocity among certifiers; and making technical corrections to
commonly misinterpreted rules.

DATES: This rule is effective May 9, 2024.

FOR FURTHER INFORMATION CONTACT: For questions related to the final
rule or general information about the DBE and ACDBE Program
regulations, please contact Marc D. Pentino, Associate Director,
Disadvantaged Business Enterprise Programs Division, Departmental
Office of Civil Rights, Office of the Secretary, U.S. Department of
Transportation, 1200 New Jersey Avenue SE, Room W78-302, Washington, DC
20590, at <a href="/cdn-cgi/l/email-protection#172527253a2421213a212e212f387a76657439677279637e79785773786339707861">202-366-6968/[email&#160;protected]</a> or Lakwame Anyane-Yeboa,
ACDBE and DBE Compliance Lead, Disadvantaged Business Enterprise
Programs Division, Departmental Office of Civil Rights, Office of the
Secretary, U.S. Department of Transportation, 1200 New Jersey Avenue
SE, Room W78-103, Washington, DC 20590, at <a href="/cdn-cgi/l/email-protection#d1e3e1e3fce2e7e7fce8e2e7e0fe9db0baa6b0bcb4ff90bfa8b0bfb4fc88b4b3beb091b5bea5ffb6bea7">202-366-9361/[email&#160;protected]</a>. Questions concerning part 23 amendments should be
directed to Marcus England, Office of Civil Rights, National Airport
Civil Rights Policy and Compliance (ACR-4C), Federal Aviation
Administration, 600 Independence Ave. SW, Washington, DC 20591, at <a href="/cdn-cgi/l/email-protection#162426243b2420213b26222e21397b7764756365387378717a7778725670777738717960">202-267-0487/[email&#160;protected]</a> or Nicholas Giles, Office of Civil
Rights, National Airport Civil Rights Policy and Compliance (ACR-4C),
Federal Aviation Administration, 600 Independence Ave. SW, Washington,
DC 20591, at <a href="/cdn-cgi/l/email-protection#261416140b1410110b1614161709484f454e494a475508414f4a43556640474708414950">202-267-0201/[email&#160;protected]</a>. Office hours are from
8 a.m. to 4:30 p.m., E.T., Monday through Friday, except Federal
holidays.

Electronic Access and Filing

This document, the Notice of Proposed Rulemaking (NPRM), all
comments received, and all background material may be viewed online at
<a href="http://www.regulations.gov">www.regulations.gov</a> using the docket number listed above. Electronic
retrieval help and guidelines are available on the website. It is
available 24 hours each day, 365 days each year. An electronic copy of
this document may also be downloaded from the Office of the Federal
Register's website at <a href="http://www.federalregister.gov">www.federalregister.gov</a> and the Government
Publishing Office's website at <a href="http://www.GovInfo.gov">www.GovInfo.gov</a>.

SUPPLEMENTARY INFORMATION:

Table of Contents

Executive Summary

49 CFR Part 26

Subpart A--General
1. Bipartisan Infrastructure Law (BIL) and Fixing America's
Surface Transportation (FAST) Act (Sec. 26.3)
2. Definitions (Sec. 26.5)
3. Reporting Requirements (Sec. 26.11 and Appendix B)
Subpart B--Administrative Requirements for DBE Programs for
Federally Assisted Contracting
4. Threshold Program Requirement for FTA Recipients (Sec.
26.21)
5. Unified Certification Program (UCP) DBE/ACDBE Directories
(Sec. Sec. 26.31, 26.81(g))
6. Monitoring Requirements (Sec. 26.37)
Subpart C--Goals, Good Faith Efforts, and Counting
7. Prompt Payment and Retainage (Sec. 26.29)
8. Transit Vehicle Manufacturers (TVMs) (Sec. 26.49)
9. Good Faith Efforts Procedures for Contracts With DBE Goals
(Sec. 26.53)
10. Terminations
11. DBE Supplier Credit (Sec. 26.55(e))
Subpart D--Certification Standards
12. General Certification Rules (Sec. 26.63)
13. Business Size (Sec. Sec. 26.65, 23.33)
14. Personal Net Worth (PNW) Adjustment (Sec. 26.68)
15. Presumption of Social and Economic Disadvantage (SED)
(Sec. Sec. 26.5, 26.63, 26.67
16. Ownership (Sec. 26.69)
17. Control (Sec. 26.71)
Subpart E--Certification Procedures
18. Technical Corrections to UCP Requirements (Sec. 26.81)
19. Virtual On-Site Visits (Sec. Sec. 26.83(c)(1) and (h)(1))
20, 23. Timely Processing of In-State Certification Applications
(Sec. 26.83(k))
21. Curative Measures (Sec. 26.83(m))
22. Interstate Certification (Sec. 26.85)
23. Denials of Initial Requests for Certification
24. Decertification Procedures (Sec. 26.87)
25. Counting DBE Participation After Decertification (Sec.
26.87(j))
26. Summary Suspension (Sec. 26.88)
27. Appeals to the Departmental Office of Civil Rights (DOCR)
(Sec. 26.89)
28. Updates to Appendices F and G

49 CFR Part 23

Subpart A--General
29. Miscellaneous Program Elements and Conncerns
30. Aligning Part 23 With Part 26 Objectives (Sec. 23.1)
31. Definitions (Sec. 23.3)
Subpart B--ACDBE Programs
32. Socially and Economically Disadvantaged Owned Financial
Institutions (Sec. 23.23)
33. Direct Ownership, Goal Setting, and Good Faith Efforts
Requirements (Sec. 23.25)
34. Fostering ACDBE Small Business Participation (Sec. 23.26)
35. Retaining and Reporting Information About ACDBE Program
Implementation (Sec. 23.27)
Subpart C--Certification and Eligibility of ACDBEs
36. Size Standards (Sec. 23.33)
37. Certifying Firms That Do Not Perform Work Relevant to an
Airport's Concessions (Sec. 23.39)
Subpart D--Goals, Good Faith Efforts, and Counting
38. Removing Consultation Requirement When No New Concession
Opportunities Exist (Sec. 23.43)
39. Non-Car Rental Concession Goal Base (Sec. 23.47)
40. Counting ACDBE Participation After Decertification (Sec.
23.55)
41. Shortfall Analysis Submittal Date (Sec. 23.57)
Subpart E--Other Provisions
42. Long-Term Exclusive Agreements (Sec. 23.75)
43. Local Geographic Preferences (Sec. 23.79)
44. Appendix A to Part 23: Uniform Report of ACDBE Participation
45. Technical Corrections
46. Duration

[[Page 24899]]

Regulatory Analyses and Notices

Executive Summary

This final rule modernizes the DBE and ACDBE program rules to
provide greater clarity and flexibility to DOT recipients and enhance
the ability of DBEs to compete on a level playing field for DOT-
assisted \1\ contract opportunities. Spanning over 40 years, the DBE
and ACDBE programs are small business initiatives intended to prevent
discrimination, and to remedy the effects of past discrimination, in
DOT-assisted contracting markets and airport concession opportunities.
Since 1983, Congress has authorized the DBE program for highway and
transit projects, most recently in Section 11101(e) of the Bipartisan
Infrastructure Law (BIL), enacted as the Infrastructure Investment and
Jobs Act (IIJA) (Pub. L. 117-58) (November 15, 2021). Congress codified
the ACDBE program in 1987. (See 49 U.S.C. 47107(e)). In reauthorizing
the DBE program in the BIL, Congress received and reviewed testimony
and documentation from numerous sources which show that discrimination,
its effects, and related barriers continue to pose significant
obstacles for minority- and women-owned businesses seeking to do
business in federally assisted surface transportation markets across
the United States. See BIL, section 11101(e)(1).
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\1\ DOT-assisted contract means any contract between a recipient
and a contractor (at any tier) funded in whole or in part with DOT
financial assistance, including letters of credit or loan
guarantees, except a contract solely for the purchase of land.
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The current rules and the revisions contained herein leave intact
the goal setting rules that have been in place over many decades. These
rules, then and now, prohibit DBE contract quotas; and they do not
impose any penalties for failing to meet DBE goals, unless a recipient
fails to administer its program in good faith. Every court to have
considered the constitutionality of the program, as implemented by
these regulations, has held that these limitations and other
flexibilities embedded in the DBE program--such as the ability of
recipients to seek waivers of or exemptions from certain provisions,
the requirement for recipients to reexamine their programs and program
goals every three years, and the authority to decertify firms that do
not continue to meet certification standards--ensure that DOT's DBE
regulations, on their face, are narrowly tailored to achieve the
compelling interest that has been identified by Congress, thus
satisfying strict scrutiny.
On July 21, 2022, the Department issued a notice of proposed
rulemaking (NPRM) in the Federal Register (87 FR 43620) setting forth
the major categories of revisions, the Department's rationale, and
proposed rule text. In July and August 2022, the Department held seven
virtual listening sessions to brief the public and stakeholders on the
proposals and to solicit further input. Recordings of the sessions are
posted on the Department's DBE web page <a href="https://www.transportation.gov/dbe-rulemaking">https://www.transportation.gov/dbe-rulemaking</a>, and a transcript of all comments received are available
at <a href="http://Regulations.gov">Regulations.gov</a> (DOT-OST-2022-0051). DOT extended the comment period
deadline from September 19 until October 31, 2022, through a notice
published in the Federal Register on September 1, 2022 (87 FR 53708).
The Department received approximately 400 written comments from
State departments of transportation, transit authorities, airports,
DBEs, non-DBEs, representatives of various stakeholder organizations,
and individuals. Many of the comments were extensive and covered
numerous proposed changes. Some commenters suggested changes beyond the
scope of what the Department proposed in the NPRM. We fully considered
all written comments we received.
Congress created the DBE and ACDBE programs by statute and has
continued to reauthorize the program in successive transportation
reauthorization laws. The purpose of this rulemaking is to make
technical improvements to the Department's DBE and ACDBE programs,
including modifications to the forms used by program and certification-
related changes. While this rule has implications for program
eligibility, it does not change the underlying programs and projects
being carried out with DOT funds. However, the Department recognizes
that certain provisions focus on discrete aspects of the DBE and ACDBE
programs. Therefore, the Department finds that the various provisions
of this final rule are severable and able to operate functionally if
severed from each other. In the event a court were to invalidate one or
more of this final rule's unique provisions, the remaining provisions
should stand, thus allowing this congressionally mandated program to
continue to operate.

Part 26

Subpart A--General

1. Bipartisan Infrastructure Law (BIL) and Fixing America's Surface
Transportation Act (FAST Act) (Sec. 26.3)

The Department proposed adding citations to applicable surface
authorization legislation. We received no comments, and the final rule
adopts our proposal with minor technical corrections to the text.

2. Definitions (Sec. 26.5)

NPRM

In addition to minor technical and spelling changes, the NPRM
proposed new or altered definitions of disadvantaged business
enterprise, principal place of business, transit vehicle, transit
vehicle dealer, transit vehicle manufacturer, and unsworn declaration.
In addition, because ``home state'' is no longer being used as a term
of art in the regulation, we are removing that definition from the
current rule.

Comments

Disadvantaged Business Enterprise
The majority of the comments addressed the proposed addition of
``be engaged in transportation-related industries'' to the definition
of ``disadvantaged business enterprise.'' We proposed the addition
because applicants that have no capability or interest in working on
DOT-assisted contracts seek DBE certification for other, unrelated
reasons, resulting in an unnecessary burden on certifiers' workloads.
Ten of the 40 commenters (mostly recipients and DBEs) supported the
proposed definition, though most requested clarification because they
found it confusing. They stated that an absence of clarification would
cause difficulty in determining which firms were in transportation-
related industries and which were not, and the results could easily be
inconsistent and arbitrary. Some commenters noted that many DBEs do not
have specific mentions of transportation in their North American
Industry Classification System (NAICS) codes. A few recipients asked
how they should handle DBEs that might not be performing work in
transportation-related industries.
The majority of commenters who sought clarification, as well as
several others who opposed the proposal altogether, opined that the
limitation would constrain opportunities for small businesses,
especially those in the goods and services sector or new or non-
traditional types of work. One commenter cited the example of firms

[[Page 24900]]

supporting electric vehicles or related infrastructure.
Very few of the commenters who sought clarification proposed an
approach that would better clarify the definition. One State DOT
suggested there could be a ``stop here'' entry on the Uniform
Certification Application, analogous to the current check entry box on
which an applicant would check whether it was a for-profit firm, on
which a company could affirm that it intended to work on transportation
projects.
Principal Place of Business
All three commenters supported the proposal, though one asked for
more guidance.
Transit Vehicles, Manufacturers, and Dealerships
For comments and the Department's response related to the
definitions of transit vehicle, transit vehicle manufacturer, and
transit vehicle dealership, please see the portion of the preamble
below concerning TVMs.
Unsworn Declaration
With the exception of one State DOT, which thought DOT's proposal
could enable fraud, all of the more than 20 commenters on the concept
and definition of unsworn declaration, both recipients and DBEs,
supported the proposal. The main reason was that it reduced the burden
on both firms and certifiers. One State DOT suggested the idea be
extended to information provided in on-site interviews as well as
applications. One transit agency suggested having a witness sign the
declaration, the use of which it thought should be limited to
declarations of eligibility (DOEs) or interstate certification
applications.
Miscellaneous Comments Received
Some commenters asked for the addition of such groups as LGBTQ
individuals, disabled veterans, individuals with disabilities, and
persons from North Africa and the Middle East to the definition of
``socially and economically disadvantaged individual.'' One commenter
found the definition of ``affiliation'' confusing but did not suggest a
clarification.
As has been the case during past rulemakings, a few commenters
disliked the use of the term ``disadvantaged business enterprise,''
finding its connotation too negative. Those commenters suggested
alternatives like ``historically underutilized business,'' ``business
inclusion program,'' or making the ``D'' in DBE stand for diverse,
dynamic, or distinguished. A commenter wished to exclude ``micro
purchases,'' as defined in Federal procurement rules, from the
definition of ``contract.'' One commenter asked to expand the
definition of ``DOT-assisted contract'' to include all contracts
relating to any phase of a DOT-assisted project (e.g., State or locally
funded pre-construction engineering or design of a project that would
ultimately gain DOT funding).

DOT Response

Disadvantaged Business Enterprise
With respect to comments on the proviso in the definition of
``disadvantaged business enterprise'' that a DBE be one ``engaged in
transportation-related industries,'' we considered two program
concerns. On one hand, some Unified Certification Programs (UCPs) may
have been burdened by significant numbers of applications from firms
that appear not to have interest in, or the ability to work on, the
DOT-assisted contracts of recipients. For example, some firms may seek
certification from a UCP in order to become eligible for State and
local programs in areas unrelated to transportation. We believe it is
useful to limit such burdens on certifiers, which themselves have
limited resources.
On the other hand, it would be counterproductive to use language
that could be interpreted as limiting DBE program participation given
the diversity of the types of work that DOT-assisted projects entail.
Thus, we exclude ``engaged in transportation-related industries'' from
the definition of DBE.
Instead, the final rule requires applicants to describe in detail
in the Uniform Certification Application (UCA)--with examples wherever
possible--the type(s) of work they envision performing on DOT-assisted
contracts. The UCA will not be considered complete if the applicant
omits this information. During the onsite visit, for example,
certifiers should ask applicants to describe the nature of their work
and what they seek to achieve with certification. If the applicant's
response reasonably suggests to the certifier that the firm would
likely not have opportunities to participate in, or has no intention of
pursuing participation in, DOT-assisted contracts, the certifier should
encourage the applicant to withdraw its UCA in order to avoid
unnecessary expenditures of time and effort by all parties. This
mechanism fulfills the intended purpose of the now-deleted
``transportation-related industries'' language.
Unsworn Declaration
Given commenters' general support of our proposal, and the
likelihood that permitting unsworn declarations will reduce burdens and
maintain program integrity, the final rule adopts the proposal without
substantive change.
Principal Place of Business
We believe that the NPRM's proposed definition of ``principal place
of business'' is clear as written, and the final rule incorporates it
without change.
Other Comments
The Department does not have legal authority to add groups (e.g.,
LGBTQ persons or disabled veterans) to the current list of groups whose
members are rebuttably presumed socially and economically
disadvantaged. However, persons who are not members of a presumptive
group may qualify as socially and economically disadvantaged through
individual determination procedures as detailed in Sec. 26.67(d).
We recognize that some commenters were uncomfortable with possibly
negative connotations of the term ``disadvantaged business
enterprise.'' We leave the program name unchanged. It is well-
recognized and cited as such in the statutes authorizing the program,
and changing the name of the program may lead to confusion.

3. Reporting Requirements (Sec. 26.11 and Appendix B)

NPRM

The NPRM proposed adding and changing three reporting requirements.
First, the NPRM proposed adding ten new data fields to the Uniform
Report of Awards, Commitments and Payments (Uniform Report) that
recipients submit annually, such as work category/trade a firm
performed in a contract, federally assisted contract number, and
terminations (for the complete list, see 87 FR 43624 (July 21, 2022)).
We believed this additional information would help the Department
evaluate whether the DBE program is making progress toward the
objectives stated in Sec. 26.1 of the regulation. Recipients would
submit the Uniform Report in a manner acceptable to the relevant OA,
but the form itself, while on the DOT website, would no longer be
printed in the regulation.
The NPRM also proposed to require recipients to obtain and enter
bidders list data into a centralized, searchable database that the
Department would

[[Page 24901]]

specify. The data points for this bidders list would be expanded to
include race and gender information for a firm's socially and
economically disadvantaged owner (SEDO) and the NAICS code applicable
to each scope of work the firm proposed to perform in its bid. The NPRM
asked for comment on the estimated costs for developing and maintaining
such a database. The Department said that since recipients already
collect most of the information that would be reported on the bidders
list, reporting this data would be beneficial to the Department in
evaluating program success with anticipated minimal impact on
stakeholders.
Third, the NPRM asked for comments on expanding the information
collected through what is referred to as the MAP-21 data report. That
report includes information taken from each State's UCP directory and
reporting on the percentage and location of DBEs owned and controlled
by women, by disadvantaged individuals who are not women, and
individuals who are women and are also otherwise disadvantaged. The
NPRM proposed collecting data on the following six additional items:
the number and percentage of in-state and out-of-state SEDOs by gender
and ethnicity; the number of applications received from in-state and
out-of-state firms and the number of each found eligible or ineligible;
the number of in-state and out-of-state firms decertified or summarily
suspended; the number of in-state and out-of-state applications
involving a request for an individual determination of social and
economic disadvantage; the number of in-state and out-of-state firms
certified based on such a determination; and the number of DBEs
prequalified in their work type by the Department. The Department
proposed creating a similar data requirement for ACDBEs.

