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Disadvantaged Business Enterprises (DBE) Rule
[Federal Register: February 2, 1999 (Volume 64, Number 21)]
[Rules and Regulations]
[Page 5095-5148]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr02fe99-13]
[[Page 5095]]
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Part II
Department of Transportation
_______________________________________________________________________
Office of the Secretary
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49 CFR Parts 23 and 26
Participation by Disadvantaged Business Enterprises in Department of
Transportation Programs; Final Rule
[[Page 5096]]
DEPARTMENT OF TRANSPORTATION
Office of the Secretary
49 CFR Parts 23 and 26
[Docket OST-97-2550; Notice 97-5]
RIN 2105-AB92
Participation by Disadvantaged Business Enterprises in Department
of Transportation Programs
AGENCY: Office of the Secretary, DOT.
ACTION: Final rule.
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SUMMARY: This final rule revises the Department of Transportation's
regulations for its disadvantaged business enterprise (DBE) program.
The DBE program is intended to remedy past and current discrimination
against disadvantaged business enterprises, ensure a ``level playing
field'' and foster equal opportunity in DOT-assisted contracts, improve
the flexibility and efficiency of the DBE program, and reduce burdens
on small businesses. This final rule replaces the former DBE
regulation, which now contains only the rules for the separate DBE
program for airport concessions, with a new regulation. The new
regulation reflects President Clinton's policy to mend, not end,
affirmative action programs. It modifies the Department's DBE program
in light of developments in case law requiring ``narrow tailoring'' of
such programs and last year's Congressional debate concerning the
continuation of the DBE program. It responds to comments on the
Department's December 1992 notice of proposed rulemaking (NPRM) and its
May 1997 supplemental notice of proposed rulemaking (SNPRM).
DATES: This rule is effective March 4, 1999. Comments on Paperwork
Reduction Act matters should be received by April 5, 1999; however,
late-filed comments will be considered to the extent practicable.
ADDRESSES: Persons wishing to comment on Paperwork Reduction Act
matters (see discussion at end of preamble) should send comments to
Docket Clerk, Docket No. OST-97-2550, Department of Transportation, 400
7th Street, SW., Room 4107, Washington, DC 20590. We emphasize that the
docket is open only with respect to Paperwork Reduction Act matters,
and the Department is not accepting comments on other aspects of the
regulation. We request that, in order to minimize burdens on the docket
clerk's staff, commenters send three copies of their comments to the
docket. Commenters wishing to have their submissions acknowledged
should include a stamped, self-addressed postcard with their comments.
The docket clerk will date stamp the postcard and return it to the
commenter. Comments will be available for inspection at the above
address from 10 a.m. to 5:00 p.m., Monday through Friday.
FOR FURTHER INFORMATION CONTACT: Robert C. Ashby, Deputy Assistant
General Counsel for Regulation and Enforcement, Department of
Transportation, 400 7th Street, SW., Room 10424, Washington, DC 20590,
phone numbers (202) 366-9306 (voice), (202) 366-9313 (fax), (202) 755-
7687 (TDD), bob.ashby@ost.dot.gov (email); or David J. Goldberg, Office
of Environmental, Civil Rights and General Law, Department of
Transportation, 400 7th Street, SW., Room 5432, Washington, DC 20590,
phone number (202) 366-8023 (voice), (202) 366-8536 (fax).
SUPPLEMENTARY INFORMATION:
Background
The Department has the important responsibility of ensuring that
firms competing for DOT-assisted contracts are not disadvantaged by
unlawful discrimination. For eighteen years, the Department's most
important tool for meeting this responsibility has been its
Disadvantaged Business Enterprise (DBE) program. This program began in
1980. Originally, the program was a minority/women's business
enterprise program established by regulation under the authority of
Title VI of the Civil Rights Act of 1964 and other nondiscrimination
statutes that apply to DOT financial assistance programs. See 49 CFR
part 23.
In 1983, Congress enacted, and President Reagan signed, the first
statutory DBE provision. This statute applied primarily to small firms
owned and controlled by minorities in the Department's highway and
transit programs. Firms owned and controlled by women, and the
Department's airport program, remained under the original 1980
regulatory provisions. In 1987, Congress enacted, and President Reagan
signed, statutes expanding the program to airports and to women-owned
firms. In 1991 (for highway and transit programs) and 1992 (for airport
programs), Congress enacted, and President Bush signed, statutes
reauthorizing the expanded DBE program.
After each statutory amendment, and at other times to resolve
program issues, the Department amended part 23. The result has been
that part 23 has become a patchwork quilt of a regulation. In addition,
years of interpretation by various grantees and different DOT offices
has created confusion and inconsistency in program administration.
These problems, particularly in the area of certification, were
criticized in General Accounting Office reports. The Department's
desire to improve program administration and make the rule a more
unified whole led to our publication of a December 1992 notice of
proposed rulemaking (NPRM).
The Department received about 600 comments on this NPRM. The
Department carefully reviewed these comments and, by early 1995, had
prepared a draft final rule responding to them. However, in light of
the Supreme Court's June 1995 decision in Adarand v. Pena and the
Administration's review of affirmative action programs, the Department
conducted further review of the DBE program. As a result, rather than
issuing a final rule, we issued a supplemental notice of proposed
rulemaking (SNPRM) in May 1997. This SNPRM incorporated responses to
the comments on the 1992 NPRM and proposed further changes in the
program, primarily in response to the ``narrow tailoring'' requirements
of Adarand. We received about 300 comments on the SNPRM. The Department
has carefully considered these comments, and the final rule responds to
them. The final rule also specifically complies with the requirements
that the courts have established for a narrowly tailored affirmative
action program.
At the same time that the Department was working on this final
rule, Congress once again considered reauthorization of the DBE
program. In both the House and the Senate, opponents of affirmative
action sponsored amendments that would have effectively ended the
program. In both cases, bipartisan majorities defeated the amendments.
The final highway/transit authorization legislation, known as the
Transportation Equity Act for the 21st Century (TEA-21), retains the
DBE program. In shaping this final rule, the Department has listened
carefully to what both supporters and opponents of the program have
said in Congressional debates.
Key Points of the Final Rule
This discussion reviews and responds to the SNPRM comments and the
Congressional debates on certain key issues. Congressional debate
references are to the Congressional Record for March 5 and 6, 1998, for
the Senate debate and April 1, 1998, for the House debate, unless
otherwise noted.
[[Page 5097]]
1. Quotas and Set-Asides
SNPRM Comments: Most comments on this issue came from non-DBE
contractors, who argued that the program was a de facto quota program.
Many of these contractors said that recipients insisted that they meet
numerical goals regardless of other considerations, and that the
recipients did not take showings of good faith efforts seriously. Some
non-DBE contractor organizations argued, in addition, that the program
was a quota program because it was based on a statute that had a 10
percent target for the use of businesses defined by a racial
classification.
Congressional Debate: Opponents of the DBE program generally
asserted that it created quotas or set-asides. Senator McConnell
described the entire program, particularly the provision that ``not
less than 10 percent'' of authorized funds go to DBEs, as
* * * a $17.3 billion quota. In other words, if the government
decides that you are the preferred race and gender, then you are
able to compete for $17.3 billion of taxpayer-funded highway
contracts. But, if you are the wrong race and gender, then--too
bad--you can't compete for that $17 billion pot. (S1936).
The ``not less than 10 percent'' language also led opponents, such as
Senator Ashcroft, to label the program a ``set-aside,'' (S1405), a term
also employed in testimony provided by a law professor from California
who said that the statute ``imposes a set-aside that's required
regardless of the availability of race-neutral solutions.'' (S1407).
Senator Gorton said that the DBE statute provides that ``those not
defined as disadvantaged in our society are absolutely barred and
prohibited from getting certain governmental contracts.'' (S1415).
On the other hand, supporters of the program were adamant that it
was not a quota program. Senator Baucus argued that the program, as
implemented by DOT, allows substantial flexibility to recipients and
contractors. Recipients could have an overall goal other than 10
percent under current rules, he pointed out. Senator Kerry of
Massachusetts added that what the statute does is to ``set a national
goal. And it is appropriate in this country to set national goals for
what we will do to try to break down the walls of discrimination. * *
*'' (S1408). He also alluded to the flexibility of the Secretary to
permit overall goals of less than 10 percent. Senator Robb stated:
I want to stress at the outset that this program is not a
``quota program,'' as some have suggested. There is a great
difference [between] an aspirational goal and a rigid numerical
requirement. Quotas utilize rigid numerical requirements as a means
of implementing a program. The DBE program uses aspirational goals.
(S1425).
With respect to individual contract goals, Senator Baucus said,
``once a goal is established for a contract, each contractor must make
a good-faith effort to meet the goal--not mathematically required, not
quota required, but a good faith effort to meet it.'' (S1402). Senator
Baucus pointed to provisions of the SNPRM concerning overall goals,
means of meeting them, and good-faith efforts as further narrowly
tailoring the program. The SNPRM confirms, he said, that ``contract
goals are not binding. If a contractor makes good faith efforts to find
qualified women or minority-owned subcontractors, but fails to meet the
goal, there is no penalty.'' (S1403). Senator Robb added that
``Contract goals are not operated as quotas because they require that
the prime contractor make `good faith efforts' to find DBEs. If a prime
contractor cannot find qualified and competitive DBEs, the goal can be
waived.'' (S1425).
One of the Senators who addressed the quota/set-side issue in the
most detail was Senator Domenici. He concluded that ``I do not agree
that this minority business program we have in this ISTEA bill before
us is a program that mandates quotas and mandates set-asides.''
(S1426). He made this statement, in part, on the basis of March 5,
1998, letter to him signed by Secretary of Transportation Rodney Slater
and Attorney General Janet Reno. In relevant part, this letter (which
Senator Domenici inserted into the record) read as follows:
The 10 percent figure contained in the statute is not a
mandatory set aside or rigid quota. First, the statute explicitly
provides that the Secretary of Transportation may waive the goal for
any reason * * * Second, in no way is the 10 percent figure imposed
on any state or locality * * * Moreover, state agencies are
permitted to waive goals when achievement on a particular contract
or even for a specific year is not possible. The DBE program does
not set aside a certain percentage of contracts or dollars for a
specific set of contractors. Nor does the DBE program require
recipients to use set-asides. The DBE program is a goals program
which encourages participation without imposing rigid requirements
of any type. Neither the Department's current nor proposed
regulations permit the use of quotas. The DBE program does not use
any rigid numerical requirements that would mandate a fixed number
of dollars or contracts for DBEs. (S1427).
