The Infrastructure Investment and Jobs Act (IIJA) is a historic investment in our nation’s roads, bridges, railways, airports and transportation systems. The bill appropriates $550 billion to physical infrastructure projects, requires stricter enforcement of the prompt payment rule for small businesses, and places a particular emphasis on the Disadvantaged Business Enterprise (DBE) Program.
The DBE program – administered through the Department of Transportation (DOT) – attempts “to level the playing field by providing small businesses owned and controlled by socially and economically disadvantaged individuals a fair opportunity to compete for federally funded transportation contracts.”
The IIJA formally reauthorized the DBE Program, allocating 10% of surface transportation projects, public transportation programs, and funds for highway safety Research and Development to DBE firms. The legislation directs DOT to award more than $37 billion in federal contracts to small disadvantaged contractors.
This investment comes as the DOT issued a proposed rule in July to overhaul the DBE program. Most notably, the proposed rule would make changes to DBE certification standards, DBE size requirements, and DBE counting credit.
DBE Certification Standards
DBEs are for-profit small business concerns at least 51% owned and controlled by socially and economically disadvantaged individuals. To be socially disadvantaged, the DBE owner must be a woman, African American, Hispanic American, Asia-Pacific Islander or another minority the Small Business Administration (SBA) has determined socially disadvantaged. This determination is done on a case-by-case basis.
Currently, to prove an economic disadvantage, the owner’s personal net worth must be less than $1.32 million. To calculate net worth, the DOT excludes the ownership interest in applicant firm, equity in a primary residence, and tax and interest penalties that would accrue if retirement savings or investments were distributed. However, the presumption is rebuttable. The agency takes a holistic view considering multiple factors to determine if the individual “has the ability to accumulate substantial wealth.” Those factors include:
- Is an individual’s average gross income more than $350,000 over the last three years?
- Is the amount of income unusual and unlikely to be repeated?
- Are the earnings offset by losses?
- Is the income reinvested?
- Does the total fair market value of the individual’s assets exceed $6 million?
The proposed rule would thoroughly readjust the certification standards in the following ways:
- It would increase the net worth threshold to $1.6 million and increase the timeframe from three to five years.
- The rule would exclude the full balance of retirement accounts after struggling with calculating an actual number.
- It would eliminate the distinct factors that the SBA uses to make its determination of an individual’s “ability to accumulate substantial wealth” and implement a holistic approach where evaluators would determine whether a reasonable person would consider the owners disadvantaged. Some indicators would include: whether the individual has access to wealth, lives a lavish lifestyle, and has assets of the type or magnitude inconsistent with an economically disadvantaged individual. This holistic approach gives considerable discretion to the certifier, which many worry could lead to subjective decisions.
DBE Counting Credit
Under the current DBE requirements, DBE firms must perform “a commercially useful function,” meaning the DBE must perform at least 30% of its scope. DOT requires the 30% threshold to ensure the firm is not used as simply a “pass through” business, controverting the program’s objective.
This percentage is calculated based on the amount of work the DBE subcontracts out, industry practices, and the amount the DBE is paid compared to the amount of work performed and the amount of credit claimed. The calculation also depends on the type of work the DBE is performing. For example, for work on construction projects, DOT counts the portion of work performed by the DBE’s workforce; but for professional and consulting services, DOT counts the fee charged by the DBE firm.
The proposed rule would make a few changes to the counting calculation. First, it would allow drop-shippers to receive more credit for their services. Instead of only receiving credit for the charged fees, the proposed rule would allow them to receive 40% credit for the cost of materials they supply. Additionally, the rule caps the total allowable credit a DBE can receive for prime contractor expenditures at 50%. This cap is expected to encourage prime contractors to rely on DBE firms for more than just supplies.
Prompt Payment Enforcement
The DBE program already requires prime contractors to comply with the prompt payment rule, a clause in many contracts that requires “prime contractors to pay subcontractors for satisfactory performance of their contracts no later than 30 days from receipt of each payment you make.” However, it is seldom proactively enforced. Normally, subcontractors are forced to complain to obtain relief.
The IIJA requires the Secretary of Transportation to “take additional steps to ensure recipients” comply with the rule when awarding federally funded transportation projects. The proposed rule moves to implement the IIJA’s mandate as it requires prime contractors and subcontractors to implement an affirmative monitoring program to ensure compliance, a mechanism for enforcement, and penalties for violators. It also notes that prompt payment obligations flow down to subordinate DBE subcontractors.
Against the backdrop of billions of dollars in federally funded projects being doled out by the states, the proposed rule makes the aforementioned changes as well as others – changes to size standards, monitoring requirements, and certification standards. The IIJA makes a historic investment in our nation’s infrastructure and the opportunities are plentiful for DBEs, their mentors, and prime contractors. Government contractors should familiarize themselves with DBE regulations and make an effort to identify DBE teammates. DBE firms should also keep an eye on their state Departments of Transportation to identify opportunities. Additionally, comments are due on the proposed rule by Monday, October 31.
If you have any questions about the DBE program and how these proposed rules may affect your business, please contact the author.
Bass, Berry & Sims attorney Richard Arnholt provided more information on this topic in an article published by Reuters on March 23, 2023. Read more here.