Comments

This section was one of the most frequently commented upon of any
subject in the NPRM, with some commenters expressing general support
for the proposals, some expressing general opposition, and others
delving into the details of one or more of the reports.
General Comments on Proposed Reports
Of the nearly 60 commenters who expressed a view (pro or con) about
the Uniform Report and MAP-21 report proposals, a significant majority,
predominantly recipients, opposed the proposals. Often, these comments
did not distinguish closely between the MAP-21 report and the Uniform
Report but talked about the NPRM's reporting requirements generally.
Opponents primarily expressed that the proposals were too detailed
and created unnecessary burdens and costs, particularly for local
agencies and subrecipients. The required information would be difficult
to collect, and create a cumbersome, time-consuming process, sometimes
involving manual reporting (e.g., concerning listing replaced firms),
keeping staff from doing more substantive work. One recipient said it
would have to double its staff to handle the requirements, for example.
Another said that handling the proposed Uniform Report requirements
would double its staff time on that work by 16 hours per year. Programs
are short-staffed as it is, others said, especially for small
recipients and some saw the expanded Uniform Report items as a
substantial change. Certification could be slowed down.
While some commenters in this category said the requested
information could be helpful, they did not think that its potential use
outweighed the burdens involved. One commenter questioned the use the
Department would make of the additional data; something more specific
than ``program evaluation'' in general was needed to justify new
collections. Instead of making reporting requirements more complex,
commenters said they should be reduced and simplified (e.g., one
contractor suggested limiting fields to firm name, disadvantaged group
membership, contracts, and DBE commitment amount).
Some commenters also thought that certain fields in the report were
duplicative or redundant. For example, one commenter said that
information about decertifications had to be reported in three
different places. A few commenters thought some fields, such as those
addressing decertifications and terminations, did not fit well in the
Uniform Report. Another said the proposed reports generally were not
relevant to ACDBEs. Rather than sending one report to the OA and
another to DOCR, there should be a single, streamlined form sent to
only one office at DOT.
Some commenters recommended that DOT convene a recipients' group to
do a feasibility study and figure out how to make the reports work
efficiently prior to adopting the proposals. Commenters suggested time
frames from one to five years to phase in the requirements. Other
commenters suggested that the Department should also develop, test, and
make available a uniform, centralized database before imposing
requirements that all recipients, vendors, and subcontractors could use
and delay implementation 3 to 5 years.
Commenters said that such a database would allow data from
different sources to merge and that the database should be made
available to users through an online portal. Other commenters said DOT
should provide funding for recipients to comply with the expanded
requirements and provide more guidance on the reporting forms and
process.
Supporters of the proposals included some recipients but were
predominantly DBEs. Generally, they favored obtaining the additional
detailed data for program evaluation purposes. Some cited particular
items they thought were useful, such as race/ethnic/gender data,
explaining that those items could keep better track of the use of
Black-owned firms. Some commenters suggested collection of additional
data points such as dollar amount of contracts by NAICS codes, and some
commenters recommended that recipients be required to maintain copies
of all prime contracts and subcontracts.
Bidders Lists
A large majority of the over 40 comments concerning the NPRM's
bidders list proposal opposed it. A few comments, all but one of which
were from DBEs, supported the proposal for the reasons stated in the
preamble. Some of these comments favored the idea of a centralized
database for bidders list information. One asked for more data on the
actual use of successful DBE bidders, to address the issue of prime
contractors listing DBEs in their bid and then not using them.
Most of the comments opposing the proposal were from recipients.
Some of these commenters said that the existing bidders list
requirements were sufficient, and that there was no need to make any
changes. They asserted that the proposed changes to the Uniform and
MAP-21 reports would be unduly burdensome and create an unfunded
mandate. One airport trade organization member noted it would take 25
hours to complete the MAP-21 report of ACDBEs in various categories
rather than the 3.2 hours estimated.
Commenters said that the NPRM underestimated the costs and burdens
of the proposal, particularly with recipients for small staffs. One
commenter estimated that its staff would have to take an extra 20
minutes per project under the proposed system, adding up to 13 hours
per month, in contrast to the eight hours forecast in the NPRM. Another
said it could take weeks of staff time per year to comply.

[[Page 24902]]

Another estimated that it would take two hours of staff time to enter
information into the system for each bidder.
A few commenters expressed concern that prime contractors would be
disincentivized from hiring DBE subcontractors, especially if they had
to input information at the time of submitting a bid or offer. They
also stated that it would reduce the data available to recipients. One
commenter explained that it would be better if a bidder on a prime
contract could submit information within a short time after the time
the bid or offer was submitted, such as five days. One recipient said
it typically allows prime contractors until the end of the month in
which a letting takes place to submit bidders list data. On the other
hand, a comment said that bidders list items should be submitted at the
time of bid or offer. Another commenter suggested that to reduce
burdens on prime contractors, recipients should collect information
directly from subcontractors. One commenter recommended that firms
submit to the recipient the NAICS codes they have worked on in the past
year.
In addition to the general concern about burdens, a number of
commenters focused on the centralized database that the NPRM said the
Department would specify. Some thought having to communicate with such
a database would be a source of administrative burdens for their staff.
Others, while sympathetic to the concept of a centralized database,
pointed to the fact that the Department had not yet specified the
database to be used. Without such a system being in place, including a
standard format, they said, the proposed changes would not work. Two
commenters said that rather than creating a centralized database, DOT
should make software available to allow interface with UCP directories
and create reports. Another was concerned that, in the absence of an
actual centralized system, recipients would develop their own
electronic formats, which were likely to be incompatible with each
other.
Some commenters questioned the utility of bidders lists. One said
that such a list is an imperfect tool to gauge DBE interest in the
program, since some DBEs do not submit bids because, in their
experience, prime contractors typically use the same DBE firms that
they always use. Because of this, another commenter said, firms
effectively drop out of the program because they are not getting any
work, even if they maintain their certified status. Others said that
bidders lists have proved not to be an accurate or reliable indicator
of DBEs' availability or interest in seeking contracts.
One commenter suggested that DBEs should not have to submit
confidential or proprietary business information, another suggested
that race/ethnic/gender information should be part of bidders list
entries; while another indicated that some firms may decline to submit
this information. Another asked if there should be an exemption to some
requirements for publicly traded firms. One commenter suggested working
with American Association of State Highway and Transportation
Official's Civil Rights and Labor Committee on how best to handle
bidders list issues.
Detailed Comments on Reporting and Bidders List Contents
Commenters had a wide variety of comments on details of the
documents discussed in this portion of the NPRM. A commenter wanted to
clarify the meaning of ``awards,'' ``commitments, and ``payments.'' It
said the age of a firm should be entered only for DBEs. Another
suggested that termination data should be submitted as ``known DBE
terminations during the reporting period'' to capture a lag in
information reaching the recipient from contractors.
One commenter suggested not using ``dollar value of contract,''
preferring the use of ranges (e.g., less than $100,000 or $100,000-
500,000). On the other hand, another commenter thought that the dollar
value of contracts and NAICS codes involved were very important
information to capture. That same commenter also thought that
information on firms that have exceeded size standards was important,
to see if the program was creating sustainable growth.
Another commenter wanted to make sure that the reporting would
include professional services, even in States that do not include
professional services in their DBE goals. One commenter said it does
not do prequalifications, and so did not know how to respond to that
field. One commenter expressed uncertainty about how reporting could be
uniform since different States have different prequalification
requirements. The commenter was also unsure what ``work type'' meant,
and how firms prequalified in some, but not all, of the areas in which
they were certified could be counted.
With respect to terminations and replacements of DBEs, one
commenter thought reports should include the date of contract award,
the date of the prime's termination notice, the reasons for the action,
and the DBE's response. Another commenter agreed that the reason should
be reported, adding that any resulting revisions of the recipient's
overall goal should be noted. One commenter said that termination data
should be reported in the semi-annual reporting timeframe, using a
Google or Excel spreadsheet, and that the reporting should include the
number of terminations and NAICS codes of terminated firms. Another
commenter also supported using Excel spreadsheets or XML files for
reporting this and other information into the reports, rather than
relying on manual inputs of information.
Two commenters addressed the ``running tally'' requirement, one
saying it did not currently have a running tally provision and was
unsure how to develop one. Another asked how the running tally
provision differed from the ``open'' and ``completed'' reporting
fields, suggesting that the information requested was duplicative.
Another commenter suggested that information about DBE's that have been
decertified or graduated only be included in the ``open'' and
``completed'' fields, while a different commenter suggested that, for
re-entering firms, the reports include the date and basis of
graduation, the date of reapplication, and the basis for re-entry.
Some commenters expressed concern about what data should be
submitted and by whom. One commenter said that the DBE owner's contact
information and the ZIP code of the firm's principal place of business
need not be reported. Another suggested that if multiple contracts were
awarded to a firm during a reporting period, there should not have to
be multiple entries of the firm's information. Two others said that if
recipients submitted basic information (e.g., a firm's certification
number and NAICS code), the Operating Administration (OA), rather than
the recipient, should enter other information about the firm.
One commenter asked whether race and gender were intended to be
entered for all firms or only DBEs, and how the recipient would handle
situations in which a firm is certified in more than one NAICS code.
Another commenter advocated expanding the information reported, adding
such items as the number and percentage of in-state and out-of-state
firms by race and ethnicity, looking at applications, decertifications,
and prequalifications information.
With respect to the bidders list, one commenter raised several
questions. Would the centralized database be available at all times to
recipients, as opposed to only during certain reporting periods? Would
the December 1 date for submitting information apply to the bid date or
the contract award date, when

[[Page 24903]]

one was before and the other was after December 1? How would micro
purchases and single bidder or sole source procurements be handled? How
should a recipient handle incomplete forms submitted by bidders? Since
the commenter had a race-neutral program, how would ``subcontract
approval'' be reported? This commenter, as well as another, said that
reporting a high volume of bids would be very burdensome and expensive.
A few commenters said that prime contractors should have to submit
most or all of the data required for the bidders list, while another
said that recipients should collect bidders list information directly
from bidders for subcontracts or certification process records, rather
than indirectly through prime contractors.
One commenter said that, with respect to engineering firms, the
bidders list should include the number of such firms bidding on prime
contracts or subcontracts, the number of such firms that were
shortlisted or awarded, and the total number of engineering contracts
with and without DBE goals.

DOT Response

As described in this preamble (see discussion of Sec. 26.11 and
Appendix B), the final rule adopts revisions to all three reporting
requirements, including the creation of a centralized bidders list
system.
A recipient must provide its bidders list collection information in
a standardized and centralized form. Although recipients are already
obligated to gather most of this data, the rule imposes the additional
step of reporting this information. However, the burden of this
reporting process is expected to be minimal since recipients are
already required to collect most of the information. One commenter
stated that it does not collect bidder information on a per project
basis. That recipient maintained that the compliance burden would be
more than minimal. We respond that the current rule requires collection
for all projects. The bidders list data that needs to be reported to
DOT includes specific details such as the race and gender information
for the owners of all firms and the NAICS code that is applicable to
each scope of work proposed by the firm in its bid.
To ensure usability and standardization of the bidders list data,
the Department will build a comprehensive and searchable database to
house this information, a feature recommended by a commenter. The final
rule allows for a delay in the requirement to allow ample time for the
Department to complete the development of the database and ensure its
readiness before recipients are obligated to submit the necessary data.
Once the database is fully operational, recipients will be able to
seamlessly enter the required information with minimal additional
burden. Recipients may use the information to set their overall goals.
With this data, the Department will analyze the representation of
DBEs within the bidding process. This assessment will enable a closer
examination of the specific types of work that DBEs actively pursue and
competitively bid for. Ultimately, this analysis will serve as a vital
tool in monitoring the effectiveness of the rule and guiding future
policy decisions. It enables the Department to make informed
assessments regarding the impact of the regulations and take
appropriate actions to address any identified shortcomings, thereby
ensuring that DBEs can compete fairly for DOT-assisted contracts.
For the Uniform Report, the Department is requiring recipients to
submit names of DBEs, NAICS codes performed in a contract, federally
assisted contract number(s), and the dollar value of the contract. We
disagree with a commenter who stated entering this information
constitutes a substantial expansion of what is collected, because these
data points should already be tabulated by the recipient in order for
them to properly upload the current report. We inadvertently listed
prequalification in the uniform report draft rule and deleted it from
the final rule. We agree with commenters' concerns regarding ``work
categories'' and exclude the ambiguous category from the final rule.
Also, after careful consideration, the Department believes that the
proposed data collection on terminations would pose significant
challenges for recipients. Given the complexities and challenges
inherent in collecting and reporting termination data, the Department
believes that it would be unreasonable to mandate recipients to
undertake this task. We must strike a balance between gathering
valuable information for analysis and avoiding excessive administrative
burden for recipients. The Department will continue to explore
alternative approaches and strategies that can provide meaningful
insights into terminations without imposing disproportionate burdens on
recipients.
The additional uniform report information will help the Department
evaluate whether the DBE program is making progress toward the
objectives stated in Sec. 26.1 of the regulation. Recipients would
submit the Uniform Report Form online in a manner acceptable to the
relevant OA. The Department will post a copy of the form, which is no
longer posted in the regulation, to the DOT website.
Finally, the Department expands the MAP-21 data report collection
to cover six items mentioned in the NPRM: the number and percentage of
in-state and out-of-state SEDOs by gender and ethnicity; the number of
applications received from in-state and out-of-state firms and the
number of each found eligible or ineligible; the number of in-state and
out-of-state firms decertified or summarily suspended; the number of
in-state and out-of-state applications involving a request for an
individual determination of social and economic disadvantage; and the
number of in-state and out-of-state firms certified based on such a
determination. Decertified DBEs that exceed gross receipts and PNW caps
must be reported using MAP-21 data instead of the uniform report
proposed in the NPRM.

Subpart B--Administrative Requirements for DBE Programs for Federally
Assisted Contracting

4. Tiered Program Requirements for FTA Recipients (Sec. 26.21)

NPRM

Under the current rule, FTA recipients who will award prime
contracts exceeding $250,000 (cumulatively) in a fiscal year must have
a DBE program meeting all requirements of part 26. Based on changes in
the consumer price index (CPI) since 1983 (the year the $250,000 value
was established), the NPRM proposed to increase this value to $670,000.
FTA recipients receiving planning, capital, or operating assistance who
will award prime contracts (other than transit vehicle purchases) that
cumulatively exceed $670,000 in a fiscal year would be required to
comply with every requirement of part 26 and have a full DBE program.
Recipients awarding prime contracts totaling $670,000 or less would
also have to maintain a program, but compliance with only certain
provisions of part 26 would be required. Specifically, these recipients
would be subject to the requirements for reporting and recordkeeping,
contract assurances, a policy statement, fostering small business
participation, and transit vehicle procurements.
The Department's records show that in most years there were about
80 FTA recipients awarding between $250,000 and $670,000 per year. The
Department estimated that the change would provide cost savings for
such recipients

[[Page 24904]]

from the reduction in administrative burdens. Based on attainment data
from previous years, the Department found that if there were any
reductions in total program-level DBE participation, the reduction
would be minimal.

Comments

Commenters on this issue, predominately transit operators and DBEs,
were almost evenly divided. Supporters were attracted to the reduction
in administrative burdens for some small transit providers. One
commenter suggested raising the value further, to $750,000, while
another suggested that a similar threshold should be established for
airports. One supporter of the proposal asked the Department to define
``significant changes'' to a DBE program that would require OA approval
(this provision, in proposed Sec. 26.21(b)(2), applies to all OAs).
Opponents pointed to the estimated 80 transit operators that would
not have to maintain full DBE programs, saying that this would reduce
opportunities for DBEs. All recipients should have DBE programs, some
comments said. One commenter said a problem could arise for a recipient
who had been below the threshold but then received a large grant that
put it above the threshold. The recipient would have to quickly create
a full program, the commenter said.
Most of the commenters not in favor of the proposals or who
expressed negative opinions were concerned that DBEs seeking to work
with smaller recipients would not be afforded a level playing field
because the DBE programs of such recipients would not be subject to as
stringent oversight by FTA. These commenters were concerned that less
oversight would result in these recipients taking the program less
seriously.

DOT Response

The final rule is adopting this proposal substantively unchanged
from the NPRM. The Department recognizes that the proposed regulatory
text used a structure and phrasing that may not have been clear to some
readers. Though commenters did not address the clarity of the drafting
specifically, the comments suggested there may be some confusion as to
what requirements apply to which recipients. In response to these
comments, the final rule includes definitions for FTA Tier I and FTA
Tier II recipients. Further, the final rule adds paragraphs to Sec.
26.21(a)(2) to list the applicable requirements for Tier II recipients
more clearly. The Department notes that under the new requirement, all
FTA recipients that receive planning, capital, or operating assistance
and award FTA funded contracts must have a DBE program.
The Department takes seriously commenters' concerns that some
affected recipients might operate their DBE programs less robustly
under the new rules. The Department expects that the positive impacts
of expanding DBE program requirements to almost all FTA recipients
mitigates that risk. The intent of reducing administrative burdens on
smaller recipients is to allow them to direct a greater share of their
resources towards implementing the DBE program elements that expand
opportunities for DBEs, and the Department expects that they will do
so. Under the final rule, all FTA recipients with DBE programs will be
subject to enhanced reporting requirements, which will allow FTA to
conduct more effective oversight.
As explained in the Regulatory Impact Analysis of the NPRM, if
every single contract awarded annually to DBEs by the approximately 80
recipients that award between $250,001 and $670,000 annually (in prime
contracts) went instead to non-DBEs, 99.7 percent of Federal funds
awarded to DBEs on FTA assisted contracts would still be awarded to
DBEs. In response to the comments received, FTA reviewed Uniform Report
data for fiscal year 2021 to better understand the potential impact of
the proposed Tier II DBE program on contract awards to DBEs. The data
shows that 195 recipients reported awarding between $0 and $250,000 in
that fiscal year. Of those, 159 operated completely race-neutral DBE
programs. Of the remaining 36 recipients with race conscious goals,
five awarded race conscious contracts to DBEs, resulting in $170,913 of
cumulative awards to DBEs through the use of race-conscious means (or
0.02 percent of total dollars to DBEs that year).
The Department expects that many Tier II recipients will operate
entirely race-neutral programs, though they are not prohibited from
employing race-conscious means as necessary. The Department does not
anticipate any reduction in awards to DBEs by Tier II recipients under
the new rules, especially in light of increased funds being awarded by
FTA to transit agencies. Further, FTA will be conducting more oversight
of recipients currently awarding $250,000 or less. FTA will remain
responsible for ensuring that all FTA recipients subject to the DBE
program are awarding and administering their contracts in a
nondiscriminatory manner, and the reporting requirements under the new
rules will provide FTA the information needed to ensure compliance.
Regarding the comment that discusses the impact of receiving a
large grant, as compared to the current rule the final rule would
reduce the risk and mitigate the negative impact of exceeding the
threshold due to a single grant. First, and as a matter of
clarification, whether a recipient is tier I or II is determined by the
value of contracts it awards, not the value of funds it receives from
FTA. Under the current rule, since the contract value threshold is low
($250,000), there is a greater risk than under the final rule that a
recipient will be required to implement all DBE program requirements
after receiving a large grant. Further, since FTA Tier II recipients
will be operating DBE programs, the additional administrative burden of
becoming an FTA Tier I recipient is comparatively less than under the
current rule, since recipients below the current threshold do not have
the experience and administrative infrastructure to operate an
effective DBE program. Finally, the Department expects recipients to
budget and plan accordingly, and if a large grant is awarded then
appropriate and commensurate resources should be devoted to compliance.
Regarding the comment that suggested raising the contract value to
$750,000, the Department notes that $670,000 represents an inflationary
adjustment, and there is no evidence to support that $750,000 would be
more effective. Regarding the comment asking the Department to define
``significant changes'' to program plans, the Department notes that the
final rule does not change what qualifies as a significant change.