The debate in the House proceeded in similar terms. Opponents of
the DBE program, such as Representative Roukema (H2000), Representative
Cox (H2004) and Speaker Gingrich (H2009) said the legislation
constituted a quota, while proponents, such as Representatives Tauscher
(H2001), Poshard (H2003), Bonior (H2004) and Menendez (H2004) said the
program did not involve quotas or set-asides.
DOT Response: The DOT DBE program is not a quota or set-aside
program, and it is not intended to operate as one. To make this point
unmistakably clear, the Department has added explicitly worded new or
amended provisions to the rule.
Section 26.41 makes clear that the 10 percent statutory goal
contained in ISTEA and TEA-21 is an aspirational goal at the national
level. It does not set any funds aside for any person or group. It does
not require any recipient or contractor to have 10 percent (or any
other percentage) DBE goals or participation. Unlike former part 23, it
does not require recipients to take any special administrative steps
(e.g., providing a special justification to DOT) if their annual
overall goal is less than 10 percent. Recipients must set goals
consistent with their own circumstances (see Sec. 26.45). There is no
direct link between the national 10 percent aspirational goal and the
way a recipient operates its program. The Department will use the 10
percent goal as a means of evaluating the overall performance of the
DBE program nationwide. For example, if nationwide DBE participation
were to drop precipitously, the Department would reevaluate its efforts
to ensure nondiscriminatory access to DOT-assisted contracting
opportunities.
Section 26.43 states flatly that recipients are prohibited from
using quotas under any circumstances. The section also prohibits set-
asides except in the most extreme circumstances where no other approach
could be expected to redress egregious discrimination. Section 26.45
makes clear that in setting overall goals, recipients aspire to
achieving only the amount of DBE participation that would be obtained
in a nondiscriminatory market. Recipients are not to simply pick a
number representing a policy objective or responding to any particular
constituency.
Section 26.53 also outlines what bidders must do to be responsive
and responsible on DOT-assisted contracts having contract goals. They
must make good faith efforts to meet these goals. Bidders can meet this
requirement either by having enough DBE participation to meet the goal
or by documenting good faith efforts, even if those efforts did not
actually achieve the
[[Page 5098]]
goal. These means of meeting contract goal requirements are fully
equivalent. Recipients are prohibited from denying a contract to a
bidder simply because it did not obtain enough DBE participation to
meet the goal. Recipients must seriously consider bidders'
documentation of good faith efforts. To make certain that bidders'
showings are taken seriously, the rule requires recipients to offer
administrative reconsideration to bidders whose good faith efforts
showings are initially rejected.
These provisions leave no room for doubt: there is no place for
quotas in the DOT DBE program. In the Department's oversight, we will
take care to ensure that recipients implement the program consistent
with the intent of Congress and these regulatory prohibitions.
2. Sanctions for Recipients Who Fail To Meet Overall Goals
SNPRM Comments: The issue of sanctions for recipients who fail to
meet overall goals was not a subject of comments on the SNPRM. Since
the Department has never imposed such sanctions, this absence of
comment is not surprising.
Congressional Debate: DBE program opponents asserted, in connection
with their argument that the DBE program is a quota program, that the
Department could impose sanctions for failure to meet goals. ``The
goals have requirements and the real threat of sanctions,'' Senator
McConnell said. (S1488). Citing a provision of a Federal Highway
Administration (FHWA) manual saying that if ``a state has violated or
failed to comply with Federal laws or * * * regulations,'' FHWA could
withhold Federal funding, Senator McConnell said,
In other words, there are sanctions. The same threats appear in
* * * the Federal transportation regulations * * * When the Federal
government is wielding that kind of weapon from on high, it does not
have to punish them. A 10 percent quota is still a quota, even if
the States always comply and no one is formally punished. (Id.)
Defenders of the DBE program pointed out that the Department had
never punished a recipient for failing to meet an overall goal (e.g.,
Rep. Tauscher, H2001; Senator Boxer, S1433). Senator Domenici asked
Secretary Slater and Attorney General Reno whether there are sanctions,
penalties, or fines that may be (or ever have been) imposed on a
recipient who does not meet DBE program goals. He entered the following
reply in the record:
No state has ever been sanctioned by DOT for not meeting its
goals. Nothing in the statute or regulations imposes sanctions on
any state recipient that has attempted in good faith, but failed, to
meet its self-imposed goals. (S1427).
Senator Lieberman added that if states fail to meet their own goals,
``there is no Federal sanction or enforcement mechanism.'' (S1493).
DOT Response: The Department has never sanctioned a recipient for
failing to meet an overall goal. We do not intend to do so. To
eliminate any confusion, we have added a new provision (Sec. 26.47)
that explicitly states that a recipient cannot be penalized, or treated
by the Department as being in noncompliance with the rule, simply
because its DBE participation falls short of its overall goal. For
example, if a recipient's overall goal is 12 percent, and its
participation is 8 percent, the Department cannot and will not penalize
the recipient simply because its actual DBE participation rate was less
than its goal.
Overall goals are not quotas, and the Department does not sanction
recipients because their participation levels fall short of their
overall goals. Of course, if a recipient does not have a DBE program,
does not set a DBE goal, does not implement its DBE program in good
faith, or discriminates in the way it operates its program, it can be
found in noncompliance. But its noncompliance would never be having
failed to ``make a number.''
3. Economic Disadvantage
SNPRM Comments: Some commenters favored eliminating the presumption
of economic disadvantage, saying that applicants should have to prove
their economic disadvantage. Other commenters favored obtaining
additional financial information from applicants so that, even if the
presumption remained in force, recipients would have a better idea of
whether applicants really were disadvantaged. The question of the
standard for determining disadvantage generated substantial comment,
with some commenters favoring, and others objecting to, the proposed
use of a personal net worth standard to assist recipients in
determining whether an applicant was economically disadvantaged. There
was also disagreement among commenters concerning the level at which
such a standard should be set (e.g., $750,000, or something higher or
lower). These comments, and the Department's response to them, are
further discussed in the section-by-section analysis for Sec. 26.67.
Congressional Debate: The Congress debated the topic of who is
regarded as economically disadvantaged under the statute. DBE
opponents, including Senators Ashcroft (S1405) and McConnell (S1418)
and Representative Cox (H2004), asserted that outrageously rich people
could be eligible to participate as DBEs, frequently using the Sultan
of Brunei as an example. The basic thrust of their argument was that if
the program does not exclude wealthy members of the designated groups--
meaning those who are not, in fact, disadvantaged--then it is
``overinclusive'' and therefore not narrowly tailored. Senator
McConnell added that, because the Department's SNPRM did not include a
specific dollar amount for a cap on personal net worth, it would not be
effective. (S1486). On the other hand, DBE program supporters cited the
SNPRM's proposed net worth cap as an effective device to stop wealthy
people from participating in the program. These included Minority
Leader Daschle (with a reference to a letter from the Associate
Attorney General, S1413), Senator Baucus (S1414, S1423), Senator
Lieberman (S1493), Senator Boxer (S1433), and Senator Moseley-Braun,
who responded to the Sultan of Brunei example by noting that the
program was directed primarily at U.S. citizens (S1420).
DOT Response: The final rule (Sec. 26.67) specifically imposes a
personal net worth cap of $750,000. This means that, regardless of
race, gender or the size of their business, any individual whose
personal net worth exceeds $750,000 is not considered economically
disadvantaged and is not eligible for the DBE program. The provision
also makes it much easier for recipients to determine whether an
individual's net worth exceeds the cap. Applicants will have to submit
a statement of personal net worth and supporting documentation to the
recipient with their applications. If the information shows net worth
above the cap, the recipient would rebut the presumption based on the
information in the application itself and the individual would not be
eligible for the program. In such a case, it would not be necessary for
a third party to challenge the economic disadvantage of an applicant in
order to rebut the presumption. While there have been very few
documented cases of wealthy individuals seeking to take advantage of
the Department's program, the revised provisions of part 26 virtually
eliminate even the possibility of this type of abuse.
4. Social Disadvantage
SNPRM Comments: A few commenters suggested that the
[[Page 5099]]
presumption of social disadvantage, as well as that of economic
disadvantage, be eliminated, so that applicants would have to
demonstrate both elements of disadvantage. Any presumption of
disadvantage tied to a racial classification, in the view of some of
these commenters, undermined the constitutionality of the program.
Other commenters noted that persons who are not members of the
presumptively disadvantaged groups can be eligible and, in some cases,
suggested that the criteria for evaluating such applications be
clarified.
Congressional Debate: The presumption of social disadvantage drew
fire from DBE program opponents because it was allegedly overinclusive.
For example, Senator McConnell produced a map illustrating the over 100
countries of origin leading to inclusion in one of the presumed
socially disadvantaged groups, pointing out that people from some
countries (e.g., Pakistan) are presumed to be socially disadvantaged
while those from other countries (e.g., Poland) are not. (S1418).
Senator McConnell said that there was no basis for selecting this
definition over any other. (Id.) Senator Hatch also listed the
countries from which Asian-Pacific Americans and Subcontinent Asian-
Americans can originate, suggesting that it was inappropriate to create
``all kinds of special interest groups who are vying for these
programs.'' (S1411).
DBE proponents responded that discrimination against minorities and
women in general, and against specific minorities in particular (e.g.,
African Americans) was very real and formed a basis for the presumption
of social disadvantage (see discussion below concerning the existence
of discrimination). Senator Baucus also noted that this presumption
could be overcome. (S1402).
Opponents also charged that the presumption of social disadvantage
was underinclusive; that is, ``you underinclude people who have a right
to be included in the bid process.'' (Senator McConnell, S1399). The
people who are not included who have a right to be, in the view of
opponents, are white males (e.g., Senator Sessions' reference to
testimony from Adarand Constructors' owner, S1400). Senator Kennedy
disagreed with this assertion, saying
Of course, this program doesn't just help women and minorities.
It extends a helping hand to firms owned by white males, as well.
They can be certified to [participate] if they prove that they have
been disadvantaged. Just ask Randy Pech--owner of the Adarand
Construction Firm--because he is currently seeking certification.
(S1482).
Senator Domenici was interested in the same question, and entered into
the record the following response from Secretary Slater and Attorney
General Reno:
Any individual owning a business may demonstrate that he is
socially and economically disadvantaged, even if that individual is
not a woman or a minority. Both the current and proposed regulations
provide detailed guidance to recipients to assist them in making
individual determinations of disadvantaged status. And, in fact,
businesses owned by white males have qualified for DBE status.
(S1427).
