1. Transportation Research Board Disadvantaged Business Enterprise (DBE) Hot Topics Martha Kenley FHWA National DBE Program Manager martha.kenley@dot.gov January 11, 2016

2. Main Program Objectives Ensure nondiscrimination in the award and administration of DOT-assisted contracts in FHWA, FTA and FAA federal-assistance programs Create a level playing field on which DBEs can compete fairly for DOT- assisted contracts 2 DBE Brief Overview

3. FHWA apportions funds to State DOTs annually FHWA recipients are State DOTs; subrecipients are LPAs, MPOs, cities, etc. As a condition of receiving funds State DOTs must administer a FHWA-approved DBE program FHWA Division Offices oversee State DOT program administration FHWA DBE Program

4. DBE Definition A DBE is a for-profit small business that is: At least 51% owned by one or more individuals who are socially and economically disadvantaged Managed, operated and controlled by one or more of the socially and economically disadvantaged owners 4

5. Social Disadvantage: U.S. citizens or permanent residents Groups with presumed disadvantage African Americans Subcontinent Asian Americans Asian Pacific Americans Hispanic Americans Women Native Americans Others must prove social disadvantage DBE Definition

6. Economic Disadvantage Disadvantaged owner’s personal net worth cannot exceed $1.32 million Small Business Firm’s annual gross receipts averaged over a 3-year period may not exceed Small Business Administration size standards, and in any case, may not exceed $23.98M DBE Definition

7. Each State must establish an overall DBE goal every 3 years narrowly tailored to its market area Goal is a percentage of a State DOT’s FHWA annual apportionment Goal is reasonable proxy for the disparity between the current percentage of DBE participation on highway projects and the percentage of DBE participation that would be expected in a discrimination-free marketplace Overall State Goal

8. State must establish contract goals to meet portion of goal not met race-neutrally Includes professional services contracts States are not required to set DBE goals on every Federal-aid contract, but must set goals on enough contracts to cumulatively reach the overall goal If a prime does not meet the DBE contract goal, it must provide the State DOT with documentation to show that it used “good faith efforts” to do so Contract Goals

9. State must analyze bidder’s documents to determine whether: Bidder took all necessary and reasonable steps to achieve a DBE goal that by their scope, intensity, and appropriateness to the objective could reasonably be expected to obtain sufficient DBE participation Efforts should be those that one could reasonably expect a bidder to take if the bidder were actively and aggressively trying to meet the goal Good Faith Efforts

10. If State DOT does not meet annual goal in any given year, must submit analysis of why goal was not met and establish corrective measures Contract goals too low? Many contracts without goals? Significant percentage of contract dollars awarded based on good faith efforts? Accountability Analysis

11. Reauthorized DBE Program “...testimony and documentation provide a strong basis that there is a compelling need for the continuation of the disadvantaged business enterprise program to address race and gender discrimination in surface transportation-related business.” Fixing America’s Surface Transportation (FAST) Act

12. New: It is the sense of Congress that— (A)Secretary should take additional steps to ensure that recipients comply with prompt payment provision (49 CFR § 26.29) (B) such additional steps should include increasing the Department’s ability to track and keep records of complaints FAST Act

13. Prompt Payment 26.29 Recipients have contract provision that requires primes to pay all subcontractors no later than 30 days after completion and acceptance (usually after prime is paid) Primes must also return retainage within 30 days of subcontractor’s satisfactory completion Must have oversight mechanism to track Cannot rely on subcontractor complaints Must have sanctions in contract for noncompliance 13

14. To be an eligible DBE, a firm (including its affiliates) must be a small business as defined by Small Business Administration (SBA) standards. Only small businesses qualify for the DBE program 49 CFR §26.65 North American Industry Classification System (NAICS)

15. The SBA assigns size standards (gross receipts caps) to each NAICS code (13 CFR 121.402) The DBE program uses NAICS codes to determine whether a DBE is, or continues to be, a small business NAICS codes list size standards (gross receipt caps) based the type of work a business performs NAICS Codes

16. UCPs may certify firms only for specific types of work that the socially and economically disadvantaged owners have the ability to control.(49 CFR § 26.81) UCPs must determine what NAICS code, or codes, is associated with the type of work the DBE owner can control and will perform on federally-assisted contracts Applies to new certifications or when a DBE requests to add work types to its certification 16 NAICS Codes

17. A correct NAICS code is one that describes, as specifically as possible, the types of goods or services which the firm would provide to DOT recipients (49 CFR §26.71 (n)(1)) With respect to the DBE code the most specific code that describes the type of work the firm performs may or may not be found under “Highway Construction” Example, the most specific code that includes structural steel work (rebar) is 238120 found under “Vertical Construction” NAICS Codes

18. Once a business’s gross receipts, averaged over a 3 year period, exceed the size standard associated with its NAICS code, it no longer meets the definition of a small business and, by definition, does not qualify as a DBE NAICS Codes

19. Regardless of the SBA size standards, A DBE’s gross receipts, averaged over three years, cannot exceed $23.98 M Example: NAICS Codes associated with construction work has a size cap of $36.5M. A DBE that performs construction work cannot exceed the DBE statutory cap of $23.98 M NAICS Codes

20. A DBE that is certified under multiple NAICS codes, and has exceeded the size standard for some, but not all, of its assigned codes, may receive DBE credit only for work that falls under those NAICS codes for which it has not exceeded the size standard. NAICS Codes

21. Example The NAICS code that most narrowly describes structural steel work is 238120 The size standard for that NAICS code is $15 million Once a firm’s gross receipts averaged over a three year period exceed $15 million, it is not eligible to receive DBE credit for structural steel work However, if that firm remains certified under other codes, i.e., has not exceeded the associated size standards, it may count its work associated with those codes NAICS Codes

22. HCR has recently identified instances in which UCPs incorrectly certified DBEs under NAICS code 237310 (Heavy Highway) while also certifying those same firms under other, more narrow, NAICS codes. NAICS code 237310 describes a broad array of highway construction work types and has a gross receipts cap in excess of $23.98 million (the maximum size limit for a DBE), and should only be assigned to those DBEs that perform work types specifically associated with that code NAICS Codes

23. As stated above, if a DBE performs work type “x” and there is a NAICS Code that specifically addresses work type “x,” UCPs must certify that DBEs under only code “x.” UCPs should not also certify that DBE under a broader code that includes the specific work type “x” NAICS Codes

24. The practice of certifying most DBEs that perform work on highway contracts under the broad Heavy Highway NAICS code 237310, when there is a code or codes more applicable to the specific work the DBE performs on federally-assisted contracts, does not comply with the regulatory requirements or corresponding guidance NAICS Codes

25. Removing a NAICS code equates to decertification and requires the State DOT to follow the regulatory due process procedures that include an opportunity for an informal hearing DBEs may have multiple NAICS codes Can exceed some while remaining certified in others NAICS Codes

26. To review the official guidance on this matter, see the Q and A posted on the website of the Departmental Office of Civil Rights: https://cms.dot.gov/partners/small- business/official-faqs-dbe-program- regulations-49-cfr-26 https://cms.dot.gov/partners/small- business/official-faqs-dbe-program- regulations-49-cfr-26 NAICS Codes