5. Unified Certification Program (UCP) DBE/ACDBE Directories
(Sec. Sec. 26.31 and 26.81(g))

NPRM

The NPRM proposed to expand existing DBE and ACDBE directories to
allow certified firms to display information about the firms' ability,
availability, and capacity to perform work. The Department thought that
this would provide a one-stop tool that would enable DBEs to market
their services and help prime contractors seek out potential DBE
subcontractors. Directories would include a standard set of options for
information that firms could choose to make public, such as a
capability statement, State licenses held, prequalifications, personnel
and firm qualifications, bonding coverage, recently completed projects,
equipment capability, and a link to the firm's

[[Page 24905]]

website. UCPs would not have to vouch for the accuracy of the
information provided.
The NPRM would also eliminate the option for a hard copy directory
since online availability of the information is sufficient. The NPRM
said that the Department anticipated that UCPs could implement the
proposed requirements by January 1, 2024, or 180 days after the final
rule. However, the Department sought comment on having a phase-in
period to allow necessary changes to be made.

Comments

This subject was among the most heavily commented upon in the NPRM,
attracting over 70 comments. Of the almost 50 comments that expressed
an opinion about the overall wisdom of the proposal, a majority fully
or partially supported it. Many other comments addressed details of the
directory process or had other ideas of how the directory process could
best work.
Comments from supporters said that an expanded directory would help
DBEs market themselves to primes, especially if DBEs could update
information in an efficient way. Such a directory would be useful to
primes searching for DBEs for a contract and could help to avoid the
``can't find qualified DBEs'' excuse for failing to meet goals, one
comment said. More detail in the directory would also save DBEs from
being inundated with solicitations from primes for work in areas in
which the DBEs are not interested. DBEs, several comments said, should
be allowed to add data about their operations, since NAICS codes, by
themselves, provide only limited information about what a firm does.
Some supporters of the proposal nevertheless noted concerns about
it. For example, commenters believed that the information in the
expanded directories would be helpful to DBEs but acknowledged that
costs and administrative burdens could be a problem, throwing the cost-
effectiveness of the expanded directories into question. One asked
whether there would be any DOT funds to support the expansion. Another
supported the proposed expansion only if DBEs were not allowed to be
certified in all 50 States under the interstate certification proposal
in the NPRM. Others were concerned that, despite disclaimers to the
contrary, the public would think that information about firms in the
directory had been vetted for accuracy by certifiers. If certifiers
were expected to verify information submitted by DBEs, another asked,
how would certifiers determine the accuracy and timeliness of the
information?
One commenter wanted to make sure that capability information about
a firm be specific; another, however, thought that information about
bonding and equipment should not be included because some of this
information could be proprietary and could change from project to
project. Other commenters suggested that owners' race and gender
information should be included or that additional information
categories should be included.
One commenter expressed concern that there would be large burdens
on certifiers if they, rather than DBEs themselves, had to input data
about the firms. It estimated that it would take 30 minutes to two
hours of staff time per procurement for this process. Another commenter
wanted the rule to prohibit recipients from using data from the
expanded directory to judge which firms are ready, able, and willing to
work.
A small number of commenters suggested that the Department go
beyond the proposed changes and create a centralized, nationwide
database, to which DBEs could upload information and which would be
user-friendly and readily searchable by such terms as State and type of
work. A variation on this idea was that States' UCP directories should
be merged together to avoid duplication and inconsistency. A comment
said that such a directory should specify which states a firm is
certified in and should be in an Excel format and include the DBE's
email and the SEDO's presumptive group membership. It could also
include information on a firm's ability to perform a commercially
useful function (CUF).
The principal objection of commenters who opposed the proposal is
that it would add costs, take additional staff time, and create
unnecessary administrative burdens. New software and additional staff
would be needed, and staff would be unable to keep up with the workload
they claimed.
Two commenters said that adding too much detail about firms would
be counterproductive, and making sure information was updated would be
a slow and difficult process. Another said that most of the proposed
fields were available in commercial software, but seldom used.
Similarly, another commenter questioned the usefulness of the added
fields.
Commenters were concerned that there could be confusion about what
a prime contractor could get credit for, based on representations in
material DBEs added, since self-reported capability statements could be
misleading. For this reason, one commenter said, DBEs should not be
able to upload information themselves. Another said that capacity,
availability, and other detailed information should not be entered, as
that could lead to inaccuracy, discrimination, and lost opportunities.
Two commenters suggested that it would be simpler and less burdensome
to limit additional information to a link to the DBEs' websites, making
additional directory fields unnecessary.
There was a wide variety of other comments concerning directories
and the NPRM's proposal. A commenter expressed concern that, with many
firms potentially being added to a UCP's directory as the result of the
interstate certification proposal, the availability numbers used for
goal setting could be distorted, even though many of the newly added
firms might not be available to work in projects in the State. On the
other hand, another commenter was concerned that directories might
undercount firms that were potentially ready, willing, and able to work
in a State, affecting goals in the other direction.
Some commenters were concerned about computer security and privacy.
Two mentioned a concern about the privacy implications of including
home addresses for businesses operated out of the SEDO's home,
particularly in the context of more widespread certification under the
interstate certification proposal. Some commenters thought the proposed
implementation time frame for the new requirements was too short, and
should be extended a year, or until software development and vendors
were in place.
A commenter asked that more detail about the specifics of directory
format, including using a spreadsheet and having search functions based
on such factors as NAICS and ZIP codes. Another commenter wanted more
to ensure that the dates when details concerning such items as
prequalification, licensing, or bonding would be displayed. A commenter
asked that all UCP directories use a standard format. Another commenter
said the Department should give a unique identifier for each DBE that
would be consistent across all UCP directories. A commenter recommended
that directory entries have a notation about whether a DBE firm was
eligible for FAA projects but not FTA or FHWA projects, because of
differences in applicable size standards.

[[Page 24906]]

DOT Response

The main purpose of the DBE directory is to show DBEs, prime
contractors, and the public which firms are certified as a DBE to do
the various kinds of work that take place in DOT-assisted contracts.
The directory is not primarily about the resources, equipment, bonding,
experience, or other qualifications of a firm to do particular sorts of
work. In performing their due diligence in selecting DBE contractors,
considering those factors is a task for prime contractors.
We understand that it is useful for prime contractors to have such
information readily at hand. One important means of making this
information available to prime contractors would be for DBEs to include
such information on their websites, which would then be linked to their
entries in UCP directories.
In the NPRM, we proposed including fields for many of these types
of information in UCP directories. However, we recognize, as commenters
pointed out, that mandating a large expansion of the content of
directories could create additional administrative burdens for
certifiers. We are also concerned about some pitfalls that we recognize
about open data fields for firms to enter their own information (e.g.,
accuracy, information that has not been updated, unintended exclusion
of eligible firms, available information being inconsistent from one
firm to another).
In light of these concerns, DOT has limited the elements that must
be included. They are firm name, location, NAICS code(s), and websites.
The directory, which we now clarify must be an online platform, must
permit the public to search and/or filter for these items in addition
to the types of work a firm is seeking to perform. We will also mandate
that the directory must include a prominently displayed disclaimer
(e.g., large type, bold font) that states the information within the
directory is not a guarantee of the DBE's capacity and ability to
perform work.
Certifiers may, at their discretion, include optional additional
fields in their directories, including those proposed for inclusion in
the NPRM. UCPs with sufficient resources may include such fields in
their electronic directories, while others may find it more feasible to
simply tell firms to provide a link to their own company websites,
which would include the information they wanted prime contractors to
access. UCPs have the responsibility, under the final rule, to ensure
that mandatory items about firms are and remain accurate. UCPs
permitting permissive entry of other information about firms'
capabilities should also take steps to ensure that what the firms enter
is accurate and up to date, including removal of inaccurate or untimely
information they learn of. But the disclaimer mentioned above must
state, UCPs do not warrant the accuracy of information provided by
firms, and users' reliance upon it is at their own risk. Prime
contractors always need to fact-check the claims made by firms they are
considering doing business with.

6. Monitoring Requirements (Sec. 26.37)

NPRM

The NPRM would make a number of changes concerning a recipient's
monitoring responsibilities. Recipients must monitor race-neutral
participation by DBEs as well as participation on contracts that have
DBE goals. The recipient would have to verify that a DBE was performing
work on a contract, the recipient would also have to verify that it was
performing a commercially useful function (CUF). This dual verification
would have to occur on every contract involving a DBE. The NPRM
emphasized the need for recipients to keep a ``running tally'' of its
overall DBE attainment as well as each prime contractor's payments to
DBEs it is using to meet its goal, rather than waiting until the end of
the contract.

Comments

Monitoring Proposal
Most of the over 30 commenters on the NPRM supported the idea of
more intensive and consistent monitoring of work in the DBE program,
some saying they were already effectively doing what the NPRM proposed.
Design/build contracts were one place where more monitoring was needed,
a commenter said. The focus should be on actual dollars that DBEs
receive, and payments should be confirmed on a regular and frequent
basis, particularly to ensure compliance with prompt payment
requirements.
Monitoring should continue throughout the procurement process and
involve all elements of the recipient's organization, not just the
civil rights office. More resources for monitoring are necessary,
another comment said, because often times monitoring is not happening
as it should. A comment said that DOT should verify commitment and
performance numbers as well as CUF matters. One comment suggested that
recipients use independent, third-party monitors.
Some of the comments supported the ``running tally'' requirement,
especially the point that this applies to progress throughout the
contract, and not just at the end of the project. One comment said that
there should be written verification or a signed checklist concerning
progress. Similarly, another said that there should be payment
reconciliation on all invoices issued by DBEs.
Two comments questioned how and whether the running tally provision
would apply to race-neutral contracts. Two others said that for funding
or software reasons, implementation of the running tally provision
should be phased in as funding, or software, becomes available (which
one of these comments said would take 3-5 years). Another commenter, a
recipient, said that more monitoring procedures are not needed beyond
what it was already doing and that the OAs should provide uniform forms
for monitoring purposes. One comment asked how often monitoring would
have to be done and what the effect would be on staff workload. Another
asked whether ``local public agencies'' that are part of FHWA's local
public agency program would have to follow the proposed requirements
applying to principal recipients themselves.
Other Enforcement Comments
Several comments talked about enforcement matters generally in the
DBE program, rather than the specifics of the NPRM's monitoring
proposal. One detailed a complaint about the commenter's perceived
failure of a major recipient to enforce the program effectively.
Another asked for stricter enforcement by the Department, since the
commenter did not believe recipients could be trusted. There should be
stiffer sanctions for noncompliance, including debarment of
contractors, and DBEs who violate the rules should be decertified,
other comments said. Another suggested that the Department should set
up a public list of prime contractors' performance in meeting goals and
getting DBE ``waivers.'' A commenter said that the Department should
crack down on misuse of waivers and exemptions that evaded DBE
requirements. A commenter asked for greater involvement by the Office
of Inspector General (OIG) and the imposition of penalties for
noncompliance. On the other hand, a commenter said that audits should
focus more on customer service, rather than on negative matters.

[[Page 24907]]

DOT Response

Bidders on contracts with DBE contract goals can meet their
obligations in one of two ways, which are equally acceptable under the
regulation. First, they can enlist sufficient DBE participation to meet
the goal. Second, they can document sufficient good faith efforts to
meet the goal. Either route results in compliance with the requirements
of the rule. The second route is not a ``waiver'' of the requirements
of the regulation. This is simply an alternative method of compliance,
one necessary to avoid the DBE program becoming a quota-based program
that would not be narrowly tailored, as is legally required.
We believe that the running tally requirement is an important
element of the compliance monitoring that all recipients are
responsible for completing. It ensures that, throughout the course of a
contract, the recipient will know whether a DBE is doing the work to
which the prime contractor has committed, whether payments to DBEs are
timely, and whether DBEs are performing a commercially useful function.
If problems are found, then they can be corrected at a time before it
becomes too late to do anything about them as a practical matter. We
believe it is crucial to avoid situations where issues are revealed
only when a contract is completed, and there are no available measures
to achieve the meaningful DBE participation that was promised at
contract award.
The optimal frequency of running tally inspections of a contract is
likely to vary with the length and complexity of the contract. In a
relatively simple, 60-day contract involving one DBE, for example, a
running tally check 30 days after the beginning of the contract might
suffice. In a more complex, multi-year contract, involving several
DBEs, more frequent checks focusing on the times when the DBEs would be
performing their tasks would be appropriate. While there is not a one-
size-fits-all interval for running tally checks, it is essential that a
recipient know at all times what is going on with DBE participation on
its projects. ``There was a problem we didn't know about until after
the fact'' is not an acceptable way for a recipient to oversee a
project.
The Department chose to clarify that the ``running tally'' not only
applies to monitoring contract goal attainment but also to monitoring
the recipient's progress toward attaining its overall goal each year.
Recipients must meet the maximum feasible portion of their overall goal
by using race-neutral means (Sec. 26.51(a)), establishing contract
goals to meet any portion of the overall goal that the recipient does
not project being able to meet using race-neutral means (Sec. 26.51
(d)). Accordingly, recipients need a mechanism to keep a running tally
of progress toward annual goal achievement that provides for a frequent
comparison of current DBE awards/commitments to DOT-assisted prime
contract awards to determine whether the use of contract goals is
appropriate.
It is also important to emphasize who provides information that
goes into the running tally. The DBE program is not the exclusive
province of a recipient's civil rights or business diversity office,
the staff of which are often small. The DBE program is the
responsibility of all parts of the recipient's program and of all
personnel who work with it.
On a highway construction project, for example, it is inconceivable
that resident engineers, inspectors, procurement officials, and others
would not be keeping track of the progress of the work, whether the
work met schedules and specifications, whether the work was meeting
budget projections, etc. The DBE program is an element of the contract
no less than these routine matters that are regularly overseen, and
needs to be given the same attention and, importantly, by the same
people. The same individuals who inspect a project to see if, for
example, materials meet specifications and that a project is on time
and on budget can and should be trained, and required, to give the same
attention to providing the information informing the recipient's
running tally. It is part of their job. This is a point that the
Department has emphasized over many years, and we wish to re-emphasize
it here. When the Department reviews a recipient's compliance, we will
be paying special attention to whether the recipient is doing what
needs to be done in this respect.

Subpart C--Goals, Good Faith Efforts, and Counting

7. Prompt Payment and Retainage (Sec. 26.29)

NPRM

Responding to Congressional mandates and OIG recommendations, the
Department in 2016 issued guidance concerning prompt payment and
retainage. The guidance emphasized that recipients had responsibility
for affirmatively monitoring contractors' compliance with prompt
payment and retainage requirements, rather than relying on complaints
from subcontractors. However, a 2020 FHWA review of recipients'
practices showed that many were not fulfilling this responsibility
adequately. Therefore, the NPRM proposed a specific provision
concerning mandating affirmative monitoring and an enforcement
mechanism, including appropriate penalties for noncompliance.
Requirements would flow down to lower-tier subcontractors as well as
prime contractors.

Comments

DBE and recipient commenters generally supported the NPRM proposal,
emphasizing the need for affirmative monitoring and stressing the need
for prompt payment to avoid cash flow problems for subcontractors.
Commenters who mentioned the flow-down of requirements to lower-tier
contractors also supported the proposal. Several commenters asked for a
clarification of the rule that would specifically authorize enforcement
of State laws mandating payment to subcontractors with a shorter period
of the time than the 30 days provided for in Sec. 26.29(b).
Many of these commenters and others emphasized the need for closer
oversight and stricter enforcement; a few made suggestions about what
this would look like. Monitoring should be conducted on a regular and
frequent basis (e.g., monthly). Other commenters suggested mandating a
10- or 15-day rather than 30-day payment period. Some commenters
advocated those penalties (e.g., 3 percent of the subcontractor's
invoice, interest on late payments) be assessed against tardy
contractors.
Several comments proposed alternative ideas to achieve the
objective of prompt payment. One was to provide an incentive to prime
contractors who paid subcontractors on time or early, such as a bonus
or gaining points that could be used in future procurements. Another
was to follow a model the commenter said was used in the Department of
Defense and some SBA programs, involving an automated payment system
and online certifications that payments have been made on time.
A comment suggested that recipients could set up an escrow-like
account to pay subcontractors in the event prime contractors were late.
Some commenters emphasized that primes should send invoices to
recipients on time or that recipients could avoid problems by making
partial payments to primes when a subcontractor's portion of the work
was completed, as opposed to waiting until the entire project had been
completed. A commenter suggested that DOT should develop software for

[[Page 24908]]

grantees to track payments by all parties at all stages of the process.
Comments from some recipients, especially in the transit industry,
expressed concern about affirmative monitoring being burdensome,
especially for smaller recipients that have limited staff. Other
commenters thought that applying prompt payment requirements to all
subcontractors, rather than just DBEs, exceeded the scope of the DBE
program.

DOT Response

We believe as a basic, upper limit, standard for a national
program, the proposed 30-day period for payment and for the return of
retainage following the satisfactory completion of a DBE's work on its
portion of the overall contract is appropriate. We agree with
commenters that when State law or a recipient's program calls for a
quicker turnaround time, that shorter requirement prevails. For
example, if State M's law calls for payment to be made in 15 days, all
recipients in that State would have to observe the 15-day rule. On the
other hand, if State P's law allowed 45 days for payment or the return
of retainage, the regulation would require the action to be taken in 30
days on a DOT-assisted contract.
We strongly encourage recipients to establish shorter time frames
for lower tier subcontractors, because these smaller businesses have
more acute cash flow needs than their larger counterparts. While we are
not adopting, as generally applicable national requirements, the
various ideas that commenters suggested to make prompt payment and
retainage more effective, we encourage recipients to adopt measures
that will work in their circumstances, and we will work with recipients
to incorporate such measures in their DBE programs. The idea of
providing special incentives for contractors, merely for doing what
they are supposed to do, is not one that the Department supports,
however.
In any case, adopting strong enforcement mechanisms is critical to
making prompt payment and retainage return requirements work. For
example, making failure to meet these requirements a material breach of
contract, or an explicit cause for liquidated damages in the prime
contract, are among many possible measures for this purpose. Letting
failure to comply go unnoticed, or to be without consequences, is not
an acceptable option. As part of their normal oversight of recipient
operations, as well as in compliance reviews, the OAs will make prompt
payment and return of retainage a point of emphasis.