DOT Response: By having passed the DBE statutory provision, after
lengthy and specific debate, Congress has once again determined that
members of the designated groups should be presumed socially
disadvantaged. All of these groups are specifically incorporated by
reference in the legislation that Congress debated and approved. This
presumption (i.e., a determination that it is not necessary for group
members to prove individually that they have been the subject of
discrimination or disadvantage) is based on the understanding of
Members of Congress about the discrimination that members of these
groups have faced. The presumption is rebuttable in the DOT program. If
a recipient or third party determines that there is a reasonable basis
for concluding that an individual from one of the designated groups is
not socially disadvantaged, it can pursue a proceeding under Sec. 26.87
to remove the presumption. Likewise, a white male, or anyone else who
is not presumed to be disadvantaged, can make an individual showing of
social and economic disadvantage and participate in the program on the
same basis as any other disadvantaged individual (see Sec. 26.67).
5. The ``Low-Bid System''
SNPRM Comments: Non-DBE contractors expressed concern that a
variety of provisions under the program and the SNPRM adversely
affected the low-bid system, including contract goals, evaluation
credits, and good faith efforts guidance concerning prime contractors'
handling of subcontractor prices and consideration of other bidders'
success in meeting goals.
Congressional Debate: Opponents of the DBE program assert that the
program results in white male contractors not receiving contracts they
would otherwise expect to receive. Senator Sessions cited the statement
of the Adarand company to this effect. (S1400). Senator Ashcroft said
that ``if two bids come in from two subcontractors, one owned by a
white male and the other by a racial minority, and the bids are the
same, or even close, the job will go to the minority-owned company, not
the low bidder.'' (S1405). Senator Gorton inserted into the record
letters from a Spokane subcontractor asserting that, in a number of
cases, it had lost subcontracts to DBE firms despite having a lower
quote. (S1415-16). Representative Roukema also cited examples of firms
who made similar assertions. (H2000).
In contrast, DBE program proponents argued that the program was
about leveling the playing field for DBEs. Senator Moseley-Braun cited
letters from her constituents for the point that
* * * the DBE program is not about taking away contracts from
qualified male-owned businesses and handing them over to unqualified
female-owned firms. The program is not about denying contracts to
Caucasian low bidders in favor of higher bids that happen to have
been submitted by Hispanics or African Americans or Asians or women.
(S1420).
Without such a program, her constituents' letters said, they would lose
the chance to compete. (Id.). Citing testimony from a Judiciary
Committee hearing, Senator Kennedy noted that it was the experience of
some DBEs that white male prime contractors had accepted higher bids
from other firms to avoid working with DBEs. (S1430).
Why would a general contractor accept a higher bid? It doesn't
make sense unless you remember that the traditional business network
doesn't include women or minorities * * * [A woman business owner
testified] that some general contractors would rather lose money
than deal with female contractors. (Id.)
DOT Response: For the most part, statutory low-bid requirements
exist only at the prime contracting level. That is, state and local
governments, in awarding prime contracts, must select the low bidder in
many procurements (there may be exceptions in some types of purchases).
Nothing in this regulation requires, under any circumstances, a
recipient to accept a higher bid for a prime contract from a DBE when a
non-DBE has presented a lower bid. This rule does not interfere with
recipients' implementation of state and local low-bid legislation.
The selection of subcontractors by a prime contractor is typically
not subject to any low-bid requirements under state or local law. Prime
contractors have unfettered discretion to select any subcontractor they
wish. Price is clearly a key factor, but nothing legally compels a
prime contractor to hire the subcontractor who makes the lowest quote.
Other factors, such as the prime
[[Page 5100]]
contractor's familiarity and experience with a subcontractor, the
quality of a subcontractor's work, the word-of-mouth reputation of the
subcontractor in the prime contracting community, or the prime's
comfort or discomfort with dealing with a particular subcontractor can
be as or more important than price in some situations. It is in this
context that Sec. 26.53 requires that prime contractors make good faith
efforts to achieve DBE contract goals. The rule does not require that
recipients ignore price or quality, let alone obtain a certain amount
of DBE participation without regard to other considerations. The good
faith efforts requirements are intended to ensure that prime
contractors cannot simply refuse to consider qualified, competitive DBE
subcontractors. At the same time, the good faith efforts waiver of
contract goals serves as a safeguard to ensure that prime contractors
will not be forced into accepting an unreasonable or excessive quote
from a DBE subcontractor.
6. Constitutionality
SNPRM Comments: Non-DBE contractors and their groups argued that
the SNPRM proposals, particularly with respect to overall goals and the
use of race-conscious measures, failed to meet the Adarand narrow
tailoring test. Many of these commenters said that the overall goals
were suspect because they did not adequately consider the capacity of
DBEs to perform contracts and Adarand requires that race-conscious
measures may be used only after a recipient has demonstrated that race-
neutral means have failed. The use of presumptions based on racial
classifications was viewed as intrinsically unconstitutional by these
commenters, many of whom cited the language of Judge Kane's decision in
the Adarand remand to this effect. Some commenters also contended that,
absent recipient-specific findings of compelling need, the program
could not be constitutional. They said that existing information
alleging compelling interest--such as various disparity studies or
information compiled by the Department of Justice--was inadequate to
meet the compelling interest test. DBEs and recipients who commented
defended the constitutionality of the program, often citing experience
with discrimination in the marketplace and contending that the SNPRM
succeeded in narrowly tailoring the program.
Congressional Debate: Proponents and opponents of the DBE program
extensively debated the constitutionality of the DBE statutory
provision and the entire DBE program. Generally, opponents argued that
the Supreme Court and District Court decisions in Adarand rendered the
program unconstitutional, while proponents said that the decisions did
not have that effect.
Proponents and opponents of the DBE program agreed that the Supreme
Court's Adarand decision established a two-part test for the
constitutionality of a program that uses a racial classification. The
program must be based on a compelling governmental interest and be
narrowly tailored to further that interest (e.g., Senator McConnell,
S1396; Senator Baucus, S1403). Opponents relied on the finding of a
Colorado district court on remand that the program was not narrowly
tailored and was thus unconstitutional (Senator McConnell, S 1396;
Senator Ashcroft, S1405). Proponents replied that the remand decision
represented the views of only one district court (Senator Baucus,
S1403), that it failed to properly apply the reasoning of the Supreme
Court decision with respect to narrow tailoring (Senator Domenici,
S1425), and that the Department's forthcoming regulations would ensure
that the program was narrowly tailored (see discussion below).
A. Compelling Interest
(1) Existence of Discrimination. Proponents (and some opponents) of
the DBE provision said that discrimination and/or disadvantage with
respect to minorities and/or women persists. In the House, these
included Representative Roukema (H2000-01), Representative Norton
(H2003), Representative Poshard (H2003), Representative Menendez
(H2004), Representative Davis of Illinois (H2005), Representative
Boswell (H2005), Representative Lampson (H2006), Representative Kennedy
(H2006), Representative Jackson-Lee (H2006), Representative Edwards
(H2007), Representative Andrews (H2007), Representative Rodriguez
(H2008), Representative Towns (H2010), Representative Dixon (H2010),
and Representative Millender-McDonald (H2011). DBE opponents typically
remained silent on this point, neither affirming nor denying the
existence of discrimination against women and minorities.
There was a similar pattern in the Senate debates. Opponents
typically did not address the present existence of discrimination or
disadvantage with respect to minorities and women or its continuing
effects, spoke of such discrimination as something that existed in the
past (Senator Sessions, S1399; Senator Hatch, S1411), or asserted that
race-based disadvantage or discrimination no longer exists (Senator
Ashcroft, S1406).
The Senators who said that such discrimination persists included
Senator Baucus (S1403, S1413, S1496), Senator Warner (S1403), Senator
Kerry (S1408), Senator Wellstone (S1410), Senator Moseley-Braun (S1419-
20), Senator Robb (S1422); Senator Brownback (S1423-24), Senator
Domenici (S1425-26), Senator Kennedy (S1429-30, S1482), Senator Specter
(S1485), Senator McCain (S1489), Senator Lautenberg (S1490), Senator
Durbin (S1491), Senator Daschle (S1492), Senator Lieberman (S1493),
Senator Bingaman (S1494), Senator Murray (S1495), and Senator Dorgan
(S1495).
(2) Evidence of discrimination or disadvantage. In comments on the
passage of the TEA-21 conference report in the Senate, Senator Chafee
noted a Colorado Department of Transportation disparity study that
found a disproportionately small number of women- and minority-owned
contractors participating in that state's highway construction
industry. More than 99 percent of contracts went to firms owned by
white men. (Congressional Record, May 22, 1998; S5413). In the House
discussion of the conference report, Representative Norton presented an
extensive summary of relevant evidence of discrimination forming the
basis for a compelling need for the DBE program. (H3957).
Throughout the debate, the Members who affirmed the existence of
discrimination and/or disadvantage asserted a number of factual bases
for concluding that the DBE program was necessary. This information is
largely drawn from the Senate debate; the briefer House debate contains
less detail.
Senator Baucus cited disparities between the earnings of women and
men and between the percentage of small businesses women own and the
percentage of Federal procurement dollars they receive. He also noted
that minorities make up 20 percent of the population, own 9 percent of
construction businesses, and get only 4 percent of construction
receipts. (S1403). Finally, Senator Baucus, via a letter from the
Associate Attorney General, cited to numerous Congressional findings
concerning the effects of discrimination in the construction industry
and in DOT-assisted programs. (S1413).
Senator Kerry added that women own 9.2 percent of the nation's
construction firms but their companies earn only about half of what is
earned by male-owned firms. (S1409). Senator Robb
[[Page 5101]]
commented that the evidence of racially based disadvantage is
``compelling and disturbing.'' He continued, stating that, ``White-
owned construction firms receive 50 times as many loan dollars as
African-American owned firms that have identical equity.'' (S1422).
Senator Kennedy said that the playing field for women and minorities
and other victims of discrimination was still not level. Job
discrimination against minorities and the ``glass ceiling'' for women
still persisted, he said, adding that ``Nowhere is the deck stacked
more heavily against women and minorities than in the construction
industry.'' (S1429). He cited a number of instances in which minority
or female contractors encountered overt discrimination in trying to get
work. (S1429-30).
Senator Lautenberg said that, for transportation-related contracts,
minority-owned firms get only 61 cents for every dollar of work that
white male-owned businesses receive. The comparable figure for women-
owned firms was 48 cents. He also mentioned that ``women-owned
businesses have a lower rate of loan delinquency, yet still have far
greater difficulty in obtaining loans.'' (S1490). He then spoke of the
continuing effects of past discrimination:
Jim Crow laws were wiped off the books over 30 years ago.
However, their pernicious effects on the construction industry
remain. Transportation construction has historically relied on the
old boy network which, until the last decade, was almost exclusively
a white, old boy network. * * * This is an industry that relies
heavily on business friendships and relationships established
decades, sometimes generations, ago--years before minority-owned
firms were even allowed to compete. (Id.)