8. Transit Vehicle Manufacturers (TVMs) (Sec. Sec. 26.5 & 26.49)

NPRM

The Department proposed several changes to provisions in 49 CFR
part 26 related to requirements for FTA assisted transit vehicle
procurements. The NPRM included revisions in Sec. 26.5 to the
definition of TVM and proposed two new definitions, transit vehicle and
transit vehicle dealership. Additionally, the Department proposed
several revisions to Sec. 26.49 to clarify reporting requirements for
FTA recipients and TVMs.
The NPRM proposed terminology changes to make Sec. 26.49 more
reader-friendly and clear, such as using ``TVM'' consistently to refer
to transit vehicle manufacturers and using the term ``eligible'' rather
than ``certified'' when referring to a TVM's eligibility to bid. The
Department also sought to clarify that a contract to procure vehicles
from a transit vehicle dealership (TVD) does not qualify as a contract
with a TVM, even if the vehicle was originally manufactured by a TVM.

Comments

Definitions
The proposed definitions of transit vehicles, manufacturers, and
dealers drew only a small number of comments, most of which supported
the changes, though a transit authority and a consultant sought more
clarity. As noted above, a commenter said that a transit vehicle dealer
(TVD) should be more simply defined as a firm that sells transit
vehicles (including modified vehicles) made by a transit vehicle
manufacturer (TVM), whether or not the dealer is ``primarily engaged''
in selling such vehicles.
Terminology
The few comments addressing the proposed change from ``certified''
to ``eligible'' in Sec. 26.49(a)(1) and (2) supported it.
Procuring Transit Vehicles
Two commenters agreed that a vehicle purchased from a non-TVM
should not be treated in the TVM category for goal and reporting
purposes. Another suggested that paratransit vehicles like SUVs and
vans be allowed to be purchased from dealers rather than manufacturers.
Two commenters expressed concerns about the proposal that vehicles
purchased from TVDs are not treated under the TVM provisions of the
rule. Both said they procure ADA paratransit vehicles from TVDs. One
concern was that because a TVD is not a TVM under the proposal, FTA
funding would not be available for the paratransit vehicle purchases. A
related concern was that since most TVDs are non-DBE firms, there are
no meaningful contacting opportunities for DBEs in that field and hence
no point in setting contract goals for TVDs. Moreover, a commenter
noted that the proposal could limit DBE opportunities related to
paratransit vehicles that might exist through the TVM program.
A commenter recommended that neither modified nor unmodified
transit vehicles purchased through TVDs should be included in a
recipient's goals or uniform reports.
A State DOT said that it procured its paratransit vehicles from
TVDs, which then would not count as TVMs under the proposed language.
It was concerned that FTA therefore would not treat such purchases as
eligible for Federal funds because, as TVDs rather than TVMs, they
could not participate in the TVM program. The commenter was unsure how
a recipient would comply with the rule under these definitions.
Moreover, it said, most TVDs are owned by socially and economically
disadvantaged individuals (SEDs) and have few if any DBE subcontracting
opportunities. It suggested that recipients be able to report purchases
of such vehicles from TVDs in the same manner as for TVMs.
TVM Goal Submissions
Four commenters recommended that TVMs only have to submit goals
every three years, rather than annually. This would reduce burdens,
they said.
Ferries
The NPRM did not address ferries specifically, but several
commenters noted the difficulty in applying the TVM rules to ferry
procurements. For example, commenters suggested that the proposed
definition of transit vehicle would likely result in additional
confusion as to how to treat procurements of ferries because they are
vehicles that clearly should be regarded as transit vehicles yet are
manufactured by entities that should not be considered TVMs.
TVM Other Details
A commenter said that since TVMs report directly to FTA, a TVM
should not have to report the same data to recipients. Another
commenter said that TVMs should not have to provide confidential
bidders list information in their DBE goal submission; FTA can

[[Page 24909]]

audit their records for this information if needed.
A commenter suggested amending Sec. 26.49(a)(4) to say, ``becoming
contractually required [as opposed to the proposed ``obligated''] to
procure a transit vehicle.'' Another commenter said that it thought
that NAICS codes do not cover vehicle component manufacturers
adequately.
Another commenter supported the proposed revision of Sec. 26.49(c)
that clarified that TVMs would have to submit reports only for years in
which they were eligible. It also suggested that the ``awards/
commitments'' line item in section A of the Uniform Report form be
clarified to apply only to work performed in the U.S., to be consistent
with the language in Sec. 26.49(b) that limits TVM goals to work
performed in the U.S. A transit advocacy organization added that since
many TVMs may be small businesses with limited staff, TVMs should be
required to submit their goal information in the same three-year
interval as recipients, thus further reducing the paperwork burden.
Overall, this organization commented that any additional administrative
burdens could result in fewer DBE businesses participating, fewer bids,
less competition, and longer lead time for new capital projects.

DOT Response

Sec. 26.5 Definitions
The final rule will adopt the proposed definition of TVM. In
response to the comments expressing concern over applying the
definition to ferry manufacturers, the final rule further clarifies how
recipients may establish project goals to procure transit vehicles from
entities that are not eligible TVMs. See the discussion of Sec.
26.49(f) below.
After considering the comments received, the Department decided not
to adopt the proposed definition of transit vehicle. As noted in the
preamble to the 2022 NPRM, the Department recognizes that there is some
ambiguity as to what qualifies as a ``transit vehicle procurement'' and
is therefore subject to special rules. However, since these situations
are relatively rare and the most appropriate course of action depends
on the unique facts and circumstances, the Department expects that
providing training, guidance, and technical assistance will be more
effective than issuing a one-size-fits-all regulatory definition.
The final rule will not include a definition for transit vehicle
dealer. Commenters explained that small transit agencies routinely use
dealers to procure transit vehicles, and that paratransit vehicles are
often procured through dealers. As discussed elsewhere in this notice,
these comments persuaded the Department to maintain the status quo with
respect to dealership transactions in Sec. 26.49. Since the definition
would only be relevant if the Department retained the proposal in Sec.
26.49, there is no need for a definition.
Sec. 26.49 Procuring Transit Vehicles
As noted above, the proposed revisions to Sec. 26.49 received
mixed comments. Generally, commenters agreed that the proposals would
clarify the requirements. The Department appreciates the comments in
support of the proposed change from ``certified'' to ``eligible'' in
Sec. 26.49(a)(1) and (2). Accordingly, the final rule adopts this
change as proposed. The Department agrees with the commenter who
suggested that the word ``required,'' instead of ``obligated,'' better
conveys the necessary action that triggers the 30-day reporting
requirement in Sec. 26.49 (a)(4). The final rule therefore uses the
term ``required.'' Several commenters opined that the proposed addition
of paragraph (a)(5) addressing awards to dealerships could severely
disrupt vehicle acquisition practices by small transit agencies and
paratransit providers. In response to these comments, the final rule
does not adopt proposed paragraph (a)(5) or otherwise address awards to
dealerships. The final rule substantively adopts all other proposed
changes in Sec. 26.49 with only minor additional revisions to
paragraph (a)(2) for clarity. Additionally, the final rule incorporates
changes to paragraph (f) to address situations in which recipients
establish project goals.
Sec. 26.49 TVM Goal Submissions
The Department recognizes that TVMs are required to set and submit
goals more frequently than recipients. The timelines are different
because TVMs and direct recipients (often transit agencies in the case
of FTA funds) fundamentally differ in their ability to predict
contracting opportunities. Generally, transit agencies are able to
predict the projects they will undertake over the next three years with
a relatively high degree of accuracy, which allows transit agencies to
accurately predict the scale and scope of contracts they will award.
TVMs, though, are often limited to the information their potential
clients (often transit agencies) make available. Since most transit
agencies do not provide extensive details on the vehicles that they
intend to procure prior to issuing a public solicitation, which in many
cases is within months (at most) of the deadline to submit bids, TVMs
cannot accurately predict the federally funded subcontracting
opportunities they will have available in several years. Thus, the
Department will retain the requirement for TVMs to set DBE goals on an
annual basis and submit goal methodologies annually. Without more
information from commenters, we are unaware of how this administrative
burden can result in fewer DBEs participating, fewer bids, etc.
Ferries
The Department understands that large ships are manufactured by
shipyards, and that the shipyard industry is different from bus and
rail manufacturing industries. Shipyards are contracted by entities
from various other industries to build vessels specified to the
customer's needs. Smaller vessels, though, are typically manufactured
by well-known brands, and may be specialized by the manufacturer or
third parties. Thus, there are aspects of ferry manufacturing that are
unique to the shipbuilding industry. However, other aspects are similar
to the rest of the transit vehicle manufacturing industry. Such factors
mean that ferry procurements are often best addressed through project
goals pursuant to Sec. 26.49(f). As discussed below, the final rule
clarifies how to apply project goals to transit vehicle procurements
from specialized manufacturers when a TVM cannot be identified.
Use of Project Goals
The final rule revises Sec. 26.49(f) to clarify how to use project
goals to procure transit vehicles. The revisions codify and clarify
current practices and are in response to comments expressing confusion
over how to apply the TVM rules to ferry procurements (project goals
may be used to acquire vehicles other than ferries).
The final rule adds new paragraphs (f)(1), (f)(2) and (f)(3) and
simplifies paragraph (f) to clarify that project goals are used in
cases when transit vehicles are procured from specialized manufacturers
when a TVM cannot be identified. Pursuant to paragraph (f)(1), if a
recipient establishes a project goal, it must use the process
prescribed in Sec. 26.45 to do so. This effectively requires
recipients to use the same methodology for project goals as overall
goals. Pursuant to paragraph (f)(2), FTA must approve the recipient's
decision to use a project goal before the recipient issues a public
solicitation for vehicles. Paragraph (f)(3) requires recipients to
demonstrate that no TVMs are available to manufacture the transit
vehicle it intends to procure.

[[Page 24910]]

The Department established the project goal option in paragraph (f)
in 2014. This option has always been intended to maintain the spirit of
the DBE program when compliance with the general rule would be
impracticable or create more barriers for DBEs in the transit vehicle
manufacturing industry. Often, this scenario occurs when a transit
agency intends to procure a vehicle for transit purposes but the
entities that manufacture the vehicle do not meet the TVM definition
(and are not excluded from the definition).
It has been FTA's longstanding practice that if a recipient can
show that it is procuring transit vehicles with FTA funds and there are
no entities that qualify as TVMs that manufacture such vehicles, the
recipient may use a project goal to procure the vehicles. If a
recipient intends to use a project goal, the recipient must request
FTA's approval of that decision, and must not issue a public
solicitation until FTA has approved the decision. The request for
approval must demonstrate that the recipient looked for and could not
identify a TVM that manufactures the vehicles sought. To be clear, the
project goal does not have to be approved by FTA prior to the
recipient's issuance of a request for proposals. Generally, recipients
will be required to submit the project goal methodology prior to
issuing a public solicitation, though FTA may make case-by-case
decisions depending on the facts and circumstances; only under
extraordinary circumstances will FTA permit recipients to submit the
goal methodology after contract award. This is similar to how FTA
reviews and approves all project and overall goals.
TVM Other Details
Regarding the comments on duplicative reporting requirements
imposed by part 26 and locally by recipients, the Department recognizes
that recipients have legitimate reasons for collecting information from
TVMs, some of which may also be reported to FTA. Thus, the Department
does not believe it would be prudent at this time to limit recipients'
ability to collect such information.
Regarding the comments on confidential bidders lists submitted with
goal methodologies, part 26 only requires submission of such
information if the TVM chooses to use a bidders list when calculating
its overall goal. Otherwise, TVMs are merely required to retain their
bidders lists on file. Since it would be impossible to verify the
validity of a goal based on a bidders list without reviewing the
bidders list, the Department intends to continue to require TVMs to
submit their bidders lists when they choose to use a bidders list in
their goal methodology.
The final rule adopts the proposed changes to Sec. 26.49(c).
Regarding the comment about changing the Uniform Report to clarify that
only domestically performed work is to be included in the report, the
Department does not believe that this specific change is necessary. We
acknowledge that the final rule will result in several changes to the
Uniform Report; FTA will issue guidance to TVMs on how to fulfill their
reporting requirements under the new rules.
The Department appreciates the comment that discussed the
inadequacy of NAICS codes to describe the sort of work available in the
vehicle manufacturing industry. The Department intends to use the data
it collects under the final rule to learn more about the opportunities
available to small businesses and DBEs in the vehicle manufacturing
industry.
Finally, the Department intends to use this notice to clarify
longstanding policy on how to count DBEs performing on transit vehicle
procurements. In recognition of the complex supply chain necessary to
manufacture a transit vehicle, the Department has always permitted TVMs
to count awards to any certified DBE if the DBE is certified in the
State in which it performs the work, regardless of whether the TVM is
present in the State. More recently, particularly in the context of
ferry procurements, the Department has been asked to allow recipients
to count awards to DBEs certified in States other than the recipient's
home State if the recipient is using a project goal. The Department has
found that such practices can be an effective means of ensuring DBEs
are afforded opportunities to compete on transit vehicle procurements.
Thus, the Department may approve such practices when sufficiently
justified (here, the Department reminds recipients and TVMs that work
performed outside of the United States or its territories must not be
counted).

9. Procedures for Good Faith Efforts on Design-Build Contracts With DBE
Goals (Sec. 26.53)

NPRM

The NPRM proposed that, in a negotiated procurement (e.g., for
professional services), the bidder or offeror may make a binding
commitment to meet the goal at the time of bid submission or
presentation of initial proposals but provide the detailed information
about its DBE participation later, before selection. This provision
would not apply to design/build contracts, however.
The NPRM proposed that for a design-build contract, the bidder or
offeror would submit a DBE Performance Plan (DPP) with its proposal.
The DPP would have to include a commitment to meet the goals and
provide details--including dollar amounts and time frames--for the type
of subcontracting work or services the proposer will solicit DBEs to
perform. The recipient would monitor the design-builder's good faith
efforts (GFE) to comply with the DPP and its schedule. The recipient
and design-builder could agree to revisions of the DPP over the course
of the project.

Comments

DBE Performance Plans
Nearly 50 commenters, from all the major interests, addressed the
NPRM's DPP proposal. Of these, about 40 supported the proposed concept,
though many had suggestions for modifying the proposal.
In addition to agreeing with the NPRM's rationale for DPPs,
supporters said that the DPP would help small businesses seeking work
on large projects and would update the regulation to be consistent with
existing best practices. Several comments said that they already used
something like a DPP in their procurements. Other advantages include,
commenters said, giving greater flexibility to prime contractors while
allowing for detailed planning and monitoring to provide better
experiences for DBEs.
One suggestion made by numerous commenters for modifying the
proposal was to have a ``hybrid'' or two-step process in design/build
procurements. That is, for the design and pre-construction phases of a
project, recipients could use this flexibility to set goals that the
design-builder would have to meet up front, as traditionally done in
the DBE program. For the longer construction phase, recipients would
have a process like that described in the NPRM.
A few commenters suggested that if, as might happen in smaller
design/build projects, a contractor meets the goal with sufficient DBE
commitments before the project started, the DPP might not be required
for the project. A comment requested that prime contractors be required
to commit to DBEs as soon as possible in the process.
Other suggestions included setting specific time frames in which
actual DBE contracts would have to be executed and making the DPP
process available to a broader scope of projects than design/build
projects per se (e.g.,

[[Page 24911]]

public-private partnerships). To make this point clearer, some comments
said, the regulation should use a term like ``alternative delivery''
rather than ``design/build'' for projects involving a DPP.
Several commenters wanted to make sure that there was active and
frequent monitoring of contractors' performance under the DPP.
Commenters suggested that DOT could assist this process by providing
monitoring software and additional funding to deal with the costs of
additional resources for evaluating and monitoring DPPs, and that DOT
should also provide more details about what an adequate DPP looks like.
Other commenters suggested that DOT should also provide guidance on how
to deal with issues that may arise in the course of a project (e.g.,
change orders), several commenters said, as well as on proper use of
DPPs to avoid bids nonresponsive bids.
A few commenters asked how, if at all, the DPP concept would apply
to contracts that have race-neutral goals (e.g., as is commonly the
case in Florida). One comment suggested that since many design/build
projects are large, DBE size standards should be increased for firms
participating in them. Another commenter asked that the regulation
prohibit prime contractors from making small, incremental additions to
their contracts to avoid making firm commitments to subcontractors for
DBE work. Another pointed to what it thought could be an inconsistency
between the DPP proposal and present Appendix A, section VI, which says
that a promise to use DBEs after contract award is not considered
responsive to the contract solicitation or to constitute GFE.
If what a prime contractor promises in a DPP does not happen, then
what is a recipient to do, some commenters asked. In addition to
monitoring, these commenters said, the rule should take enforcement
action and impose consequences on prime contractors who are in
noncompliance with their DPP obligations. One commenter said, however,
that enforcement can be difficult because contractors often do not
understand what is involved in a DPP.
The smaller number of comments opposed to the DPP proposal said
that moving away from the requirement to have prime contractors commit
to specific DBEs in advance would diminish opportunities for DBEs. A
comment suggested that a bidder on a prime contract should have to
always meet a goal or show GFE before being awarded a contract, no
matter what the structure of the contract may be. DBEs need time to get
working capital, employees, and equipment in order; and advance notice
at the start of a project is important to enabling them to do so, a
commenter noted. Another commenter asserted that the premise of the
proposal is mistaken, it is not that difficult to identify
subcontractors at the start of a project, it said. In the absence of
requiring compliance before contract award, DBE participation could
become an afterthought for the prime contractor and recipient.
Others opposing the proposal said that implementing the DPP
proposal could increase burdens and costs for recipients, delay
projects, or lead to additional restrictions or conditions on RFPs,
potentially deterring some bidders.