Senator Durbin referred to recent studies concerning job bias
against minorities and women. (S1491). Senator Lieberman referred
generally to previous Congressional committee findings and testimony
concerning still-existing barriers to full participation for minorities
and women. (S1493). He also cited the May 1996 Department of Justice
survey of discrimination and its effects in business and contracting.
He referred to a recent study in Denver showing that African Americans
were 3 times, and Hispanics 1.5 times, more likely than whites to be
rejected for business loans. Senator Daschle summed up by saying,
``[t]here is clearly a compelling interest in addressing the pervasive
discrimination that has characterized the highway construction
industry.'' (S1492).
Throughout the portion of the debate described above, many of the
Members stressed that goal-based programs like the DBE program were the
only effective way to combat the continuing effects of discrimination.
Senator Baucus cited the experience of Michigan, in which DBE
participation in the state-funded portion of the highway program fell
to zero in a nine-month period after the state terminated its DBE
program, while the Federal DBE program in Michigan was able to maintain
12.7 percent participation. (S1404). Senator Kerry also raised the
Michigan example, and went on to cite similar sharp decreases in DBE
participation when Louisiana, Hillsborough County, Florida, and San
Jose, California, eliminated affirmative action programs covering
state- and locally-funded programs. Senator Kerry asked rhetorically:
* * * is that just the economy of our country speaking, an
economy at one moment that is capable of having 12 percent and at
another moment, where they lose the incentive to do so, to drop down
to zero, to drop down by 99 percent, to drop down by 80 percent, to
have .4 at the State level while at the Federal level there are 12
percent? You could not have a more compelling interest if you tried.
* * * (S1409-10).
Senator Moseley-Braun added the examples of Arizona, Arkansas,
Rhode Island, and Delaware to the jurisdictions cited by other members
where state-funded projects without a DBE program have significantly
less DBE participation than Federally funded projects subject to the
DBE program. She added, ``Where there are no DBE programs, women- and
minority-owned small businesses are shut out of highway construction.''
(S1420-21). Senator Kennedy added Nebraska, Missouri, Tampa and
Philadelphia to the list of jurisdictions that experienced precipitous
drops in DBE participation after goals programs ended. (S1429-30;
S1482). He also cited comments from DBE companies that goal programs
were needed to surmount discrimination-related barriers. (S1482).
Senator Domenici repeated many of the same points as previous DBE
proponents concerning the basis for concluding that the program was
needed (S1426), as did Senator Kempthorne. (S1494).
Senator Robb emphasized that the DBE program was essential to
combating discrimination and ensuring economic opportunity, explicitly
linking the fall-off in DBE participation to continuing discrimination:
Where DBE programs at the State level have been eliminated,
participation by qualified women and qualified minorities in
government transportation contracts has plummeted. There is no way
to know whether this discrimination is intentional or subconscious,
but the effect is the same. This experience demonstrates the sad but
inescapable truth that, when it comes to providing economic
opportunities to women and minorities, passivity equals inequality.
(S1422).
3. Narrow tailoring.--DBE proponents cited the Department's
proposed DBE rule as the vehicle that would ensure that the DBE program
would be narrowly tailored. They cited features of the SNPRM including
a new mechanism for calculation of overall goals, giving priority to
race-neutral measures in meeting goals, a greater emphasis on good
faith efforts, DBE diversification, added flexibility for recipients,
net worth provisions, ability to challenge presumptions of social and
economic disadvantage, and flexibility in goal-setting. In comments on
the Senate consideration of the TEA-21 conference report, Senator
Baucus concluded by saying:
As I explained in my statements during the debate on the
McConnell amendment * * * the program is narrowly tailored, both
under the current and the new regulations, which emphasize flexible
goals tied to the capacity of firms in the local market, the use of
race-neutral measures, and the appropriate use of waivers for good
faith efforts. (Congressional Record, May 22, 1998; S5414).
Following Senator Baucus' remarks, Senator Chafee, Chairman of the
committee of jurisdiction, requested that he be associated with Senator
Baucus' remarks on constitutionality. (S5414).
DBE opponents denied that regulatory change could result in a
narrowly tailored program. Senator Smith said ``The administration's
attempt to comply with the Court's decision by fiddling around with the
DOT regulations does not meet the constitutional litmus test.''
(S1398). The most frequent argument against the efficacy of regulatory
change was that a racial classification is inherently unable to be
narrowly tailored. (Senator Sessions, S1399-1400; Senator Ashcroft,
S1407).
DOT Response: The 1998 debate over DBE legislation was the most
thorough in which Congress has engaged since the beginning of the
program. The record of this debate clearly supports the Department's
view that there is a compelling governmental interest in remedying
discrimination and its effects in DOT-assisted contracting. Congress
clearly determined that real, pervasive, and injurious discrimination
exists. Congress backed up that determination with reference to a wide
range of factual material, including private and public contracting,
DOT-assisted and state-and locally-funded programs and the financing of
the contracting industry. By retaining the DBE statutory provisions
[[Page 5102]]
against this factual background, Congress clearly found that there was
a compelling governmental interest in having the program.
The courts, including the court in the Adarand Constructors Inc. v.
Pena, 965 F.Supp. 1556 (D. Colo., 1997) and the court in In re:
Sherbrooke Sodding, 6-96-CV-41 (D. Minn. 1998), agree that Congress has
the power to legislate on a nationwide basis to address nationwide
problems. Congress has a unique role as the national legislature to
look at the whole of the United States for the basis to find a
compelling governmental interest supporting the use of race-based
remedies. Congress is not required to make particularized findings of
discrimination in individual localities to which a nationwide program
may apply. Nor is Congress required to find that the Federal government
itself has discriminated before applying a race-conscious remedy. (Id.
at 1573).
Having reviewed the extensive evidence of discrimination and its
relationship to DOT-assisted contracting, the District Court in Adarand
determined that current and previous DBE provisions were a ``considered
response by Congress to the effects of discrimination on the ability of
minorities to participate in the mainstream of federal contracting.''
(Id. at 1576). The court stated that ``Congress has a strong basis in
evidence for enacting the challenged statutes, which thus serve a
`compelling governmental interest.' '' (Id. at 1577). The extensive
Congressional debate and information supporting the enactment of the
1998 DBE provision significantly strengthens the existing basis for
declaring that this program serves a compelling governmental interest.
The basis for District Court's view that the program at issue in
Adarand is unconstitutional is stated most clearly in the following
passage:
Contrary to the [Supreme] Court's pronouncement that strict
scrutiny is not `fatal in fact,' I find it difficult to envisage a
race-based classification that is narrowly tailored. By its very
nature, such [a] program is both underinclusive and overinclusive.
(Id. at 1580).
By underinclusive, the court said it meant that caucasians and members
of non-designated minority groups are excluded. By overinclusive, it
said it meant that all the members of the designated groups are
presumed to be economically and/or socially disadvantaged, without
Congress having inquired whether a particular entity seeking a racial
preference has suffered from the effects of past discrimination (citing
the Supreme Court's Croson decision, which concerned the powers of
state and local governments to use race-based remedies). (Id.)
As Senator Domenici pointed out (S1425), the key words in the
District Court's opinion are ``Contrary to the [Supreme] Court's
pronouncement. * * *'' The District Court's analysis departs markedly
from the controlling decision of the Supreme Court on this issue
(Adarand v. Pena, 515 U.S. 200 (1995)). The Supreme Court's language
with which the District Court disagreed is the following:
Finally, we wish to dispel the notion that strict scrutiny is
``strict in theory, but fatal in fact.'' [citation omitted] The
unhappy persistence of both the practice and the lingering effects
of racial discrimination against minority groups in this country is
an unfortunate reality, and government is not disqualified from
acting in response to it * * * When race-based action is necessary
to further a compelling interest, such action is within
constitutional constraints if it satisfies the ``narrow tailoring''
test this Court has set out in previous cases. (515 U.S. at 237).
The Supreme Court evidently considers the ``not fatal in fact''
language to have continuing vitality, having cited it in a subsequent
case (U.S. v. Virginia, 518 U.S. 515, note 6 (1996)).
Under the District Court's analysis, Congress could never use a
race-based classification, no matter how compelling the need, because
any such classification would intrinsically fail to be narrowly
tailored. This approach effectively moots the determination of whether
there is a compelling governmental interest. The Supreme Court's
approach, by contrast, permits a racial classification to be used,
given the existence of a compelling interest, if it is narrowly
tailored.
What is the test for narrow tailoring? As set forth in United
States v. Paradise, 480 U.S. 149, 171 (1987), the test includes several
factors: ``the necessity for relief and the efficacy of alternative
remedies; the flexibility and duration of the relief, including the
availability of waiver provisions; the relationship of the goals to the
relevant labor market; and the impact of the relief on the rights of
third parties.'' In Adarand, the Supreme Court specifically invited
inquiry into whether there was any consideration of the use of race-
neutral means to increase minority business participation (related to
the efficacy of alternative remedies) and whether the program was
appropriately limited so that it will not last longer than the
discrimination it is designed to eliminate (related to the duration of
relief). (515 U.S. at 238).
This final rule successfully addresses each element of this test:
<bullet> The necessity of relief. Throughout the debate on the
compelling governmental interest, the bipartisan majority of both
houses of Congress repeatedly described the necessity of the DBE
program's goal-based approach to remedying the effects of
discrimination in DOT-assisted contracting. The most significant
evidence demonstrating the necessity of a goal-oriented program is the
evidence cited of the fall-off in DBE participation in state
contracting when goal-oriented programs end, compared to participation
rates in the Federal DBE program.
<bullet> Efficacy of alternative remedies. This element of the
narrow tailoring standard is related to the Supreme Court's inquiry
concerning race-neutral programs. Under Sec. 26.51 of this rule,
recipients are required to meet the maximum feasible portion of their
overall goals by using race-neutral measures. Recipients are not
required to have contract goals on each contract. Instead, they are
instructed to use contract goals only for any portion of their overall
goal they cannot meet through race-neutral measures. Contract goals are
intended as a safety net to be used when race-neutral means are not
effective to ensure that a recipient can achieve ``level playing
field.'' Moreover, the regulations provide that recipients must reduce
the use of contract goals when other means are sufficient to meet their
overall goals. This ensures that race-conscious relief is used only to
the extent necessary and is replaced by race-neutral as quickly as
possible.
<bullet> Flexibility of relief. Flexibility is built into the
program in a variety of ways. Recipients set their own goals, based on
local market conditions; their goals are not imposed by the federal
government nor do recipients have to tie them to any uniform national
percentage. (Sec. 26.45). Recipients also choose their own method for
goal setting and can choose to base the goal on the evidence that they
believe best reflects their market conditions. (Sec. 26.45). Recipients
have broad discretion to choose whether or not to use a goal on any
given contract, and if they do choose to use a contract goal, they are
free to set it at any level they believe is appropriate for the type
and location of the specific work involved. (Sec. 26.51). The rule also
ensures flexibility for contractors by requiring that any contract goal
be waived entirely for a prime contractor that demonstrates that it
made good faith efforts but was still unable to meet the goal.
(Sec. 26.53). The rule also allows recipients that believe they can
achieve equal opportunity for DBEs through different approaches to get
waivers releasing
[[Page 5103]]
them from almost any of the specific requirements of the rule.
(Sec. 26.103). Recipients can also get exemptions from the rule if they
have unique circumstances that make complying with the rule
impractical. (Sec. 26.103).
<bullet> Duration of relief. The TEA-21 DBE program will end in
2004 unless reauthorized by the Congress. In each successive
reauthorization bill for the surface transportation and airport
programs, Congress will have the opportunity to examine the current
state of transportation contracting and determine whether the DBE
program statutes are still necessary to remedy the continuing effects
of discrimination. In addition, the duration of relief for individuals
and firms are limited by the personal net worth threshold and business
size caps. When an individual's personal wealth grows beyond the
threshold, he or she will lose the presumption of disadvantage.
(Sec. 26.67). Similarly, when a firm's receipts grows beyond the small
business size standards, it loses its eligibility to participate in the
program. (Sec. 26.65). Finally, to ensure that race-conscious remedies
are not used any longer than absolutely necessary, Sec. 26.51 requires
recipients to reduce the use of contract goals and rely on race-neutral
measures to the extent that they are effective.
<bullet> Relationship of goals to the relevant market. The overall
goal setting provisions of Sec. 26.45 require that recipient set
overall goals based on demonstrable evidence of the relative
availability of ready, willing and able DBEs in the areas from which
each recipient obtains contractors. These provisions ensure that there
is as close a fit as possible between the goals set by each recipient
and the realities of its relevant market. When a recipient sets
contract goals, Sec. 26.51 provides that these goals are to be set
realistically in relation to the availability of DBEs for the type and
location of work involved.
<bullet> Impact of relief on the rights of third parties. The
legitimate interests of third parties (e.g., prime contractors, non-DBE
subcontractors) are only minimally impacted by the DBE program, since
the program is aimed at replicating a market in which there are no
effects of discrimination and the program affects only a relatively
small percentage of total federal-aid funds. The design of the overall
and contract goal provisions ensures that the use of race-conscious
remedies having the potential to affect the interests of third parties
is limited to the extent necessary to counter the effects of
discrimination. Individual prime contractors are further protected from
suffering any undue burdens by Sec. 26.51, which prevents a prime
contractor from losing a contract if it made good faith efforts but was
still unable to meet a goal. Non-DBE firms are also protected by
Sec. 26.33, which directs recipients to take appropriate steps to
address areas of overconcentration of DBE firms in certain types of
work that could unduly burden non-DBE firms seeking the same type of
work.
<bullet> Inclusion of appropriate beneficiaries. The certification
provisions of Subparts D and E, and particularly the social and
economic disadvantage provisions of Sec. 26.67, ensure that only firms
owned and controlled by individuals who are in fact socially and
economically disadvantaged can participate in the program. Eligibility
provisions guard against overinclusiveness by ensuring that individuals
with too great net worth are not presumed disadvantaged and by
permitting the recipient--on its own initiative or as the result of a
complaint--to follow procedures to rebut the presumption of social and/
or economic disadvantage. They guard against underinclusiveness by
permitting any business owner, including a white male, to demonstrate
social and economic disadvantage on an individual basis.
Section-by-Section Analysis
Section 26.1 What Are the Objectives of This Part?
There were relatively few comments on this section of the SNPRM,
most of which agreed with the proposed language. We have adopted the
suggestion of some commenters that specific reference be made to the
role of the DBE program in helping DBEs overcome barriers (e.g., access
to capital and bonding) to equal participation. We have also added a
specific reference to the role of the program in creating a level
playing field on which DBEs can compete fairly for DOT-assisted
contracts. Some non-DBE contractors urged that language be added to
explicitly oppose ``reverse discrimination.'' The rule clearly states
that nondiscrimination is the program's first objective and the
Department reiterates here that it opposes unlawful discrimination of
any kind.
Section 26.3 To Whom Does This Part Apply?
This provision is unchanged from the SNPRM, except for references
to the new TEA-21 statutory provisions. A few commenters wanted this
provision to apply to Federal Railroad Administration (FRA) programs,
as did the original version of former part 23. However, FRA does not
have specific statutory authority for a DBE program parallel to the
TEA-21 language. One commenter asked if the language saying that DBE
requirements do not apply to contracts without any DOT funding is
inconsistent with Federal Transit Administration (FTA) guidance on
applicability. While the structure of the FTA program is such that FTA
funds are commingled with local funds in many transit authority
contracts (e.g., any contract involving FTA operating assistance
funds), to which DBE requirements would apply, a contract which is
funded entirely with local funds--and without any Federal funds--would
not be subject to requirements under this rule.
Section 26.5 What Do The Terms Used in This Part Mean?
There were relatively few comments on the definitions proposed in
the SNPRM. One commenter wanted to substitute the term ``historically
underutilized business'' for DBE. Given the continued use of the DBE
term in Congressional consideration of the program, the continued use
of the ``socially and economically disadvantaged individuals'' language
in the statute, and the familiarity of concerned parties with the DBE
term, we do not believe changing the term would be a good idea.
A few commenters asked for additional definitions or elaboration of
existing definitions (e.g., ``form of arrangement,'' ``financial
assistance program,'' ``commercially useful function''). These terms
are either already defined sufficiently or are best understood in
context of the operational sections in which they are embedded, and
abstract definitions in this section would not add much to anyone's
ability to make the program work well. Consequently, we are not adding
them. Otherwise the final rule adopts the SNPRM proposals for
definitions with only minor editorial changes.
The Department has added, for the sake of clarity and consistency
with other Federal programs, definitions of the terms Alaskan native,
Alaskan native corporation (ANC), Indian tribe, immediate family
member, Native Hawaiian, Native Hawaiian organization, principal place
of business, primary industry classification, and tribally-owned
concern. These definitions are taken from the SBA's new small
disadvantaged business program regulation (13 CFR Sec. 124.3). The
definitions of the designated groups included in the definition of
``socially
[[Page 5104]]
and economically disadvantaged individual'' also derive from the SBA
regulations, as the Department's DBE statutes require. We believe these
will be useful terms of art in implementing the DBE program.
A few commenters requested definitions for the terms ``race-
conscious'' and ``race-neutral,'' and we have provided definitions. A
race-conscious program is one that focuses on, and provides benefits
only for, DBEs. The use of contract goals is the primary example of a
race-conscious measure in the DBE program. A race-neutral program is
one that, while benefiting DBEs, is not solely focused on DBE firms.
For example, small business outreach programs, technical assistance
programs, and prompt payment clauses can assist a wide variety of small
businesses, not just DBEs.
Section 26.7 What Discriminatory Actions Are Forbidden?
One commenter wanted to add prohibitions of discrimination based on
age, disability and religion. The Department is not doing so, because
discrimination on these grounds is already prohibited by other statutes
(e.g., the Americans with Disabilities Act with respect to disability).
Also, statutes which form the basis for this rule focus on race, color,
national origin, and sex. Congress determined that remedial action
focused on these areas is necessary. These grounds for discrimination
are also most relevant to problems in the DBE program that have been
alleged to exist (e.g., disparate treatment of DBE certification
applicants by race or sex). Some opponents of the program said that the
DBE program discriminates against non-DBEs. However, the Department
believes that the program is constitutional and does not violate equal
protection requirements. A reference to DOT Title VI regulations has
been deleted as unnecessary; otherwise, this provision is the same as
in the SNPRM.
Section 26.9 How Does the Department Issue Guidance and
Interpretations Under This Part?
Commenters, most of whom were recipients, focused on two issues in
this section. First, a majority of the comments favored the
``coordination mechanism'' concept for ensuring consistent DOT guidance
and interpretations. The few that disagreed with this approach did so
out of a concern that the mechanism would add delays to the process.
These commenters favored additional training or an 800 number hot line
to speed up the process.
We believe that proper coordination of interpretations and guidance
is vital to the successful implementation of this rule. As the
preambles to the 1992 and 1997 proposed rules mentioned, inconsistent
implementation of part 23 has been a continuing problem, which has been
criticized by a General Accounting Office report and which has created
unnecessary difficulty for recipients, contractors, and the Department
itself. A process for ensuring that the Department speaks with one
voice on DBE implementation matters, and for letting the public know
when DOT has spoken, will greatly improve the service we give our
customers.
We do not believe this coordination process will result in
significant delays in providing guidance. Nor will it inhibit the
ability of DOT staff and customers to communicate with one another. For
example, the process does not apply to informal advice provided by
staff to recipients or contractors over the phone or in a letter or e-
mail. It does maintain, however, the important distinction between
informal staff assistance on one hand and a binding institutional
position on the other.
For clarity in the process, we have modified the language of the
rule text to make clear that interpretations and guidance are binding,
official Departmental positions if the Secretary signs them or if the
document includes a statement that they have been reviewed and approved
by the General Counsel. The General Counsel will consult fully with all
concerned offices as part of this review process.
We intend to post significant guidance documents and
interpretations on the Department's web site to make them widely and
quickly available. As some commenters suggested, we are also continuing
to consider forming an advisory committee (or working group of an
existing committee) to facilitate customer input into DBE program
matters. This is separate from the coordination mechanism, however,
which is an internal DOT process.
The rule's provisions regarding exemptions and waivers, previously
found in the SNPRM's Sec. 26.9 (c) and (d), are now included as a
separate section at Sec. 26.15.
Section 26.11 What Records do Recipients Keep and Report?
The Department asked, in the SNPRM, whether it would be advisable
to have one standard reporting form for information about the DBE
program. Currently, each operating administration (OA) has its own
reporting form and requirements. Virtually all the commenters that
addressed this issue favored a single, DOT-wide reporting form.
Commenters also had a wide variety of suggestions for what data should
be reported, formats, and retention periods.
The Department is adopting the suggestion of having a single
reporting form, which we believe will reduce administrative burdens for
recipients, particularly those who receive funds from more than one OA.
Because we do not want to delay the issuance of this rule while a form
is being developed, we are reserving the date on which this single form
requirement will go into effect. We will take comments on the specifics
of reporting into account and consult with interested parties as we
devise the form, which will be published subsequently in Appendix B to
this rule. The Appendix will also address the issues of reporting
frequency and record retention periods. Meanwhile, recipients will
continue to report as directed by the concerned OA(s), using existing
reporting forms.