DOT Response

Commenters generally approved of the concept of a DBE performance
plan in design/build contracts, and we continue to believe that this
will be a useful tool in managing DBE participation in a type of
contract in which award of the contract occurs before the design is
complete and the details of the work, quantities, and scheduling are
not yet known. We agree with commenters that there may well be
circumstances in which DBE subcontractors can be selected for the
design phase of a project at the outset, in which case the DBE
Performance Plan would include commitments to those firms while listing
the work types it plans to solicit DBEs to perform in the remainder of
the plan. While we appreciate that many projects span over the course
of several years, at this time, it is only those contract procurement
and delivery methods that lack the details needed to make
subcontracting commitments prior to contract award to which the
Department approves of the use of a DBE Performance Plan.
Since the beginning of the DBE program in the 1980s, the Department
has heard complaints from prime contractors that they cannot find
sufficiently qualified, capable DBEs to meet goals on a project. This
belief itself appears to be one of the effects of discrimination that
the program is designed to combat, and it can act as a self-fulfilling
prophecy preventing prime contractors from exerting optimal efforts to
find DBEs to meet a goal, whether on a traditional contract or a
design-build project. Making good faith efforts to find DBEs is
essential to compliance with the regulation. Open communication among
the recipients and prime contractors is essential to ensure that the
work commitments in the performance plan result in actual subcontracts.
With agreement of the parties, work types identified up front could be
altered to account for actual work needed in real time; however as long
as there are subcontracting opportunities, the recipient must enforce
the prime contractor's requirement to make ongoing good faith efforts
to meet the goal. We do appreciate the comment that Appendix A needs to
be revised to provide an exception for design-build contracts. We are
making that alteration. In addition, we are re-naming the DBE
Performance Plan to DBE Open Ended Performance Plan (OEPP) to align
with the FHWA's EDC-7 initiative.\2\ Other than these changes, we are
adopting the proposal as proposed in the NPRM without substantive
change.
---------------------------------------------------------------------------

\2\ In 2009, FHWA launched the Every Day Counts (EDC) initiative
in cooperation with state, local, and industry partners to speed up
the delivery of highway projects and create a broad culture of
innovation within the highway community. Proven innovations and
enhanced business processes promoted through EDC facilitate greater
efficiency at the state and local levels, saving time, money, and
resources that can be used to deliver more projects. The EDC
initiative is a state-based model to identify and rapidly deploy
proven, yet underutilized innovations to shorten the project
delivery process, enhance roadway safety, reduce traffic congestion,
and improve environmental sustainability. Rethinking DBE for design-
build projects is one of the innovations being promoted in the
seventh round of the EDC initiative.
---------------------------------------------------------------------------

10. Terminations (Sec. 26.53(f))

NPRM

The NPRM restated the prohibition on terminating DBE
subcontractors' work without the recipient's written consent (e.g.,
because the prime contractor wanted to self-perform the work or use a
different firm for the work that had been committed to the DBE). The
NPRM further clarified that ``terminations'' need not be terminations
in full, but that ``partial terminations,'' e.g., removing a work item
or decreasing the amount of work committed to a DBE would still require
prime contractors to follow the process by providing a ``good cause''
reason it proposes to terminate, provide the DBE with time to respond,
and not terminating before receiving prior written consent from the
recipient. The NPRM also proposed to clarify that termination, on the
one hand, and replacement or substitution, on the other, are two
separate and distinct processes.
Comments
The majority of the nearly 20 commenters supported the proposal.
They agreed that a prime contractor may not terminate a DBE's contract
without the recipient's written consent. Some of these comments said
that it made sense

[[Page 24912]]

to fold the notion ``substitution'' into the overall ``termination''
framework, since a substitution had the effect of terminating the
original contractor. One commenter wanted to make sure that the five-
day period for a recipient's consent had elapsed before the prime
contractor actually terminated the DBE. Another said that, if there was
additional work to be done in the scope of a DBE's work, and the goal
had been met, the DBE should complete the additional work, rather than
the prime contractor self-performing it.
Some commenters sought clarifications of the proposal. Three
commenters said that a recipient's removal of work intended for a DBE
to perform should not be treated as a termination by the prime
contractor. There could be circumstances, another commenter said, in
which a recipient would need to make a determination in less than five
days; for example, there may be an urgent need to ensure that hauling
supplies to the job site happens on time. In such a case, the commenter
said, the recipient would have to respond to the contractor's written
notice in 24 hours, and a formal termination process could follow.
The small number of opponents preferred retaining the former
regulation's provisions. Some thought that the list of ``good cause''
reasons for termination is too restrictive.

DOT Response

In the NPRM, the Department underscored that any time a prime
contractor seeks to terminate a DBE to which it had made a commitment
in response to a contract goal or approved substitution, it must follow
the process set out in Sec. 26.53(f). The Department sought to clarify
that this requirement applies not only to a complete termination but
also to a ``partial termination,'' i.e., eliminating a portion of work
committed to a DBE. For example, a ``partial termination'' in which a
prime contractor wishes the DBE to do $100,000 worth of work as opposed
to the originally committed $200,000, is just as much subject to the
approval as an action to terminate the DBE firm entirely. This would
not apply to change orders initiated by the recipient that had the
effect of eliminating some or all of the work to which a DBE was
committed to perform.
The Department continues to believe that it is important to
separate the termination requirements from the substitution process. We
have found that some recipients will not allow the prime contractor to
terminate a DBE until it has submitted a substitution. Other recipients
forgo the termination process and merely require the prime contractor
to submit a request for substitution. The due process requirements in
Sec. 26.53(f) are essential to protect DBEs committed toward a
contract goal, or approved replacement, from arbitrary elimination.
This is true whether or not a substitution of another firm for the
terminated DBE's work is intended. Again, after considering the
comments, we are adopting the termination and substitution provisions
as proposed in the NPRM.

11. DBE Supplier Credit (Sec. 26.55(e))

NPRM

As noted in the 2022 NPRM preamble (87 FR 43631-43632), the issue
of how to count DBE credit for suppliers has long been a subject of
debate and extensive stakeholder input. Changes over the years in the
way that materials are delivered for projects and the importance of
concepts like the ``regular dealer'' to DBE suppliers and prime
contractors seeking to meet goals have been among the frequent topics
of discussion.
Based on the Department's consideration of stakeholder input, the
NPRM proposed several changes to the counting provisions of Sec.
26.55(e). First, a prime contractor could meet no more than 50 percent
of a goal on a given contract through use of DBE suppliers (including
manufacturers, regular dealers, distributors, or transaction
facilitators). A recipient could, with prior OA approval, make
exceptions to this limit (e.g., for material-intensive contracts). The
purpose of this proposal was to prevent the use of DBE suppliers from
crowding out opportunities for other types of DBE contractors on a
project.
To avoid ad hoc, post-contract award determinations of whether the
contributions of a supplier were those of a ``regular dealer'' eligible
for 60 percent credit, the NPRM proposed that recipients establish a
system to determine, before contract award, whether a DBE supplier
meets the basic requirements for being a regular dealer. That is, does
the firm generally engage in the sale or purchase of the items in
question or items having the general character of those to be supplied
under the contract? As part of this pre-award process, the recipient
would look at such questions as whether the items would be provided
from the supplier's inventory, whether the supplier would have physical
possession of the items, or, in the case of bulk items, whether the
supplier would deliver the items using its own distribution equipment.
Goal credit would ultimately be decided on a contract-by-contract basis
based on the recipient's final evaluation of whether the firm would
provide a commercially useful function (CUF) deserving of 60 percent
regular dealer credit.
The recipient's system for carrying out this proposal would also
evaluate situations in which all or most of a regular dealer's supplies
come from its inventory, but other sources, such as a manufacturer,
would provide additional minor quantities of items related to those in
the contract.
In addition, the recipient's system would consider situations in
which a DBE supplies items/goods that are not typically stocked (e.g.,
specialty items). A DBE that provides such items would be eligible for
60 percent regular dealer credit if, like a supplier of bulk items, it
used its own distribution equipment.
One of the issues that stakeholders have discussed is the handling
of ``drop shipping,'' in which a DBE supplier arranges to have a
product sent from its manufacturer to the job site, without passing
physically through the hands of the DBE. On the one hand, this
arrangement appears similar to that of a transaction facilitator, whose
credit is limited to its fees or commissions. On the other, some
stakeholders said that dealers in bulk items with distributorship
agreements had a good deal of control of a transaction, take
significant risks, and often use their own delivery equipment, meaning
that their involvement went beyond being simply a transaction
facilitator.
To address these concerns, the NPRM proposed that a ``distributor''
having a valid distributorship agreement receive 40 percent credit for
the items it provides. Recipients would have to review distributorship
agreements, prior to contract award, to determine their validity with
respect to each purchase order/subcontract and the risk the DBE
assumes. Where a distributor ``drop ships'' materials without assuming
risk, or does not operate according to its distributorship agreement,
its credit would be limited to fees or commissions.
The NPRM proposed to retain the existing requirement that to
receive credit for supplying materials, a DBE must negotiate the price
of supplies, determine quality and quantity, order the materials, and
pay for the materials itself.
The NPRM would clarify the definition of ``manufacturer'' by
proposing that manufacturing includes blending or modifying raw
materials or assembling components to create the finished product to
meet contract specifications. Minor modifications do

[[Page 24913]]

not count as manufacturing eligible for 100 percent credit.

Comments

The 50 Percent Limit on Credit Toward Goals for Use of Suppliers
This provision of the NPRM attracted over 60 comments, which, by
roughly a 5-1 ratio, opposed the Department's proposal. DBEs, non-DBEs,
and recipients found reasons for objecting to the proposed limit on the
use of suppliers to meet goals. Commenters opposing the proposal did so
on a variety of grounds.
Several comments challenged the factual basis for the proposal. A
DBE supplier said that there were no statistics or other evidence
supporting the proposal, making the limit arbitrary, a point other
commenters made as well.
A non-DBE contractor said that there were no studies showing that
DBE suppliers were favored over other kinds of DBEs, or showing what
percentage of goals were being met by different categories of DBE
firms. Nor was there evidence that suppliers or manufactures were being
used at a greater rate in the DBE program than in the construction
industry generally, or that the participation of non-supplier DBEs were
unduly limited under the present rule. The comment added that the only
evidence in the NPRM preamble for the proposal was a reference to a
2018 stakeholder meeting in which some DBE participants had said that,
on some contracts, prime contractors were able to meet all or most of
DBE goals through use of suppliers, especially of bulk items, making
use of other types of DBEs unnecessary. It depends, one commenter said:
in some contracts in which his company had been involved, goals had
been met mostly or entirely with DBEs other than suppliers.
A State-level contractors' association said that it had been told
by its State DOT that it does not keep numbers on the participation of
DBE suppliers vs. other DBEs, resulting in a lack of evidence that
could provide a basis for a supplier limit. A national-level
contractors' association said, referencing the stakeholder meeting
mentioned above, that use of comments constituted rulemaking by
anecdote. Moreover, it said, it had not been given the opportunity to
participate in the meeting, the results of which had never been
published. Another commenter noted it did not appear that the views of
prime contractors or recipients had been solicited in the stakeholder
meeting cited in the NPRM preamble.
Commenters who are or who represented recipients expressed concern
that the proposal did not take into account the realities of their
contracting activities, such as the unique characteristics of
contracts, the needs associated with each contract, and the
availability of DBEs relevant to the work of each contract. Two such
commenters said that in their jurisdictions, there was not an excess of
suppliers, one of them noting that only 20 percent of the DBEs in its
directory were suppliers. Others said that the provision would not work
with respect to contracts heavily involving bulk and other materials
(e.g., asphalt), therefore harming businesses who focus on those
materials. One recipient said that there were often few DBEs to work on
contracts in rural areas, making reliance on suppliers more important
there.
Recipients and contractors both said that the proposal would
adversely affect the ability of prime contractors to meet contract
goals and of recipients to meet overall goals. Recipients' goals might
have to be lowered as a result, especially when a contract did not
provide significant opportunities for non-supplier DBEs. For example,
one State contractors' association said that materials made up 60-80
percent of typical highway contracts in its State. On a paving contract
for example, a commenter said, there might be only two or three,
usually small, scopes of work that a DBE subcontractor could perform.
If a contractor could count only suppliers to meet half of its goal, it
would make it impossible to meet goals in many cases, commenters
asserted, given what they characterize as the frequent unavailability
of other types of ready, willing and able non-supplier firms. The
effects of the pandemic on small business could make this problem
worse, a prime contractor suggested. All this would make more good
faith efforts ``waivers'' necessary, commenters said.
A few recipients expressed the concern that the proposal could
increase their workload and create confusion or delays in their
administration of their contracting activities.
A frequent comment opposing the proposal is that it would unfairly
create financial harm to DBE suppliers. These firms have configured
their businesses to meet the requirements of the existing rule,
commenters said, making considerable investments in facilities,
inventory, and employees. They would have fewer opportunities to work
under the proposal, as the rule favors one category of DBEs over
another, with the result that suppliers would lose income and could
even be forced out of business. One DBE stated that it would cut their
business in half.
A few comments also asked how the exception process was supposed to
work. When would recipients have to go to an OA to have an exception
approved, and what would be the OAs' criteria for approving the
request? A commenter suggested there should be a deadline for an OA's
response to a request for an exception (e.g., five days). One comment
suggested that the matter of exceptions should be delegated to
recipients, without needing approval from an OA.
Some commenters also had suggestions for modifying the proposal.
One would allow suppliers to count 50 percent of their gross sales for
credit. Another suggested giving recipients flexibility to decide what
level of credit (e.g., 50, 60, or some other percentage) applied to a
particular contract. Another suggestion was to calibrate credit
according to the percentage of supplies on a contract. If supplies
account for 80 percent of a contract, then the recipient would allow
DBE suppliers' contribution to count for 80 percent of the goal.
Another variation would be to apply the 50 percent limit with respect
to commitments in the pre-award process, but then count the entire
amount of actual supplier participation toward actual attainment at the
end of the project.
The smaller number of commenters who supported the proposal, or at
least did not object to it, said they thought the proposal fair and
useful to keep open opportunities for non-supplier DBEs. Some
supporters said there should be exceptions for materials-heavy
contracts (e.g., guardrails). Another said it could support a 50
percent limit for large contracts but not smaller contracts. A few
recipients said the issue did not much impact their operations. One
comment asked how the provision would apply to situations where there
was no contract goal. A few comments wanted stricter limits on supplier
participation (e.g., 25 percent).
Regular Dealer Issues
The largest number of comments on regular dealer issues focused on
the proposal that recipients have a system to make contract-by-contract
pre-award decisions about whether a supplier deserved 60 percent credit
as a regular dealer.
More than 20 comments, mostly from recipients, opposed the idea.
Their primary objection was that implementing the proposal would be
confusing, difficult, and burdensome. For example, there would be
additional work for contract administrators, which could delay contact
awards. Prime contract bidders would face an undue

[[Page 24914]]

burden, as they would have to do additional due diligence to make sure
that the credit they were claiming for DBE participation was consistent
with the recipient's determination in each case. These determinations
could be subjective and subject to challenge.
Most of the comments opposed to the proposal stated that if there
was to be a determination about whether a supply firm was a regular
dealer, it should be made by the UCP at the time of certification, not
on a pre-award basis on each contract by the recipient. On the other
hand, a commenter objected to UCPs performing this function, since it
would result in a de facto certification of regular dealers.
A few comments supported the proposal. One comment suggested that
the approval of a DBE as a regular dealer could be done as part of a
recipient's good faith efforts review. Another suggested that firms
could submit an affidavit attesting to its meeting regular requirements
as part of the pre-award process. Another recommended that a CUF review
for regular dealers consider such factors as the firm's ability to
secure the items, do their own takeoffs and quantity planning, get
quotes, and have distribution agreements.
On other regular dealer matters, a few commenters said that the
credit awarded to regular dealers should remain at 60 percent. Some
would increase the percentage (e.g., to 75, 80, or 100 percent). One
commenter said that regular dealers in specialized fields for items
such as bridges should be able to count 100 percent. Another commenter
favored 100 percent credit if the firm's workforce was predominately
minority or female. One commenter said the entire regular dealer
concept was outdated and should be taken out of the regulation. The
commenter urged that the regulation talk about suppliers in general in
a simpler way.
Other commenters requested clarification with respect to terms like
keeping a ``sufficient quantity'' of materials in stock (which the
commenter said could vary among different kinds of items), ``drop
shipper,'' or ``specialty items.'' Another asked how a recipient could
make regular decisions with respect to out-of-state firms that were
certified via interstate certification. Another provided a detailed
typology of regular dealers, bulk suppliers, and brokers/transaction
expediters.
Commercially Useful Function
In addition to its role in determining whether a firm was a regular
dealer, some comments addressed CUF decisions more generally. Two
supported doing CUF reviews on all federally assisted contracts, while
another thought doing so would too burdensome if applied to contracts
without a DBE goal. One of these asked for more specific CUF criteria.
One wanted to streamline the process by allowing a CUF review that
would apply to all jobs within a year, while another commenter thought
certifiers could verify CUF at the time of certification.
Recipients, not prime contractors, should make CUF determinations,
one commenter said. Another added that recipients should not be able to
request CUF data from prime contractors; the prime contractor should
get DBE credit unless there is documented evidence of noncompliance.
Another was concerned that CUF reviews and the ``running tally''
monitoring requirements could become confused with one another.
A commenter thought that prime contractors should be able to do
several things to assist DBEs without running afoul of CUF
requirements. These included providing specialized training through a
shared superintendent or foreman, access to contract management
software and back- office assistance, sharing of equipment and workers,
and guarantees consistent with industry practice.
Bulk Suppliers and Supplies of Specialty Items
The 60 percent credit given to suppliers of bulk materials and
specialty items is a subcategory of the treatment of regular dealers
under the rule. There was a division of opinion among commenters about
whether, as the NPRM proposed, these suppliers would need to have their
own distribution equipment to count for 60 percent credit towards a DBE
goal.
Several comments said that leasing equipment was a common industry
practice among suppliers, and that suppliers should not be penalized
for doing so. Being unable to lease distribution equipment would be
burdensome and could make DBE suppliers uncompetitive, one comment
said. A distinction based on physical delivery of products is
unrealistic, a DBE supplier said, as suppliers have to do a lot of work
that adds value no matter how products are delivered.
One recipient suggested that an equipment lease should be long term
(e.g., at least a year). Others would make allowance for a situation in
which a supplier that had its own distribution equipment used a short-
or long-term lease arrangement for items that are infrequently needed
(e.g., highway signs) or to supplement their own equipment, as needed
(e.g., through engaging owner-operators).
Among other comments on the subject, a few supported the proposal
as written. Another raised a problem concerning what it said was a
common practice of manufacturers (e.g., of structural steel) shipping
their products to the job site using their own trucking company. The
commenter wondered whether there would be a CUF for a DBE in such a
situation.
Drop Shipping and Distributors
All but a few of over 40 comments that addressed this issue opposed
the NPRM's proposal, though not all for the same reasons. A mix of
recipients, DBEs, and non-DBEs said that the proposal was unclear,
confusing, overly complex, burdensome, and difficult to administer.
Recipients do not have expertise in evaluating the validity of a
distributorship agreement, some said, adding that the NPRM did not
provide guidance or criteria to aid this task. It could be difficult
for recipients to distinguish between those transactions counted at 40
and 60 percent, another comment asserted. One comment suggested that
other factors aside, all drop-shipped goods should be counted at a
fixed percentage (e.g., 30 or 50 percent) to simplify matters.
Two commenters thought that, as comments had suggested about
regular dealer evaluations, decisions about the validity of
distributorship agreements should be made in advance, through the
certification process. Monitoring would be very hard to accomplish,
requiring intensive work. Recipients should have the flexibility to
determine how much credit to permit for drop-shipped goods, depending
on the circumstances of individual contracts, a comment said. Some
commenters were concerned that the 40 percent number was arbitrary,
lacking a basis in evidence.
Another theme expressed by some commenters was that drop shipping
was a normal industry practice for building and construction materials,
particularly in this day of just-in-time logistics. Firms that do
business this way, assuming that they insure the goods and bear the
risk of loss, should not be penalized by the lower 40 percent level for
credit. If a firm delivers or insures the material, commenters of this
view said, it should count at the 60 percent level, even if drop
shipped. The proposal could make it difficult for small firms to make a
profit, another said. This is particularly true, one commenter said,
for made-to-order items that are not typically kept in warehouses
(e.g., rail ties and switches). The proposal could place DBE shippers

[[Page 24915]]

at a competitive disadvantage compared to non-DBEs.
On the other hand, a few comments opposed any credit for drop
shipping distributors, beyond fees and commissions, saying that regular
dealers add more value and have more overhead costs. Moreover, a
comment said, the proposal opens opportunities for fraud. Others said
that distributorship was not a valid business model. In a similar vein,
a few commenters suggested that a lower percentage (e.g., 20 or 30
percent) should count. Another said that drop shipping credit should be
permitted only for large quantities or oversized items that are
difficult to store in a warehouse.
A few comments did support the proposal, though with the caveats
that more guidance from DOT would be needed about what a valid
distributorship agreement should look like, and that close scrutiny of
such agreements by recipients would be necessary to make the concept
work.
Negotiating Price of Supplies
Relatively few comments addressed the proposal to continue in
effect the current requirement that, to get credit, a DBE supplier must
negotiate the price of supplies, determine quality and quantity, order
the materials, and pay for the materials itself. Some said that there
are situations (e.g., airport lighting) when the price of items cannot
be negotiated. An equal number of comments supported the proposal. One
of them added that a DBE should have to perform, and not outsource, all
of the four required functions; otherwise, there would be opportunities
for fraud and abuse. In any case, another said, recipients had to
enforce these requirements strictly.
Definition of Manufacturer
A majority of the 13 comments that addressed this proposal
supported it, though some asked for clarification of what constituted a
``minor'' modification of materials. Commenters asked whether
activities like adding logos to uniforms, cement mixing trucks, coating
rebar, or cutting materials to a specific size would count as
manufacturing or minor modifications. Some comments also suggested
using SBA regulations in 13 CFR 121.406 to define what constitutes a
manufacturer. One comment asked that manufacturers not be subject to
the proposed 50 percent limit on DBE credit for supplies provided to a
project.
Other Comments
One comment said that there should be a special rule for counting
disposal of hazardous materials, such as a percentage of the disposal
costs. Two others said that DBE credit should be allowed for at least
some of the work that a DBE subcontracts to a non-DBE, at least as long
as the non-DBE is not an affiliate. Another said that brokers had a
legitimate role, asking that the rule define their proper role.

DOT Response

50 Percent Limit on Credit Toward Goals for Use of Suppliers
In proposing the 50 percent limit on the counting of DBE
participation by suppliers toward goals, the Department was responding
to the perception of many DBEs, as well the experience of DOT staff,
that prime contractors find it easier to meet DBE contract goals
through obtaining supplies and materials from DBE suppliers than
through using DBE subcontractors who work on projects on the ground.
For example, on a highway project it can be simpler for a prime
contractor to buy paving materials through a DBE supplier than to
engage a DBE to install the materials. This has given rise to the
concern that DBE subcontractors can be frozen out of opportunities,
since goals may be able to be met without them. By limiting the portion
of the goal that could be met by using suppliers, the Department hoped
to keep open a significant percentage of work that would then be
available for DBE subcontractors.
Nevertheless, the Department has been persuaded by the comments
that this provision should not be included in the final rule. Comment
periods on proposed rules are not simply votes, and in making this
decision the Department is not simply responding to the numbers of
comments opposing the proposal. Rather, we believe that commenters made
reasonable points about the basis and potential effects of the
proposal.
We find plausible the concern that if suppliers could not comprise
more than 50 percent of a goal, many contract goals might not be met,
resulting in higher numbers of goal attainment through documented good
faith efforts instead of sufficient DBE subcontracting; this may have
possible implications for overall goal attainment. This concern appears
particularly credible with respect to contracts that emphasize bulk
supplies like asphalt or petroleum products, or projects that may be
located in parts of States or work scopes in which few DBE
subcontractors may be available.
The proposed exception mechanism, as well as some of the
commenters' suggestions for modifications that could be added to a
supplier limit regime to provide greater flexibility, are well
intended, but could easily lead to greater complexity and inconsistency
in program administration. In any event, because we are not adopting
the 50 percent limit provision, they are unnecessary.
Our underlying concern about ensuring that the program does not
have inadvertent adverse effects on DBE subcontractors is addressed
through other changes to the present rule that are adopted in this
final rule. The definition of regular dealer is being strengthened to
emphasize the necessity of regular dealers having facilities,
inventories, and/or distribution/delivery equipment in order for 60
percent of the value of their supplies to be counted toward goals.
The new distributor definition limits to 40 percent the credit that
can be obtained for many drop-shipped goods, provided the DBE bears
risk for loss or damage of such items. The credit for broker and
expediter participation continues to be limited to fees or commissions.
These provisions should reduce the incentives and opportunities for
prime contractors to over-rely on suppliers to meet goals to the
detriment of other DBEs. We expect recipients to enforce these
provisions rigorously and to take care, at the pre-award stage, to
ensure that bidders on prime contractors do not obtain credit beyond
what the provisions permit.
The Department also understands commenters' point that creating a
provision that would directly benefit one category of DBEs at the
expense of another category does risk being arbitrary. It is likewise
the case that DBE suppliers, particularly those that are regular
dealers, have a reliance interest in retaining full access to the
program, and may often have made considerable investments to establish
their position in the program. To limit their business opportunities
could well cause them economic harm, as comments asserted, based solely
on the type of work they do.
The risk of arbitrariness increases absent quantitative information
to support an impression--even one based on considerable anecdotal
experience--that there is a problem that such a regulatory provision is
needed to solve. The Department recognizes that it does not collect
information from recipients about the type of work DBEs perform on
contracts. The Department proposed in the NPRM the ability to collect
that information as part of recipient's required submission of the
Uniform Report of DBE Awards, Commitments, and Payments. It may be that
reliable data showing that DBE subcontractors

[[Page 24916]]

are effectively shut out of opportunities to work on projects by prime
contractors' over-reliance on suppliers to meet goals could make a
``market failure'' case for imposing a provision like that of the NPRM;
however, without that information at the present time, the Department
is declining to change the rule at this time.
Going forward, the Department will have recipient data from the
updated Uniform Report of DBE Awards, Commitments and Payments
regarding not only the number and dollar amount of DBEs that
participated on federally assisted contracts that we currently collect,
but information on the type of work performed by those DBEs as well.
Depending on what such data shows, the Department may reconsider
whether a limit on goal credit for DBE suppliers is appropriate.
Commercially Useful Function and Regular Dealer Issues
Finding a means of limiting potential over-crediting of suppliers,
while not unreasonably limiting their participation, is an important
step toward creating a well-balanced DBE program.
We believe that we can achieve this objective by having recipients
pay close attention, at the pre-award stage, to how suppliers proposed
to be used by a prime contract bidder can go far to avoiding over-
crediting in a way well-suited to the circumstances of a particular
contract.
Recipients are already required to carefully examine, before
contract award, whether the bidder has committed to a sufficient number
of DBEs in sufficient amounts to meet the contract goal or has
submitted adequate documentation of good faith efforts. Often, however,
recipients assume that DBEs committed as suppliers are entitled to 60
percent of the cost of supplies when evaluating pre-award goal
attainment. The final rule requires recipients to look in detail at how
a DBE supplier would provide supplies and materials to the contract to
provide more certainty whether the contractor would be entitled to
count 60 percent of the cost of supplies toward goal attainment during
contract performance. The recipient would do so through asking a series
of questions with respect to the role of a proposed DBE supplier. In so
doing, it would not determine whether a DBE was, in some intrinsic
sense, a ``regular dealer.'' The inquiry would not focus on the nature
of the firm, but on what the firm proposed to do on a particular
contract and how it proposed to carry out its responsibilities.
The Department determined that the proposed change to Sec. 26.55
with respect to requiring bidders submitting commitments to DBE
suppliers to include is better placed in Sec. 26.53(c)(1). Thus, Sec.
26.53(c)(1) of the final rule describes the nature of the questions and
affirmations a proposed DBE supplier will provide, and the prime bidder
will include in the pre-award process for each contract. This
information helps the recipient to determine if the firm should be
awarded 60 or 40 percent credit for supplies. For example, the
recipient would ask, whether on a particular contract, the DBE supplier
will be using its own distribution equipment, whether it maintain a
warehouse or other facility, whether it engages in the sale of the sort
of goods involved in the contract to the public on a regular basis,
etc. We will also make available a form tool on the Departmental Office
of Civil Rights' website.
Drop Shipping and Distributorship Issues
In an effort to address the fact that drop-shipping is a common way
of doing business, we proposed that drop-shipping by a DBE that has a
distributorship agreement with a manufacturer would be able to count 40
percent of the value of materials toward goals. The distributorship
agreement concept troubled many commenters, both from the viewpoint of
how recipients would decide if an agreement was legitimate and the fact
that many, especially smaller, DBE suppliers might not have the
resources to enter such an agreement. Commenters said that if a DBE
supplier took enough risk, it should be entitled to credit regardless
of whether it was part of a formal relationship of this kind with a
manufacturer.
The Department will respond to these comments by eliminating the
distributorship agreement proposal. Instead, as part of the pre-award
review for firms proposing to drop-ship items, the recipient would
determine whether the proposed supplier demonstrates ownership of the
items in question and assumes all risk for loss or damage during
transportation, evidenced by the terms of the purchase order or a bill
of lading (BOL) from a third party, indicating Free on Board (FOB) at
the point of origin or similar terms that transfer responsibility of
the items in question to the DBE distributor. Again, the Department's
form tool will have questions to help recipients make this
determination. If the proposed drop-shipper met these criteria, it
would receive 40 percent credit for the cost of the items. We
anticipate that many bulk material items may well fall into this
category, if all the requirements are met.
The current rule's provisions for 100 percent credit for materials
provided by a DBE manufacturer, and for credit limited to the fees or
commissions for firms who did not meet the criteria for 60 or 40
percent credit, would remain the same. The Department believes that
detailed enforcement of all the supplier provisions discussed above
would be sufficient to prevent or limit over-crediting of suppliers, to
the detriment of other kinds of DBEs, to make the proposed 50 percent
cap on supplier credit toward goals unnecessary, while respecting the
arrangements that may be appropriate to the wide variety of contracts
in DOT-assisted programs. To make this approach work, recipients would
have to ensure that bidders and proposed DBE suppliers specify and
certify the details of the work that would be performed and how it will
be performed, so that post-award monitoring could ensure that
commitments were being met.
Other Matters
The Department adopts the NPRM provisions concerning the definition
of manufacturers and the responsibility of DBEs for negotiations
concerning price without change. In regard to a commenter's view that
credit be allowed for work performed by a non-DBE subcontractor, such
an approach is not aligned with the intent of the program. The comments
regarding the disposal of hazardous materials and brokers were not
proposed in the NPRM and are therefore outside the scope of this final
rule. DOCR appreciates the commenters' input and will consider any
information or recommendations the commenters may have on these issues.

Subpart D--Certification Standards

12. General Certification Rules (Sec. 26.63)

NPRM

Proposed Sec. 26.63 of the NPRM was largely a redesignation of the
material previously found in Sec. 26.73. The one substantive change of
note would be that, in place of current Sec. 26.73(e), concerning DBEs
owned by holding or parent companies, the NPRM would substitute a
simpler provision saying that there could be one level of ownership
above the company seeking certification. That is, there could be a
subsidiary and its parent company, but there could not be a
``grandparent'' company above both of them. Eligibility in such a
situation assumes cumulative 51 percent ownership of the subsidiary
company and that other eligibility

[[Page 24917]]

requirements were met. The proposal includes several examples of
arrangements that would or would not be eligible under the revised
rule.

Comments

There were 10 comments on this proposal; all but one favored it.
The unfavorable comment expressed concern that the proposal could
compromise the independence of the subsidiary firm.
Several commenters addressed the regulation's approach to
certification in general. For example, some commenters asked the
Department to simplify the certification process, which they
characterized as a lengthy, costly, and paperwork intensive process
that was an obstacle and deterrent to firms seeking to enter the
program.
Other comments said that the annual submissions of a DOE and
financial data were unnecessarily burdensome on both DBEs and
certifiers. It would be better to require this submission only every
two or three years. Moreover, in the context of the interstate
certification proposal, the burden on firms would be multiplied if they
had to submit a DOE to every State in which they had become certified.
Two comments suggested having independent third-party
administrators do certification reviews instead of recipient personnel.
Another commenter suggested better education and training about Federal
and State program rules (e.g., requirements for continuing education).
Another commenter recommended and that the Department develop a code of
conduct for certifiers.

DOT Response

The final rule adopts NPRM's proposal to limit DBEs to having one
level of ownership above an operating DBE company. That is, there could
be a ``parent'' company but not a ``grandparent'' company. The rule
does not specify the type of business entity involved in the level
above the operating company, as long as it permitted the operating
company's ownership to meet certification requirements.
The final rule also retains the requirement for the annual DOE for
all companies. A firm that is certified in multiple States must submit
DOEs to all States in which it was certified on the anniversary date of
its certification by the jurisdiction of original certification (JOC).
Given the frequent turnover of certifier personnel, and the errors
in the certification process that too often come to light in the
certification appeal process, it is clear that training is key to
smooth operation of the certification function. This is especially true
when, following the issuance of this final rule, new and changed
certification standards go into effect. While we are not mandating a
specific number of ``continuing certification hours'' for staff, or
setting forth a standard curriculum at this time, the Department
intends to make comprehensive training opportunities available to
certifiers, which we expect all certifiers to take advantage of.

13. Business Size (Sec. Sec. 26.65, 23.33)

NPRM

Only small businesses may participate in the DBE program. The
business size limit for applicant and certified DBEs seeking to
participate in FHWA and FTA assisted contracts is adjusted for
inflation per the BIL. As of this final rule, this statutory gross
receipts cap is $30.40 million. A DBE firm must still meet the size
standard(s) appropriate to the type(s) of work the firm seeks to
perform in DOT-assisted contracts. These standards vary by industry
according to the NAICS code(s) defined by the Small Business
Administration (SBA).
The adjusted gross receipts cap does not apply to determining a
firm's eligibility for participation in FAA assisted projects. This is
due to a recent statutory change that eliminated this requirement for
FAA assisted contracts. This means that the Department does not have
the discretion to change these size standards through administrative
action. DBE firms working on FAA assisted projects must meet the size
standard(s) appropriate to the type(s) of work based solely on the
applicable NAICS code(s) size standard(s). UCP directories must clearly
indicate which firms are only eligible for counting on FAA assisted
work. (There are separate size standards for the part 23 ACDBE program
that are not affected by recent changes in SBA regulations pursuant to
the Small Business Runway Extension Act of 2018 (Pub. L. 115-324).)
The NPRM proposed to conform the Department's rule so that a firm's
compliance with NAICS code size standards would be based on its average
annual gross receipts over the firm's previous five fiscal years.
However, under Sec. 1101(e)(2)(A)(i) and (ii) of the Bipartisan
Infrastructure Law (BIL), only the firm's gross receipts for the most
recent three fiscal years may be submitted to determine whether it
meets the small business statutory size cap.
The NPRM also addressed size provisions in the ACDBE program. There
would be minor changes to part 23 and a reference to pay telephone
operators would be removed. The NPRM would also remove a requirement
for adjusting the ACDBE size standards every two years; the preamble
asked whether any change was needed at this time and, if so, what
measure of inflation the Department should use. The preamble expressed
concern that raising the standards could harm the chances of smaller
firms trying to enter the program. It also asked whether industry-
specific standards, like that for car rentals, are still needed.
Finally, the NPRM added a clarification that an ACDBE that is a party
to a joint venture must include in its gross receipts its proportional
share of receipts generated by the joint venture.

Comments

Part 26 Standards
A significant number of commenters, from both DBEs and recipients,
supported the proposal to go to a five-year calculation for NAICS code
size standard compliance, though a couple of commenters would have
preferred a shorter (3-year) or longer (7-year) calculation. A number
of commenters, however, said that the NAICS codes limits and/or
statutory size cap were themselves too low, given inflation that has
particularly affected commodity prices. Several commenters advocated
raising the part 26 limits to the level of the part 23 standards, or to
the $39.5 million level applicable to many types of business under SBA
regulations.
A few commenters recommended regional variations in the size
standards. For example, in high-cost construction areas, like New York
or San Francisco, size standards could be adjusted along a scale tuned
to the prevailing wage rates in those areas. One commenter suggested
that proceeds from COVID-19 pandemic relief legislation, like the
Paycheck Protection Program, should not be counted toward a firm's
gross receipts calculation. A few comments also suggested using net,
rather than gross, receipts to calculate whether a firm meets size
standards. One commenter said pass-through payments to subcontractors
in particular should not be part of the calculation.
A smaller number of commenters stated that the regulation should
eliminate size standards because they unfairly limit DBEs' growth.
Several commenters recommended a mechanism that would allow mid-size
DBEs to remain certified for a limited time after exceeding the size
standards so that they should be able to continue their growth and
success. For example,

[[Page 24918]]

DBE credit for using a firm could be progressively reduced over a
period of three years (i.e., 75 percent in year 1, 50 percent in year
2, 25 percent in year 3) after it first exceeded the size limits for
full DBE participation.
With respect to adjustments, commenters generally agreed with the
proposal, though some pointed out that adjustment dates had been missed
in the past, that stakeholders should be consulted on the subject, that
industry-specific data should be used, that White-owned businesses
should be omitted from the calculation, or that inflation should be
used as the measure for adjustments.
Part 23 Standards
Two commenters, both from the same urban area, asked to retain a
standard for pay telephone operators, lest existing contracts with such
operators be adversely affected. Those commenters, who addressed the
proposal that an ACDBE that is a party to a joint venture must include
in its gross receipts its proportional share of receipts generated by
the joint venture, approved it.

DOT Response

The Department adopts the NPRM's proposals on these issues. While
we understand the objectives that supporters of regional or local
standards seek to achieve, we believe that in a national program--
especially one in which interstate certification reciprocity will
become a reality--a single national standard is appropriate. We also do
not believe that a variety of different standards would be consistent
with the program's governing statutes. For example, the Department is
now working under a statutory requirement for five-year averaging for
NAICS code gross receipts size standard purposes, such that a different
period--three or seven years--is not something we have the statutory
authority to authorize.
With respect to size calculations, the final rule clarifies that
certifiers should count on a cash basis, regardless of a firm's choice
of accounting method. This is intended to level the accounting playing
field among firms.
For part 23, because there are still some airports that have pay
telephones, the final rule retains the size standard for existing pay
telephone concessionaires. Similarly, the final rule retains the
proposed provision that joint venture receipts be included in the ACDBE
size calculation in proportion to the ACDBE's demonstrated ownership
interests in the joint venture, lest the size of such firms be either
overstated or understated.