The rule is also adding a requirement that recipients develop and
maintain a ``bidders'' list. The bidders list is intended to be a count
of all firms that are participating, or attempting to participate, on
DOT-assisted contracts. The list must include all firms that bid on
prime contracts or bid or quote subcontracts on DOT-assisted projects,
including both DBEs and non-DBEs. Bidders lists appear to be a
promising method for accurately determining the availability of DBE and
non-DBE firms and the Department believes that developing bidders data
will be useful for recipients. Creating and maintaining a bidders list
will give recipients another valuable way to measure the relative
availability of ready, willing and able DBEs when setting their overall
goals. (See Sec. 26.45). We realize that identifying subcontractors,
particularly non-DBEs and all subcontractors that were unsuccessful in
their attempts to obtain contracts, may well be a difficult task for
many recipients. Mindful of that potential burden, the rule will not
impose any procedural requirements for how the data is collected.
Recipients are free to choose whether or not they wish to gather this
data through their existing bidding and reporting processes. Recipients
are encouraged to make use of all of the data already available to them
and all methods of reporting and communication with their contracting
community that they already have in place. In addition, the Department
suggests that recipients consider using a widely publicized public
notice or a
[[Page 5105]]
widely disseminated survey to encourage all firms that have bid or
quoted contracts to make themselves known to recipients.
Once recipients have created the list of bidders, they will have to
supplement that information with the age of each firm (since
establishment) and the annual gross receipts of the firm (or an average
of its annual gross receipts). Recipients can gather this additional
information by sending a questionnaire to the firms on the list, or by
any other means that the recipient believes will yield reliable
information. The recipient's plan for how to create and maintain the
list and gather the required information must be included in its DBE
program.
Section 26.13 What Assurances Must Recipients and Contractors Make?
There were few comments on this section. Most of these supported
the proposal. One comment suggested specific mention of prompt payment,
but in view of the substantive requirements on this subject, we do not
believe such a mention is needed. Some commenters favored requiring
additional public participation as part of the assurance for
recipients. Again, given substantive provisions of this rule concerning
public participation, we do not believe that repetition here is needed.
One commenter said that incorporating the requirements of part 26 in
the contract was confusing, since many provisions of part 26 apply only
to recipients. We have rewritten the assurance for contractors in
response to this concern, specifying that contractors are responsible
only for carrying out the requirements of part 26 that apply to them.
Section 26.15 How Can Recipients Apply for Exemptions or Waivers?
There has been some confusion as to this rule's distinction between
exemption and waiver. Put simply, exemptions are for unique situations
that are most likely not to be either generally applicable to all
recipients or to have been contemplated in the rulemaking process. If
such a situation occurs and it makes it impractical for a particular
recipient to comply with a provision of part 26, the recipient should
apply for an exemption from that provision. The waiver provision, by
contrast, is not designed for extraordinary circumstances where a
recipient may not be able to comply with part 26. Waiver is for a
situation where a recipient believes that it can better accomplish the
objectives of the DBE program through means other than the specific
provisions of part 26.
There were a number of comments about the proposed program waiver
provision. Most commenters on this issue favored the proposal,
believing it could add flexibility to the way recipients implement the
DBE program. A few commenters were concerned that too liberal use of
the waiver provision might undermine the goals of the rule.
The Department believes that the waiver provision is an important
aspect of the DBE program. The provision ensures that the Department
and a recipient can work together to respond to any unique local
circumstances. Recipients are encouraged to carefully review the
circumstances in their own jurisdictions to determine what mechanisms
are best suited to achieving compliance with the overall objectives of
the DBE program. If a recipient believes it is appropriate to operate
its program differently from the way that a provision of Subpart B or C
provides, including, but not limited to, any provisions regarding
administrative requirements, overall or contract goals, good faith
efforts or counting provisions, it can apply for a waiver. For example,
waiver requests could pertain to such subjects as the use of a race-
conscious measure other than a contract goal, different ways of
counting DBE participation in certain industries, use of separate
overall or contract goals to address demonstrated discrimination
against specific categories of socially and economically disadvantaged
individuals, the use or wording of assurances, differences in
information collection requirements and methods, etc.
The Department will, of course, carefully review any applications
for waivers to make sure that innovative state or local programs are
able to meet the objectives of the statutes and regulation. Decisions
on waiver requests are made by the Secretary. This authority has not
been delegated to other officials. The waiver provision, which the
Department believes will help assist recipients to ``narrowly tailor''
the program to state and local circumstances and ensure
nondiscrimination, remains in the final rule.
Section 26.21 Who Must Have a DBE Program?
The only substantive comment concerning this provision asked that
Federal Railroad Administration (FRA) programs be included. The
Department is not including FRA programs under this rule because FRA
does not have a specific DBE program statute parallel to those covering
the Federal Aviation Administration (FAA), FTA, and FHWA. FRA could
consider issuing a rule similar to part 26 under its own, separate
statutory authority. The Department shortened paragraph (b)(1) to make
it easier to understand. Within 180 days of the effective date of this
rule, all recipients with existing programs must submit revised
programs to the relevant OA for approval. The only changes from
existing programs that recipients would have to make are changes needed
to accommodate differences between former part 23 and part 26. Future
new recipients would, of course, submit a DBE program as part of the
approval process for financial assistance.
Section 26.23 What is the Requirement for a Policy Statement?
Section 26.25 What is the Requirement for a Liaison Officer?
Section 26.27 What Efforts Must Recipients Make Concerning DBE
Financial Institutions?
There were no substantive comments concerning Secs. 26.23-26.27,
and the Department is adopting them as proposed.
Section 26.29 What Prompt Payment Mechanisms Must Recipients Have?
There was substantial comment on the issue of prompt payment. A
majority of commenters supported the concept of prompt payment
provisions. Some recipients pointed out that they already had prompt
payment provisions on the books. DBEs generally supported mandating
prompt payment provisions though they, as well as other commenters,
recognized that slow payment is a problem affecting many
subcontractors, not just DBEs. Some of these comments suggested making
prompt payment requirements applicable to subcontracts in general, not
just DBE subcontracts. Some recipients were concerned about getting in
the middle of disputes between prime contractors and subcontractors.
Some commenters wanted the Department to mandate prompt payment
provisions, while others preferred that their use by recipients remain
optional.
Having considered the variety of views expressed on this subject,
the Department believes that prompt payment provisions are an important
race-neutral mechanism that can benefit DBEs and all other small
businesses. Under part 26, all recipients must include a provision in
their contracts requiring prime contractors to make prompt payments to
their subcontractors, DBE and non-DBE alike. It is clear that DBE
subcontractors are significantly--and, to the extent that
[[Page 5106]]
they tend to be smaller than non-DBEs, disproportionately--affected by
late payments from prime contractors. Lack of prompt payment
constitutes a very real barrier to the ability of DBEs to compete in
the marketplace. It is appropriate for the Department to require
recipients to take reasonable steps to deal with this barrier. We
recognize that delayed payments do not affect only DBE contractors; a
prompt payment requirement applying to all subcontracts is an excellent
example of a race-neutral measure that will assist DBEs, and we are
therefore requiring that recipients' prompt payment mechanisms apply to
all subcontracts on Federally-assisted contracts.
Paragraph (a) of this section requires recipients to put into their
DBE programs a requirement for a prompt payment contract clause. This
clause would appear in every prime contract on which there are
subcontracting possibilities, and it would obligate the prime
contractor to pay subcontractors within a given number of days from the
receipt of each payment the recipient makes to the prime contractor.
Payment is required only for satisfactory completion of the
subcontractor's work. The clause would also apply to the return of
retainage from the prime to the subcontractor. Retainage would have to
be returned within a given number of days from the time the
subcontractor's work had been satisfactorily completed, even if the
prime contract had not yet been completed. A majority of commenters on
the retainage issue favored a requirement of this kind.
The number of days involved would be selected by the recipient,
subject to OA approval as part of the recipient's DBE program. In
approving these time frames, the OAs will consider whether they are
realistic and sufficiently brief to ensure genuinely prompt payment.
Recipients who already operate under prompt payment statutes may use
their existing authority in implementing this requirement. It may be
necessary to add to existing contract clauses in some cases (e.g., if
existing prompt payment requirements do not cover retainage).
Paragraph (b) lists a series of additional measures that the
regulation authorizes, but does not require, recipients to use. These
include alternative dispute resolution, holding of payments to primes
until subcontractors are paid, and other mechanisms that the recipient
may devise. All these mechanisms could be made part of the recipient's
DBE programs.
Section 26.31 What Requirements Pertain to the DBE Directory?
Recipients maintain directories listing certified DBEs. The issue
most discussed by commenters on this section was whether the directory
should include material concerning the qualifications of the firm to do
various sorts of work. For example, has the firm been pre-qualified by
the recipient? Can it do creditable work? What kinds of work does the
firm prefer to do? Some commenters also asked that the directory should
list the geographical areas in which the firm is willing to work. Other
commenters opposed the idea of including this kind of information in
the directory.
The Department believes that the directory and the certification
process are closely intertwined. The primary purpose of the directory
is to show the results of the certification process. Consequently, the
directory should list all firms that the recipient has certified, along
with basic identifying information for the firm. Since certification
under this rule pertains to the various kinds of work a firm's
disadvantaged owners can control, it is important to list those kinds
of work in the directory. For example, if a firm seeks to work in
fields A, B, and C, but the recipient has determined that its
disadvantaged owners can control its operations only with respect to A
and B, then the directory would recite that the firm is certified to
perform work as a DBE in fields A and B.
The focus of the directory is intended to be eligibility. A
directory is a list of firms that have been certified as eligible DBEs,
with sufficient identifying information to permit interested firms to
contact the DBEs. We do not intend to turn a recipient's directory into
a comprehensive business resource manual. For example, information
about firms' qualifications, geographical preferences for work,
performance track record, capitalization, etc. are not required to be
part of the directory. Some commenters favored including one or more of
these elements, but we are concerned that other business information--
however useful in its own right--could clutter up the directory and
dilute its focus on certification.
Section 26.33 What Steps Must a Recipient Take to Address
Overconcentration of DBEs in Certain Types of Work?
For some time, the Department has heard allegations that DBEs are
overconcentrated in certain fields of highway construction work (e.g.,
guardrail, fencing, landscaping, traffic control, striping). The
concern expressed is that there are so many DBEs in these areas that
non-DBEs are frozen out of the opportunity to work. In an attempt to
respond to these concerns, the SNPRM asked for comment on a series of
options for ``diversification'' mechanisms, various incentives and
disincentives designed to shift DBE participation to other types of
work.
The Department received a great deal of comment on these proposals,
almost all of it negative. There were few comments suggesting that
overconcentration was a serious problem, and many comments said that
the alleged problem was not real. Some FTA and FAA recipients said that
if there was a problem with overconcentration, it was limited to the
highway construction program. As a general matter, recipients said that
the proposed mechanisms were costly, cumbersome, and too prescriptive.
Prime contractors opposed the provisions because they would make it
more difficult for them to find DBEs with which to meet their goals,
while DBEs opposed them because they felt the provisions would penalize
success and force them out of areas of business in which they were
experienced. Many commenters suggested using outreach or business
development plans as ways of assisting DBEs to move into additional
areas of work.
The Department does not have data from commenters or other sources
to support a finding that ``overconcentration'' is a serious,
nationwide problem. However, as part of the narrow tailoring of the DBE
program, we believe it would be useful to give recipients the authority
to address overconcentration problems where they may occur. In keeping
with the increased flexibility that this rule provides recipients, we
give recipients discretion to identify situations where
overconcentration is unduly burdening non-DBE firms. If a recipient
finds an area of overconcentration, it would have to devise means of
addressing the problem that work in their local situations. Possible
means of dealing with the problem could include assisting prime
contractors to find DBEs in non-traditional fields or varying the use
of contract goals to lessen any burden on particular types of non-DBE
specialty contractors. While recipients would have to obtain DOT
approval of determinations of overconcentration and measures for
dealing with them, the Department is not prescribing any specific
mechanisms for doing so.
[[Page 5107]]
Section 26.35 What Role do Business Development and Mentor-Protege
Programs Have in the DBE Program?
In the SNPRM, both mentor-protege programs and business development
programs (BDPs) were cast as tools to use for diversification. They
still may be used for that purpose, as noted in Sec. 26.33. However,
the Department believes that they may have a broader application, and
their use in the final rule is not limited to diversification purposes.
BDPs, in particular, are good examples of race-neutral methods
recipients can use to promote the participation of DBEs and other small
businesses in their contracting programs.
There were few comments on these provisions. Recipients wanted
flexibility, and suggested that these kinds of programs should be
optional. Their comments said that such programs were resource-
intensive, and that Federal financial assistance for them would be
welcome. One contractors' organization offered its own mentor-protege
plan as a model. A few comments voiced suspicion of mentor-protege
plans, on the basis that they allowed fronts and frauds into the
program.
The final rule makes the use of BDPs and mentor-protege programs
optional for recipients. An operating administration can direct a
particular recipient to institute a BDP, but BDPs are not mandatory
across the board. The operating administration would negotiate with the
recipient before mandating a BDP.
One feature added to this provision allows recipients to establish
a kind of mini-graduation requirement for firms that voluntarily
participate in BDPs. One of the purposes of a BDP is to equip DBE firms
to compete in the market outside the DBE program. Therefore, a
recipient could ask BDP participants to agree--as a condition of
receiving BDP assistance--to agree to leave the DBE program after a
certain number of years, or after certain business development
objectives had been achieved.
Standing alone, mentor-protege programs are not an adequate
substitute for the DBE program. While they can be an important tool to
help selected firms, they cannot be counted on to level the playing
field for DBEs in general. An effective mentor-protege program requires
close monitoring to guard against abuse, which further limits the
number of DBEs they can assist. Even with these limits, a mentor-
protege program that has safeguards to prevent large non-DBE firms from
circumventing the DBE program can be a useful component of a
recipient's overall strategy to ensure equal opportunities for DBEs.
The final rule includes safeguards intended to prevent the misuse
of mentor-protege programs. Only firms that a recipient has already
certified as DBEs (necessarily including a determination that they are
independent firms) can participate as proteges. This is intended to
preclude non-DBE firms from creating captive DBE firms to serve as
proteges. A non-DBE mentor firm cannot get credit for more than half
its goal on any contract by using its own protege. Moreover, a non-DBE
mentor firm cannot get DBE credit for using its own protege on more
than every other contract performed by the protege. That is, if Mentor
Firm X uses Protege Firm Y to perform a subcontract, X cannot get DBE
credit for using Y on another subcontract until Y had first worked on
an intervening prime contract or subcontract with a different prime
contractor.
To make mentor-protege relationships feasible, the rule provides
that mentors and proteges are not treated as affiliates of one another
for size determination purposes. Mentor-protege programs and BDPs must
be approved by the concerned operating administration before they take
effect. Recipients who already have such programs in place would make
them part of their revised DBE programs sent to the concerned OA within
180 days of the effective date of part 26.
Section 26.37 What Are a Recipient's Responsibilities for Monitoring
the Performance of Other Program Participants?
The few comments on this section asked for more detail and
clarification. In the interest of flexibility, the Department is
reluctant to be prescriptive in the matter of monitoring and
enforcement mechanisms. What we are looking for is a strong and
effective set of monitoring and compliance provisions in each
recipient's DBE program. These mechanisms could be most anything
available to the recipient under Federal, state, or local law (e.g.,
liquidated damages provisions, responsibility determinations,
suspension and debarment rules, etc.)
One of the main purposes of these provisions is to make sure that
DBEs actually perform work committed to them at contract award. The
results that recipients must measure consist of payments actually made
to DBEs, not just promises at the award stage. Credit toward goals can
be awarded only when payments (including, for example, the return of
retainage payments) are actually made to DBEs. Under the final rule,
recipients would keep a running tally of the extent to which, on each
contract, performance had matched promises. Prime contractors whose
performance fell short of original commitments would be subject to the
compliance mechanisms the recipient had made applicable.
Section 26.41 What Is the Role of the Statutory 10 Percent Goal in
This Program?
This is a new section, intended to explain what role the 10 percent
statutory goal plays in the DBE program. Under former part 23, the 10
percent figure derived from the statute had a role in the setting of
overall goals by recipients. For example, if recipients had a goal of
less than 10 percent, the rule required them to make a special
justification.
This section makes clear that the 10 percent goal is an
aspirational goal that applies to the Department of Transportation on a
national level, not to individual recipients. It is a goal that the
Department can use to evaluate its overall national success in
achieving the objectives that Congress has established for this
program. However, the national 10 percent goal is not tied to
recipients' goal-setting decisions. Recipients set goals based on what
will achieve a level playing field for DBEs in their own programs,
without regard to the national goal. Recipients are not required to set
their overall or contract goals at 10 percent or any other particular
level. Recipients are no longer required to make a special
justification if their overall goals are less than 10 percent.
As discussed in connection with the Congressional debate on the
TEA-21 DBE provision, Congress viewed flexibility concerning the
statutory 10 percent goal as an important feature of narrow tailoring
and made clear that it was setting a national goal, not a goal for any
individual recipient. The Department wants to ensure that state and
local programs have sufficient flexibility to implement their programs
in a narrowly tailored way. This section is part of the Department's
effort toward that end.
Section 26.43 Can Recipients Use Quotas or Set-Asides as Part of This
Program?
The DBE program has often been labeled as a ``quota'' or ``set-
aside'' program, especially, though not exclusively, by its opponents.
This label is, and always has been, incorrect. Fifteen years ago, in
the preamble to the Department's first rule implementing a DBE statute,
the Department carefully
[[Page 5108]]
specified that neither quotas nor set-asides were required (see 48 FR
33437-38; July 21, 1983). This remains true today. However, in light of
Adarand and this year's Congressional debates on the DBE statutes, we
believe this point deserves additional emphasis. This regulation
prohibits quotas under any circumstances and makes clear that set-
asides can only be used as a means of last resort for redressing
egregious discrimination.
A number of non-DBE contractors and their organizations continued
to assert, in comments on the SNPRM, that the DBE program operates as a
quota program. This section makes clear that recipients cannot use
quotas on DOT-assisted contracts under any circumstances. A quota is a
simple numerical requirement that a recipient or contractor must meet,
without consideration of other factors. For example, if a recipient
sets a 12 percent goal on a particular contract and refuses to award
the contract to any bidder who does not have 12 percent DBE
participation, either refusing to look at showings of good faith
efforts or arbitrarily disregarding them, then the recipient has used a
quota. The Department's regulations have never endorsed this practice.
The issue of good faith efforts is discussed further below in
connection with Sec. 26.51.
A set-aside is a very specific tool. A contracting agency sets a
contract aside for DBEs if it permits no one but DBEs to compete for
the contract. Firms other than DBEs are not eligible to bid. The
Department's DBE program has never required the use of set-asides and
has allowed recipients to use set-asides only under very limited
circumstances.
Under the SNPRM, a recipient could use a set-aside on a DOT-
assisted contract only if other methods of meeting overall goals were
demonstrated to be unavailing and the recipient had legal authority
independent of part 26. Comments were divided concerning the use of
set-asides. A number of non-DBE contractors opposed the use of set-
asides, some of them saying that set-asides might be something they
could live with if their use were balanced by the elimination of DBE
contract goals on other contracts in the same field. Some recipients
and DBEs said, however, that set-asides were a useful tool to achieve
goals, particularly for start-up contractors or small contracts.
The Department has carefully reviewed these comments and continues
to believe that set-asides should not be used in the DBE program unless
they are absolutely necessary to address a specific problem when no
other means would suffice. If a recipient has been unable to remedy the
effects of egregious discrimination through other means, it may, as a
last resort, make limited use of set-asides to the extent necessary to
resolve the problem.
Section 26.45 How Do Recipients Set Overall Goals?
Since its inception, the recipient's overall goal has been the
heart of the DBE program. Responding to Adarand, DOT clarified the
theory and purpose of the overall goal in the SNPRM. In the proposed
rule, the Department made clear that the purpose of the overall goal--
and, in fact, the DBE program as a whole--is to achieve a ``level
playing field'' for DBEs seeking to participate in federal-aid
transportation contracting. To reach a level playing field, recipients
need to examine their programs and their markets and determine the
amount of participation they would expect DBEs to achieve in the
absence of discrimination and the effects of past discrimination. The
focus of the goal section of the SNPRM was to propose ways to measure
what a level playing field would look like and to seek input on the
availability of data to make such a measurement.
The Proposed Rule and Comments
The Department proposed several options that recipients might use
for setting overall goals, including three alternative formulas for
measuring the availability of ready, willing and able DBEs in local
markets. The specific formulas will be discussed below, but generally,
they each called for setting a goal that reflected the percentage of
locally available firms that were DBEs (i.e. dividing the number of
DBEs by the number of all businesses). On all of the alternatives, the
SNPRM sought comments on both the feasibility and practical value of
the options, as well as the prospects for combining any of the
approaches and the question of whether to mandate a single approach or
allow each recipient to choose amongst the options. We invited
commenters to propose changes to any of the details of the options or
to devise entirely new ones. Finally, we asked commenters for their
input on the availability of reliable data for use with each of the
options.