14. Personal Net Worth (Sec. 26.68)

NPRM

The NPRM's discussion of proposed changes to the personal net worth
(PNW) standard was the most complex portion of its preamble. The
discussion noted the reason for having a PNW standard, namely that in
its absence persons who are members of presumptively eligible groups
but who in fact are not economically disadvantaged could benefit from
the DBE program, undermining both the program's ability to assist
persons who are truly disadvantaged and the narrow tailoring that is
vital to the program's continued legal validity.
The preamble also noted the balancing act that the Department faces
in setting a PNW cap. If set too high, persons who are not truly
disadvantaged can participate. If set too low, socially and
economically disadvantaged owners (SEDOs) whose firms have grown
successful can be prematurely excluded.
PNW Cap
Since 2011, the PNW cap has been set at $1.32 million, which had
been adjusted upward for inflation from the $750,000 level in its 1989
base year. As explained in the NPRM preamble, 87 FR 43636-38 (July 21,
2022), rather than make a direct inflationary adjustment, based on a
measure like the Consumer Price Index (CPI), the Department employed a
complex analysis based on the Federal Reserve Board's 2019 Survey of
Consumer Finances (SCF), a triennial cross-sectional survey of U.S.
families' balance sheets, pensions, income and demographic
characteristics. The methodology accounts for differences among racial
and ethnic groups (e.g., White, non-Hispanic households have net worth
of six to seven times that of Hispanic or Black households).
Specifically, using SCF data on household assets and liabilities
allowed the Department to construct a proxy measure of PNW that is
close to the how PNW is currently defined by the program but also
allows consideration of the impact of removing retirement accounts from
the definition of PNW accounts for the relative wealth of potential
DBEs by comparing their financial position to other self-employed
business owners, rather than the general public. After constructing the
proxy measure of the revised PNW definition that removes retirement
accounts using the 2019 SCF, the Department constructed a distribution
of PNW across white, male, non-Hispanic self-employed business owners.
See Table 2 of NPRM preamble. There is an apparent breakpoint between
the 80th and 90th percentiles. As described in the discussion of Table
2 of the NPRM preamble, ``[t]he 90th percentile of PNW for male, White,
Non-Hispanic self-employed business owners is roughly $1.60 million,
which is $1.04 million higher than the 80th percentile of $0.56
million, which is in turn just $0.29 million greater than the 70th
percentile.'' 87 FR at 43638. Therefore, there is a substantial jump in
PNW between the 80th and 90th percentiles, making it an intuitive
breakpoint between wealth groups. A 90th percentile cutoff is commonly
used to describe the most wealthy group and to compare the economic
position of the most wealthy group to the rest of the population.\3\
---------------------------------------------------------------------------

\3\ See Smith, Zidar, and Zwick, ``Top Wealth in America: New
Estimates under Heterogeneous Returns,'' 138 Quarterly Journal of
Economics 515 (2023) available at <a href="https://economics.princeton.edu/working-papers/top-wealth-in-america-new-estimates-under-heterogenous-returns/">https://economics.princeton.edu/working-papers/top-wealth-in-america-new-estimates-under-heterogenous-returns/</a>; Kuhn, Schularick, and Steins, ``Income and
Wealth Inequality in America,'' Center for Economic and Policy
Research (Aug. 9, 2017) available at <a href="https://www.wiwi.hu-berlin.de/de/professuren/vwl/wtm2/seminar-schumpeter/hscf_cepr.pdf">https://www.wiwi.hu-berlin.de/de/professuren/vwl/wtm2/seminar-schumpeter/hscf_cepr.pdf</a>; Bricker,
Goodman, Moore and Volz, ``Wealth and Income Concentration in the
SCF: 1989-2019'' in FEDS Notes (Sept. 28, 2020) available at <a href="https://www.federalreserve.gov/econres/notes/feds-notes/wealth-and-income-concentration-in-the-scf-20200928.htm">https://www.federalreserve.gov/econres/notes/feds-notes/wealth-and-income-concentration-in-the-scf-20200928.htm</a>; Kochar and Cilluffo, ``Income
Inequality in the U.S. Is Rising Most Rapidly Among Asians,'' Pew
Research Center (July 12, 2018) available at <a href="https://www.pewresearch.org/social-trends/2018/07/12/income-inequality-in-the-u-s-is-rising-most-rapidly-among-asians/">https://www.pewresearch.org/social-trends/2018/07/12/income-inequality-in-the-u-s-is-rising-most-rapidly-among-asians/</a>.
---------------------------------------------------------------------------

Looking to the percentile distribution of personal net worth for
male, White, non-Hispanic business owners, the Department calculated
that the 90th percentile PNW for persons in this category was
approximately $1.60 million (in 2019 dollars). Based on this
calculation, the NPRM proposed that $1.60 million be the new PNW cap
for SEDOs, meaning that they could continue in the DBE program if their
PNW was at the same level as a 90th percentile White, non-Hispanic,
male business owner. This would mean, the preamble explained, that 92.6
percent of self-employed business owners who are women, Hispanic, or
non-White would fit under the revised cap.
The NPRM proposed using changes in aggregate household net worth
data published by the Federal Reserve to adjust the PNW amount in
future years. Details of this approach are found at 87 FR 43639. We
would make the first adjustment 180 days after the effective date of
the final rule and make further adjustments at five-year intervals. The
NPRM proposed that we make only upward adjustments.

[[Page 24919]]

Reporting
The NPRM proposed several changes affecting asset inclusion and
valuation in reporting PNW. Under the proposal:
<bullet> The SEDO reports asset values without regard to community
property, equitable distribution, or similar State laws. In general,
title determines ownership.
<bullet> The SEDO reports assets held in qualified retirement
accounts at full value but excludes them in full from the calculation
of PNW.
<bullet> The SEDO may not report loans taken against retirement
assets as liabilities, regardless of title.
<bullet> The SEDO continues to exclude her share of the equity in
the primary residence although in some cases that share may change.
<bullet> The SEDO reports 100 percent of the value of household
contents unless she and a spouse or domestic partner cohabit, in which
case the SEDO reports 50 percent of total value. Total value is deemed
to be a least the amount for which contents, including fixtures and
appurtenances, are insured,
<bullet> The SEDO reports motor vehicle values in the proportion to
which she holds title. The Department requested comments concerning how
the SEDO should report, if at all, the value of leased vehicles.
<bullet> The SEDO reports at full value assets she transferred to
certain related parties during the two years preceding an application
for certification and in any single year following a declaration of
eligibility. The NPRM clarifies which related-party transfers trigger
the inclusion and adds a de minimis exception. It further clarifies
which ``personal expenditures'' the SEDO may exclude.
<bullet> A natural person's signatory (not guarantor) status on a
debt instrument generally determines ownership of the liability. In
cases in which another party consistently makes payments on the debt,
however, the certifier may determine, as it may under the current rule,
that for eligibility purposes the debt does not belong to the formal
obligor.

Comments

PNW Cap
Over 50 comments, not only from DBEs but recipients and other non-
DBE commenters as well, supported the proposed $1.60 million PNW limit.
The basic reason for their support was that the adjustment would
increase opportunities for DBEs and avoid penalizing SEDOs for success.
One comment suggested that, following SBA's practice, there should be
separate entry and retention PNW limits for firms.
Nearly as many comments (including some of the above) said that
$1.60 million was still too low a number. One common reason for this
view was that the $1.60 million adjustment, based as it was on 2019
dollars, failed to keep pace with recent higher rates of inflation.
Even if the proposed methodology were used, the final rule should
update the number to be consistent with more recent data, they said. A
commenter argued that a higher PNW number was needed to allow DBEs to
compete in markets dominated by large corporations. Another noted that
data from the Federal Reserve Bank of New York supported the
proposition that Black and Hispanic Americans took a bigger hit from
impacts on the economy of the COVID-19 pandemic and recent inflation
than other persons, suggesting that this be considered in setting PNW
numbers.
Other commenters' suggestions included $1.84 million (based on CPI
inflation since 1989), $2 million, $2.5 or 2.6 million, $3 million, $5
million, or even $20 million. A few commenters referred to New York
State's $15 million cap for its State minority and women business (M/
WBE) programs. Several DBE commenters went further, advocating for the
elimination of a PNW cap altogether, saying that it was ``anti-
entrepreneurial'' and too limiting on firms' growth.
Using the SCF as the basis for the adjustment was problematic, a
few comments said (e.g., because it uses data from the male in an
opposite-sex couple, the older person in a same-sex couple, or an
individual, making it difficult to use the SCF to determine PNW for
DBEs).
A significant number of comments advocated taking regional, or even
local, differences in the cost of living and the cost of doing business
into account in setting PNW limits, rather than establishing a one-
size-fits-all national number. For example, one comment said, the cost
of living in the New York metropolitan area was 69 percent higher than
the national average. One of these made an analogy to the ``locality
adjustments'' made in the salaries of Federal employees. Differences in
the type of business involved (e.g., have higher PNWs for types of
firms, like heavy construction companies or ACDBEs) should also be
taken into account.
A small number of commenters dissented from the concept of
increasing the PNW number. Some said that even someone whose PNW was
$1.32 million, let alone $1.60 million, should not truly be regarded as
economically disadvantaged. The main reason commenters opposed the
increase is that it allowed established DBEs who already get
significant amounts of work to remain in the program, limiting
opportunities for smaller, newer firms, especially those operated by
Black or Hispanic SEDOs.
Two recipients said that they knew of few DBEs that became
ineligible for their SEDOs' excess PNW, while a DBE association said
that increasing the limit could risk narrow-tailoring challenges to the
program. A few comments questioned the economic rationale for the
NPRM's calculation or found it confusing.
Commenters generally agreed with our proposal to make future
adjustments without formal rule making. While some commenters endorsed
the proposed five-year adjustment intervals, others advocated more-
frequent adjustments.
Several commenters questioned or opposed the 90th percentile
benchmark for the adjustment. Some commenters thought that this choice
was arbitrary or confusing, with no compelling rationale. Other
commenters said the 90 percent level is unfair because DBEs must
compete with extremely wealthy and powerful non-DBEs, and that using 95
percent might be better.
Taking the opposite point of view, some commenters thought using
the 90th percentile standard could be over-inclusive, letting too-
wealthy individuals into the program, undermining the concept of
economic disadvantage, and risking challenges to the program based on a
lack of narrow tailoring. One commenter questioned the point of having
a PNW cap at all, considering the commenter's assertion that more than
90 percent of small business owners have a PNW below the current cap,
and the NPRM would increase the cap and exclude retirement assets.
Reporting
Retirement assets drew well over 50 comments, with a considerably
wider divergence of opinion than on the PNW number itself. Supporters
of the proposal outnumbered opponents by about two to one. Supporters
were primarily DBEs but included some recipients and non-DBE groups as
well. Opponents were primarily recipients.
Comments supporting the proposal generally did so for the reasons
stated in the NPRM. It would make SEDOs' lives fairer and the program
easier to deal with, one of them said.
The most significant reason for opposition to the proposal was a
concern that it would be subject to

[[Page 24920]]

manipulation and allow wealthier SEDOs to shelter significant assets,
perhaps in the millions of dollars in some cases, from the PNW
calculation. This would exacerbate inequality among DBEs, disfavoring
SEDOs of smaller, newer DBEs and implicitly favoring White females over
minority SEDOs. The proposal would likely benefit only a few existing
firms, mostly those who already get a large portion of DBE
participation and open the door to firms that are not truly
disadvantaged, resulting in an uneven playing field among DBEs, one
recipient said.
The proposal could have unintended consequences, according to some
comments, such as incentivizing transfers of assets to retirement
accounts, resulting in unrealistically low PNW asset totals. In
addition, comments said, the proposal could disfavor individuals who
invested in real property, as distinct from financial instruments, as a
means of retirement planning. Retirement savings are a part of
someone's wealth, after all, another commenter noted, and should be
treated as such. Excluding them dilutes the notion of economic
disadvantage and could facilitate the participation in the program of
people who are not genuinely economically disadvantaged. Being able to
put significant sums into retirement accounts itself suggests a level
of affluence that may indicate that someone is not economically
disadvantaged.
Some of the opponents of the proposal, and other commenters,
suggested modifications of the proposal to deal with what they saw as
its problematic aspects. One suggested a $500,000 reduction in excluded
retirement assets, with a 10 percent reduction of the remainder. Other
comments recommended that only a portion of retirement assets be
excluded, such as 10, 20, 50, or 75 percent. Another comment wanted
more guidance on what constituted a retirement asset for purposes of
the provision.
Commenters addressed several of the NPRM's proposed provisions
regarding the SEDO's reporting of assets and liabilities for PNW
purposes.
The most contentious issue in this PNW component was the proposal
that SEDOs report assets without regard to State community property,
equitable distribution, or similar laws or principles. The opinion
among commenters was evenly divided on the subject. Supporters
generally agreed with the NPRM's rationale for the proposal, some
specifically citing the desirability of avoiding inconsistency among
States.
A number of the opponents of the proposal were concerned that
removing consideration of marital and community property laws could
disproportionately favor wealthier SEDOs over less affluent SEDOs, and
White female SEDOs over minority SEDOs. Opponents maintained that the
proposed rule would allow a SEDO access to a spouse's wealth while
artificially reducing her own reportable assets. Excluding these laws
from consideration could cause problems for some States in
administering the program, others said, and it would be better to
retain the current rule.
If household goods are divided equally between spouses or domestic
partners, a number of others asked, why should their house itself not
be treated the same way? One commenter asked how the Department would
treat a house that was titled in a revocable trust (which the commenter
said was a common estate planning technique). The commenter suggested
that it be counted in the owner's PNW calculation if the SEDO was a
beneficiary of the trust for purposes of the house.
The commenters who addressed the ownership of household goods
expressed a variety of concerns. Two opposed counting goods at all
because doing so, or keeping the information up to date, was too
complex and burdensome for applicants (e.g., figuring in depreciation).
Another idea was to exclude personal property up to a certain dollar
limit (e.g., $250,000). One said that insurance values tend to be
understated, and another stated that insurance companies tend to value
household goods at a certain percentage of the value of the home
itself, a figure which the homeowner should be able to contest in the
PNW process. Requiring a copy of the insurance policy for verification
would be a good idea, two comments suggested.
Several comments suggested that leased vehicles should be treated
neither as a liability or an asset, though a few other commenters
thought they should be one or the other. Other comments expressed
concern that vehicles, including valuable ones, could be hidden from
the PNW calculation by being placed in the name of an applicant's non-
disadvantaged spouse. One such comment suggested that a vehicle in a
spouse's name should always be counted as part of the SEDO's assets.
Two others questioned why a vehicle would be placed solely in the name
of its title holder, while other personal property, like household
goods, would be divided 50/50 between an applicant and a non-
disadvantaged spouse.
One commenter expressed concern that attributing a debt to the
signatory on a debt instrument could serve as a way for a wealthy
applicant to inflate his liabilities for PNW purposes. Another asked
whether a business going into default should be counted as a liability
if the owner had guaranteed the loan personally, while a third asked
for clarification that a firm's debt, as opposed to a personal debt,
should not count as a liability for PNW purposes. Another question
concerned how the rule would treat a debt entered into by a SEDO in his
or her personal capacity but was being paid off by the firm. One
commenter suggested that in connection with the proposal not to
consider State marital property laws, having the signatory on the debt
instrument determine the ownership of the liability would be a loophole
that would favor applicants with non-SED spouses.
Other Comments
A number of comments propose alternative approaches. One commenter
advocated not counting any of a spouse's assets for PNW purposes;
another took the opposite view, suggesting that all of a spouse's
assets be counted. Another said that in addition to excluding
contingent liabilities, contingent assets should not be counted.
Exclusions should include non-revenue producing property (e.g.,
timeshares, vacant land) and the cash surrender value life of insurance
policies should not be counted as an asset, a commenter asserted.
Another comment suggested excluding encumbered assets from
consideration.
One commenter suggested that the rule define the time period in
which direct payments for health care, education, or celebration of
significant family life events should be counted. A DBE association
said, with respect to the proposed rule limiting transfers to family
members or related entities, there should be an exception for transfers
that were irrevocable or were pursuant to a bona fide tax planning,
estate planning, family support, or similar strategy, perhaps involving
a third-party professional's certification that the transfer was part
of such a plan.

DOT Response

The PNW cap is an important feature, among the other eligibility
criteria and standards set for the program, that helps ensure that the
DBE program remains narrowly tailored. The cap prevents people who are
too wealthy to be reasonably considered economically disadvantaged from
participating in the program.

[[Page 24921]]

The PNW Cap
As explained in the NPRM, and in this final rule, the Department
undertook a fresh, comprehensive approach to tailor an original
analysis of wealth based on quantitative analysis. The approach in this
rulemaking uses SCF data on household assets and liabilities to allow
us to construct a proxy measure of PNW that is close to the how PNW is
currently defined by the program and also allows us to consider the
impact of removing retirement accounts from the definition of PNW.
Further, it allows us to allow for the relative wealth of potential
DBEs--by comparing their financial position to other self-employed
business owners, rather than the general public. After constructing the
proxy measure of the revised PNW definition that removes retirement
accounts using the 2019 SCF, we then constructed a distribution of PNW
across white, male, non-Hispanic self-employed business owners. See
Table 2 of NPRM preamble.
In arriving at the $1.60 million proposal in the NPRM, the
Department used data from the Survey of Consumer Finances (SCF), a
survey conducted every three years by the Federal Reserve and U.S.
Department of the Treasury. This data was specifically analyzed for
business owners by race and gender to reach the proposed $1.60 million
PNW threshold. The NPRM proposed to adjust that figure subsequently
based on the growth in the Federal Reserve measure of total household
net worth from ``Financial Accounts of the United States: Balance Sheet
of Households and Nonprofit Organizations Table Z.1'' using 2019 as the
base year.
Determining a threshold beyond which an individual is considered to
have accumulated wealth too substantial to need the program's
assistance is an exercise in judgment. Nonetheless, as explained in the
NPRM and in this final rule, using the 90th percentile to identify a
high level of wealth or income is a common convention used to describe
economic inequality. Choosing a substantially lower threshold, such as
the 80th percentile, would result in a cap that is lower than the
current cap and would act to remove businesses that are currently
participating in the DBE and ACDBE programs which would be an
undesirable outcome for the DBE and ACDBE programs. Choosing a
substantially higher threshold would risk the possibility of that the
program would no longer be narrowly tailored. However, we deem the 90th
percentile appropriate because based on a review of the 2019 SCF data,
the mean net worth of White, Non-Hispanic households is roughly 6 to 7
times higher than for Black, Non-Hispanic and Hispanic households. Even
at the highest wealth levels, the disparity exists: the wealth of the
top 10 percent of White households exceeds the wealth of the top 10
percent of Black, Non-Hispanic and Hispanic households by a factor of
5.
Data from the 2019 SCF suggests that between 88.7 and 90.8 percent
of self-employed business owners who are presumed to be socially and
economically disadvantaged (i.e., individuals who are women, Hispanic,
or non-White) have PNW lower than the current PNW cap as PNW is
currently defined.\4\ Under the proposed cap of $1.60 million, 92.6
percent of that group would fall under the cap, an increase of 1.8 to
3.9 percentage points.
---------------------------------------------------------------------------

\4\ The range on this estimate is the result of lack of
information in the SCF on how to appropriately adjust the current
balances of retirement accounts for early withdrawal penalties and
taxes. The lower end of the estimated range (88.7 percent) assumes
that the entire balance of retirement accounts is counted toward the
PNW cap while the upper end (90.8 percent) assumes that no portion
of retirement account balances are counted toward the PNW cap. The
Department believes that the true value is likely closer to 88.7
percent than 90.8 percent because the deduction for early withdrawal
penalties and taxes is likely to be less than 50 percent, but a more
precise estimate is not possible with the available information.
---------------------------------------------------------------------------

The final rule adopts a higher number than that of the proposal,
not only in response to comments suggesting an increase in the cap, but
also because we have modified the methodology used to establish and
later adjust the PNW cap. These modifications take into account the
inflation that has affected the financial situation of all Americans
not only since the publication of the NPRM, but more importantly since
the 2019 data on which the NPRM's calculations were based. These
modifications also rely on data more recent than the data on which we
based the NPRM proposal. The data, as cited in the NPRM, are a
combination of households and nonprofit organizations when really only
households should be considered. Additionally, by using solely the
growth in net worth we are not accounting for the normal population
growth. Accounting for population growth is necessary to obtain a
figure that represents the average wealth per household rather than an
aggregate. Consequently, for purposes of the final rule, the Department
has made two adjustments. The first adjustment is a change in the
dataset to the ``Financial Accounts of the United States: Balance Sheet
of Households (Supplementary Table B.101.h),'' effectively removing
nonprofit organizations from the net worth calculation. The second
adjustment is to normalize household net worth by the number of
households as calculated by the Census (Families and Households, Total
Households [TTLHH].\5\)
---------------------------------------------------------------------------

\5\ <a href="https://www.census.gov/topics/families/families-and-households.html">https://www.census.gov/topics/families/families-and-households.html</a>.
---------------------------------------------------------------------------

With these adjustments and using 2022 data rounded to the nearest
thousand, we have set the current PNW limit at $2,047,000. This takes
inflation into account and, as in the past, includes in the calculation
the most common forms of wealth (e.g., an owner's personal and shared
assets, real estate and trust assets, cash and cash on hand, the value
of outside businesses, life insurance policies). We have determined
that rounding to the nearest thousand is more appropriate than rounding
to the nearest ten-thousand (as we do for the statutory gross receipts
cap in Sec. 26.65(b)) because of the relative difference between these
two caps (the current gross receipts cap is $30.40 million, effective
March 1, 2023). It also takes into account the fact that the population
of business owners has greater net worth than the overall population.
PNW is now, and always has been, a relative concept: how does the
wealth of business owners in presumptively economically disadvantaged
groups relate to that of business owners generally? With this in mind,
we believe that this number effectively meets the objectives of
allowing businesses to grow; establishing a PNW limit based on current
and relevant data; and ensuring that the program remains narrowly
tailored by not creating eligibility criteria that are overbroad.
The Department will use the data discussed above in connection with
establishing the current PNW to make future adjustments to the PNW cap,
which will be made every three years. We do not believe this will
result in a substantially higher amount based on our assessment of the
likelihood that the datasets described above will produce large jumps
in net worth. An adjustment on a more frequent basis, though favored by
some commenters, will not be made because of the issues it may cause in
the certification and decertification processes. The Department will
post the adjustments on the Departmental Office of Civil Rights' web
page. Each such adjustment will become the currently applicable PNW cap
for purposes of this regulation.
Reporting
The Department adopts as final the general rule that community
property,

[[Page 24922]]

equitable distribution, and similar laws or principles have no effect
on the SEDO's PNW reporting. In most cases, the new provisions either
produce the same result or work in the firm's favor. The Program and
its stakeholders will benefit from burden reduction and more-
consistent, predictable, equitable results.
The final rule adopts the NPRM's proposal to exclude retirement
assets in full. We believe that saving for retirement is crucial to
wealth creation. We do not think it is appropriate to make it harder
for eligible firms to become and remain certified, simply because their
SEDOs are planning for their retirement.
We note this rationale mirrors SBA's 8(a) program, which eliminated
the counting of these assets for PNW purposes in 2020. (91 FR 27650
(May 11, 2020)). As SBA opined, this accords with the valuable public
policy of incentivizing, rather than punishing, saving for retirement;
and expands the pool of potential eligible participants ``because
retirement-age small business owners will no longer be ineligible
solely due to their retirement savings.'' (Id. at 27651).
We understand the concern some commenters expressed that wealthier
SEDOs could stay in the program longer by sequestering assets in
retirement accounts, to the detriment of smaller, newer DBE firms. A
certifier's continued ability to rebut an owner's claim of economic
disadvantage will help prevent this. That backstop, reworked in revised
provisions in Sec. 26.67(c)(2), is an important mechanism to prevent
wealthy individuals from gaming the PNW calculation rules and ensures
that the program remains narrowly tailored. As explained below, the
rebuttal provisions are meant for situations in which a reasonable
person would not consider the individual to be economically
disadvantaged.
Under Sec. 26.67(c)(2), certifiers may consider assets and income,
free use of them or ready access to their benefits, and any other
indicators of non-disadvantage that the certifier considers relevant.
The provision states that there are no asset (including retirement
assets), income, equity, or other exclusions and no limitations on
inclusions. Several commenters seem to have understood that the current
and/or proposed rules permit the SEDO to exclude the entire value of
the primary residence. They do not. Under either rule, the SEDO
excludes only his share of the equity in the home. Under the proposed
rule, transferring title to a spouse reduces the SEDO's PNW exclusion
to zero, and that result is consistent across all States, regardless of
the potential application of community property rules in some States,
under the old rule. The Department adopts the rule as proposed, with
modifications to clarify that the marital/community property change
applies to all PNW reporting, not simply to the exclusion of equity in
the primary residence. The new rule clarifies and refines but does not
change the general rule that actual ownership, normally denoted by
title, determines PNW reporting. We disagree with the commenters who
opine that the old rule, the effect of which varied by jurisdiction, is
preferable to the proposed rule. Under either regime, the SEDO may
transfer title to avoid reporting all or part of an asset's value. The
final rule makes the result more predictable, and it levels the playing
field nationwide. Anti-abuse rules address transfers that have an
evasive effect.
Other, targeted NPRM provisions attempt to resolve smaller,
thornier issues with bright-line solutions that should ease
administration and compliance. We finalize the rule that attributes 100
percent of personal property in a SEDO's primary residence to the SEDO
unless the SEDO shares the residence with a spouse or domestic partner.
Determining aggregate value is difficult enough; we do not believe it
is an effective use of certifiers' or owners' time to pick through
property item by item to determine individual ownership and value. In
most cases, the value of personal property is not of sufficient
magnitude to pierce the PNW ceiling. We adopt the 50 percent/100
percent rule for ease of administration and to curb some of the abuses
that concerned commenters.
PNW reporting for leased vehicles is another case in point. We
agree with the plurality of commenters that opined that a leased
vehicle is neither an asset nor a liability. Thus, the final rule
states that leased vehicles should not be reported at all.
We retain the ``two-year transfer'' rule and adopt as final the
changes proposed, again with clarifying edits in response to comments.
The broader proposition, that substance trumps form when the asserted
transaction, fact, or circumstance is unreal or abusive, remains in
effect. The final rule so provides in, for example, sections 26.68(c),
26.69(c)(3)(ii), and 26.69(g)(1) and (g)(2). All of these iterations
are anti-abuse rules that apply across the entirety of subparts D and
E. We encourage certifiers to make use of them when circumstances
warrant.

15. Social and Economic Disadvantage (Sec. 26.67)

In this section, because the overall topic contains several
important subtopics, we have organized the material around the
subtopics, with discussions about the NPRM provision, comments, and DOT
response pertaining to each individual subtopic.
As a general matter, the final rule notes that Congress continues
to recognize present-day discrimination and the ongoing effects of past
discrimination against members of certain groups who seek to
participate in DOT-assisted contracting opportunities. Under the DBE
regulation, members of those groups are rebuttably presumed socially
and economically disadvantaged. A certifier's ability to rebut the
presumption is a key ``narrow tailoring'' feature because it prevents
the DBE program from being overinclusive. We make clear that
questioning the owner's claim of membership in one or more of the
groups whose members are presumed disadvantaged is a separate process
from rebutting a presumption of social and economic disadvantage. The
former requires the applicant to bear the burden of proof to
demonstrate that they are a member of a presumed group. The latter
requires the certifier to bear the burden of proof to demonstrate that
even though the owner is a member of one or more of the presumed
disadvantaged groups, they are not, in fact socially disadvantaged.

Group Membership (Sec. Sec. 26.5, 26.63, 26.67)

NPRM

The general rule in the regulation is that all an applicant needs
to claim membership in a group whose members are presumed socially and
economically disadvantaged is to check the appropriate box or boxes on
the Uniform Certification Application (UCA) and submit a signed
Declaration of Eligibility (DOE). We reminded certifiers that this is
the only evidence of membership owners must provide at the time of
submitting the UCA. An exception is that owners claiming Native
American status must also provide proof of enrollment in a federally or
State-recognized Indian Tribe, or proof that the individual is an
Alaska Native or Native Hawaiian. We explicitly stated that certifiers
must not question an owner's claim of group membership as a matter of
course, as doing so unduly burdens applicants and contravenes the rule
itself. The NPRM retained the requirement that when questioning an
individual's group

[[Page 24923]]

membership, a certifier ``must consider whether the person has held
himself out to be a member of the group over a long period of time
prior to application for certification . . . .'' (italics added).
Without that requirement, a White male (for example) could suddenly
discover he has Black genetic ancestry and apply for DBE certification
based on that recent discovery--even though he has never held himself
out as Black, and he would likely have no evidence that the Black
community regards him as a member of the Black community. Because of
confusion expressed by certifiers and applicants alike, the Department
proposed defining ``a long period of time'' as a period of at least
five years, marking the first time the Department ever proposed a
specific number.
The NPRM placed timelines/deadlines in Sec. 26.67 to ensure that
neither certifiers nor applicants unduly delay the process of
questioning group membership. We also proposed allowing a firm whose
owner's claim of group membership has been rebutted to submit a claim
of the owner's individual social disadvantage at any time under Sec.
26.67(d) (Sec. 26.67(e) in the final rule), without regard to the
waiting period in Sec. 26.86(c). A certifier would not be able to
require the individual to file a new application; the individual would
be permitted to simply amend the original application.

Comments

The majority of comments addressed evidence of Native American
group membership and the proposed minimum 5-year time frame for
``holding oneself out.''
Given that the DOE is the only evidence of group membership an
individual must submit with the UCA, some commenters asked whether, and
how, certifiers could obtain proof of enrollment in a federally or
State-recognized Tribe from an individual claiming Native American
group membership. One commenter asked about State-recognized Tribes in
the context of interstate certification, as not all States recognize
the same Tribes. One commenter suggested that Native American-owned and
tribally owned firms be afforded the same exceptions from some
certification requirements provided to Alaska Native Corporations.
Of the 15 comments addressing the ``holding out for a long period
of time'' proposal, 10 supported implementing a minimum five-year
requirement. One commenter asked when the five-year period started to
run (e.g., from someone's first application, a current application?).
Some commenters asked for clarity on how to apply the ``holding out''
provision and examples of evidence. Opponents said that five years is
too short a period to meaningfully demonstrate that an individual had
held themselves out to be a group member. One commenter suggested 10
years. Another suggested that ``since adulthood'' would be a better
criterion.
A few commenters sought clarification about the definition of a
``well-founded reason'' for questioning an individual's claim of group
membership. Two commenters asked for guidance on how to handle
situations involving a transgender person or one whose gender
identification is inconsistent with that on her/his/their birth
certificate. One commenter noted that looking into someone's claim of
disadvantage could run up against the shortened time frame for issuance
of a certifier's decision on an application.

DOT Response

The regulation's general rule is that all an applicant needs to do
to claim membership in a group whose members are presumed SED is to
check the appropriate box(es) on the UCA and submit a signed DOE.
However, an individual claiming membership in the Native American group
must also provide proof of enrollment in a federally or State-
recognized Indian Tribe, or proof that the individual is an Alaska
Native or Native Hawaiian. Examples of proof of Tribal enrollment
include, but are not limited to, a Tribal identification card, or a
letter from a Tribal leader. We recognize that Alaska Natives and
Native Hawaiians do not necessarily possess Tribal enrollment
documents. Certifiers must verify government-recognized documentation
submitted by Alaska Natives or Native Hawaiians, such as enrollment
documents from the U.S. Department of the Interior or a State agency.
The final rule amends Sec. 26.67(a)(2) to reflect that requirement.
The Department continues to give certifiers latitude in determining
whether there is a well-founded reason to question someone's claim of
presumptive group membership. We also continue to emphasize our view
that a well-founded reason must not be a mere suspicion or a bare
expression of a certifier's opinion. Certifiers must continue to fully
explain the basis for the well-founded reason and reference specific
evidence in the record. Without that, an individual cannot meaningfully
respond.
People who are members of the regulation's designated groups are
presumed to be disadvantaged because members of those groups have,
historically and currently, suffered from discrimination and its
effects. If someone has not identified as, or been regarded as, a group
member for long enough to have suffered these effects, they are not
someone whose situation is intended to be remedied by participation in
the program.
The final rule does not include a definition of ``long period of
time'' in order for certifiers to consider the full context of an
individual's claim of group membership. Specifying a rigid time period
could be subject to manipulation by an applicant who continues to
assert a clearly invalid claim of group membership for many years.
Members of the regulation's designated groups are presumed to be
disadvantaged because members of those groups have, historically and
currently, suffered from discrimination and its effects. If someone has
not identified as, or been regarded as, a group member for long enough
to have suffered these effects, they are not someone who is intended to
have the presumption of disadvantage.\6\ By not including a definition
of ``long period of time,'' we preserve the ability of certifiers to
consider a persons' claim of group membership and to demonstrate such
by a preponderance of the evidence.
---------------------------------------------------------------------------

\6\ The Department has acknowledged, even as far back as the
1999 final rule preamble, that commenters have wanted further
definition of what ``a long period of time'' means. As we stated
then, we believe ``it would be counterproductive to designate a
number of years that would apply in all cases, since circumstances
are likely to differ. The point is to avoid ``certification
conversions'' in which an individual suddenly discovers, not long
before the application process, ancestry or culture with which he
previously has had little involvement.'' 84 FR 5116 (Feb. 2, 1999).
---------------------------------------------------------------------------

Lastly, the procedures for questioning the membership of a
transgender individual, or one whose gender identification is
inconsistent with that on the individual's birth certificate, are the
same as questioning the group membership of any other individual. If,
after a proper inquiry, a certifier rebuts a transgender individual's
membership in the ``female'' group, the certifier must deny the
application and inform the individual of the right to apply under Sec.
26.67(e) (individualized showing of disadvantage) at any time and of
the right to appeal to the Department. This scenario differs from an
instance in which a person does not check the box for ``female'' and
instead writes ``transgender'' after checking the ``other'' box. In
that instance, a certifier must inform the person that ``transgender''
is not a group whose members are presumed SED and explain the option of
applying under Sec. 26.67(e)

[[Page 24924]]

to demonstrate SED status on an individualized basis.

Evidence and Rebuttal of Economic Disadvantage

NPRM

The NPRM proposed eliminating the six ``ability to accumulate
substantial wealth'' (AASW) factors by which a certifier could rebut an
owner's presumed economic disadvantage, because the Department
witnessed the significant extent to which certifiers and firms
inappropriately treat the six factors as a checklist of required
criteria and treat the examples' numbers as floors or ceilings.
We proposed bringing the ``reasonable person'' standard from the
preamble to the 2014 regulation into the regulation itself, just as we
moved AASW from guidance into the regulation in 2014. Via a Sec. 26.87
proceeding, a certifier would bear the burden of proving, by a
preponderance of the evidence, that a reasonable person would not
consider the individual to be economically disadvantaged even though
the individual's PNW did not exceed the regulation's limit. Among the
evidence that could be considered are ready access to wealth, income or
assets of a type or magnitude inconsistent with economic disadvantage,
a lavish lifestyle, or other circumstances that economically
disadvantaged people typically do not enjoy. Liabilities and the kind
of asset exclusions used in PNW calculations would not be taken into
account as part of this determination.

Comments

Most commenters opposed our proposal to replace the AASW factors
with a ``reasonable person'' evaluation. About 30 comments, primarily
from recipients but also including some DBE and non-DBE firms, said
that it was too vague and subjective. It could lead to inconsistent and
arbitrary results and could let in people who should not be in the
program. It left too much discretion to the personal opinions of
certifiers, leading to conscious or unconscious bias, or a certifier's
dislike of a particular firm, being able to affect decisions.
More than 20 commenters (there was some overlap with the first
group) advocated retaining either the existing six guidance factors or
some other factors more concrete than a reasonable person standard.
Many of these comments suggested modifications to make something like
the existing provisions work better, such as more guidance. One subject
suggested for guidance is how certifiers should look at situations
involving S-corporations or LLCs, where business income is passed on to
an individual's personal return, enlarging the SEDO's AGI. Some said,
given inflation, the AGI criterion should be increased to $400,000-
$500,000. Others recommended stronger language to prevent single-factor
evaluations using the criteria, or that more than one factor should
always be used.
A smaller number of commenters supported the proposal, favoring the
``big picture'' approach of the NPRM. One recipient said it already
used a holistic approach successfully. One of the supporters commented
favorably on what it regarded as the NPRM's simpler approach to the
issue. Another wanted the certifier to have to prove its case under the
proposed approach by the clear and convincing evidence standard. One
comment was concerned about the proposal's subjectivity but said the
current six factors were worse. It asked that the Department not
provide guidance that made decisions on rebutting disadvantage harder
for certifiers.
Two comments said that evaluations under the section exclude
spouses' assets, while another thought those assets should be included.

DOT Response

The Department's final rule about rebutting economic disadvantage
helps ensure that the DBE program remains narrowly tailored and
strengthens current safeguards that prevent firms owned by individuals
who cannot fairly be viewed as economically disadvantaged from
participating in the program. Rebutting an owner's presumed economic
disadvantage inevitably requires certifiers to make a judgment call
about whether an owner can be reasonably considered economically
disadvantaged. We make final our proposal to eliminate the AASW
framework and shift the analysis from a list of specific criteria to a
``reasonable person'' evaluation.
By giving certifiers the ability to make

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