Hundreds of commenters of all types--including DBEs and non-DBEs,
prime and subcontractors, state and local recipients, industry and
interest groups and private individuals--responded with a wealth of
feedback, opinions and data. It is an understatement to say that there
was no consensus among commenters as to the best way to set overall
goals. Support for the proposed options was almost evenly spread over
the choices presented, with many commenters firmly against all of the
options. Still more suggested that the current, non-formulaic method
was the best way to ensure the flexibility to respond to local market
conditions. Similarly, among those who expressed an opinion, commenters
were split between the propriety of choosing a single ``best'' method
and imposing it on all recipients and allowing recipients to choose
amongst all the options. One of the few universal themes in the goal-
setting comments was the problem of the availability of reliable data
on the number of DBE and non-DBE contractors.
There were a few common threads that different groups of commenters
tended to apply to all of the formulas. Among recipients, many comments
focused on the lack of data about non-DBE contractors, especially
subcontractors. Recipients often noted that they would not have the
information needed for the denominator of any of the formulas (i.e. the
total number of available businesses). Non-DBE contractors--and
industry groups representing them--generally believed that there should
be a capacity measure built into any goal setting mechanism. Finally,
DBEs--and their industry associations--were concerned that all of the
formulas would create goals based only on the current number of DBEs,
locking in the effects of past discrimination by ignoring the fact that
the lack of opportunities in the past has suppressed the number of DBE
firms available today.
Under the proposed rule's Alternative 1, recipients would calculate
the percentage of DBE firms in their directories among all firms
available to work on their DOT-assisted contracts. Under Alternative 2,
recipients would calculate the percentage of all minority-and women-
owned firms in certain SIC codes in their areas among all firms in
these SIC codes in the same areas. Under Alternative 3, recipients
would calculate a percentage based on the average number of DBE firms
that had worked on their DOT-assisted contracts in recent years divided
by the average number of all firms that had worked on their DOT-
assisted contracts in the same period. The SNPRM also proposed that
recipients could use other means, such a disparity studies or goals
developed by other recipients serving the same area, as a basis for
their goals.
Each of the three proposed alternatives received some support,
though this was often the rather tepid endorsement of commenters who
felt that one or another alternative was the
[[Page 5109]]
best of a bad lot. Non-DBE contractors often claimed that the
alternatives would unfairly increase goals, while DBE contractors often
claimed that the same proposals would unfairly decrease goals.
Commenters said that data for determining the denominators of the
equations in Alternatives 1 and 2, as well as the numerator in
Alternative 2, did not exist and that it would be a major, time-
consuming job to begin to obtain the data. Adaptation of existing
information from other sources (e.g., Census data) was said to have
significant statistical difficulties. The difficulty of getting data on
out-of-state firms was emphasized in some comments.
Commenters looked on the alternatives as cumbersome, creating
unreasonable administrative burdens, and as producing statistical
results that were skewed in various ways. The use of DBE directories as
the source of the numerator in Alternative 1 was criticized on the
basis that directories may contain firms that never actually
participate in DOT-assisted contracts. It was suggested that the number
of firms bidding rather than the number of firms certified would be a
more reliable guide, but it was also pointed out that, because
subcontractors seldom formally bid for work, this data would be hard to
obtain. Some commenters proposed adding overall population statistics
to the mix.
A significant number of commenters--primarily non-DBE contractors,
but including some recipients and other commenters as well--emphasized
the need to take ``capacity'' into account. Most popular among these
comments was using a capacity version of Alternative 3. These comments
did not propose a method of determining the capacity of the firms
contracting with the recipient.
The Final Rule
In view of the complexity and importance of the goal setting
process and the many issues raised by commenters, the Department has
decided to adopt a two step process for goal setting. The process is
intended to provide the maximum flexibility for recipients while
ensuring that goals are based on the availability of ready, willing and
able DBEs in each recipient's relevant market. The Department believes
that this approach is critical to meeting our constitutional obligation
to ensure that the program is narrowly tailored to remedy the effects
of discrimination. The first step of the process will be to create a
baseline figure for the relative availability of ready, willing and
able DBEs in each recipient's market. The second step will be to make
adjustments from the base figure, relying on an examination of
additional evidence, past experience, local expertise and anticipated
changes in DOT-assisted contracting over the coming year.
Step 1: Determining a Base Figure for the Overall Goal
The base figure is intended to be a measurement of the current
percentage of ready, willing and able businesses that are DBEs.
Ensuring that this figure is based on demonstrable evidence of each
recipient's relevant market conditions will help to ensure that the
program remains narrowly tailored. To be explicit, recipients cannot
simply use the 10 percent national goal, their goal from the previous
year, or their DBE participation level from the previous year as their
base figure. Instead, all recipients must take an actual measurement of
their marketplace, using the best evidence they have available, and
derive a base figure that is as fair and accurate a representation as
possible of the percentage of available businesses that are DBEs.
There are many different ways to measure the contracting market and
assess the relative availability of DBEs. As discussed above, the SNPRM
proposed three alternate formulas to measure relative availability,
none of which were particularly popular with commenters. In this final
rule, the Department is placing primary emphasis on the principles
underlying the measurement, mandating only that a measurement of the
relative availability of DBEs be made on the basis of demonstrable
evidence of relevant market conditions, rather than requiring that any
particular procedure or formula be used. The final rule contains a
number of examples of how to create a base figure which recipients are
free to adopt in their entirety or to use as guidelines for how to
devise their own measurement.
There are several reasons we have taken this approach. First, the
Department is aware of the differences in available data in various
markets across the nation. The flexibility inherent in this approach
will ensure that all recipients can use the procedure to set a
reasonable goal and allow each recipient to use the best data available
to it. As discussed in another section, this rule will also provide for
the development of more standard data for future goal setting. Second,
for many recipients, setting goals in this way will be a new exercise.
By fixing only the basic principle, but allowing the methodology to
change, recipients will have the opportunity to fine tune the process
each year as their experience grows and the data available to them
improve. Finally, the rule makes sure that every recipient will have at
least one reasonable and practical goal setting method available to
them.
The first example for setting a base figure relies on data sources
that are immediately available to all recipients: their DBE
directories, and a Census Bureau database that DOT and the Census
Bureau will make available to all recipients that wish to use it. This
example has its roots in the first two goal setting formulas proposed
in the SNPRM. Recipients would first assess the number of ready,
willing and able DBEs based on their own directories. For some
recipients this will be as simple as counting the number of firms in
their directory. For others, particularly those using directories
maintained by other agencies, the directories will have to be
``filtered'' for firms involved in transportation contracting. The
resulting number of DBEs would become the numerator. The denominator
would then be derived from the Census Bureau's County Business Pattern
(CBP) database. We will provide user-friendly electronic access to the
database via the internet to allow recipients to input the geographic
area and SIC codes in which they contract and receive a number for the
availability of all businesses.
There are several issues that must be addressed when comparing
numbers derived from two different data sources, some of which were
raised in the comments on the SNPRM. Recipients will need to ensure
that the scope of businesses included in the numerator is as close as
possible to the scope included in the denominator. Using as close as
possible to the same SIC codes and geographic base is very important. A
recipient using its own DBE directory, particularly one that contains
only firms in the fields in which it contracts, will still need to
determine what fields it will use for the denominator when sorting
through the CBP database. The best way to do this would be to examine
their contracting program and determine the SIC codes in which they let
the substantial majority of their contracts and subcontracts. The
geographic area used for both the numerator and the denominator should
cover the area from which the recipient draws the substantial majority
of its contractors. While it may be sufficient for some state
recipients to use their state borders as their contracting area, local
transit and airport recipients will rarely have such an obvious choice.
Those recipients will need to more carefully examine the
[[Page 5110]]
geographic area from which they draw contractors and base their
calculation of both the numerator and denominator of the equation on
the same area.
The Department and the Census Bureau will make the CBP data
available in a format that gives recipients as much flexibility as
possible to tailor the data to their contracting programs. Recipients
will be able to extract the data in one block for all of the SIC codes
they expect to contract in, or by individual SIC codes, allowing them
to weight the relative availability of DBEs in various fields, giving
more weight to the fields in which they spend more money. For example,
let us assume a recipient estimates that it will expend 10% of its
federal aid funds within SIC code 15, 40% in SIC code 16, 25% in SIC
code 17, and the remaining 25% on contracting spread over SIC codes 07,
42 and 87. The recipient could separately determine the relative
availability of DBEs for each of the three major construction SIC codes
(i.e., 15, 16 and 17) and the relative availability of DBEs in the
other three SIC codes grouped together and weight each according to the
amount of money to be spent in each area. In this example, the
recipient could calculate its weighted base figure by first determining
the number of DBEs in its directory for each of the groups, then
extracting the availability of CBP businesses for the same groups. It
would then perform the following calculation to arrive at a base figure
for step one of the goal setting process:
[GRAPHIC] [TIFF OMITTED] TR02FE99.000
As has been stated generally, this formula is offered only as an
example of a way that a recipient could choose to use the CBP database.
Recipients using the CBP data should choose whether to weight their
calculation, and whether to do so by individual SIC codes or by groups
of SIC codes, based on their own assessment of what method will best
fit their spending pattern.\1\
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\1\ While it is not statistically necessary to account for 100%
of program dollars when performing this type of weighting, the
greater the percentage accounted for, the more accurate the
resulting calculation will be.
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Finally, there is still the question of the propriety of comparing
data from two sources as different as DBE directories and the CBP. As
mentioned above, some commenters asserted that the directories may
contain firms that do not normally perform DOT-assisted contracts. This
problem is greatest, of course, for directories maintained by other
agencies for purposes beyond DOT-assisted contracting. We believe that
the recipient's knowledge of its contracting needs and the contents of
its DBE directory will allow it to solve this problem by sorting the
directories by SIC code to extract only the firms likely to be
interested in DOT-assisted contracting. Any remaining effect from DBEs
that are certified in the relevant SIC codes but still do not intend to
compete for DOT-assisted contracts will be more than offset by the
hurdles involved in actually becoming a DBE. It is important to note
here that the certification process itself, with its paperwork, review
and on-site inspection, create a filter on the number of existing firms
that will be counted in the numerator without there being any
equivalent filter culling firms out of the denominator. Ultimately, the
Department chose these two data sources for the example because; while
they may not be perfect, they represent the best universally available
current data on both the presence of DBEs and the presence of all
businesses in local markets. Any recipient that believes it has
available to it better sources of local data from which to make a
similar calculation for its base figure is encouraged to use them.
The second example for calculating a base figure is using a bidders
list to determine the relative availability of DBEs. The concept is
similar to the one described above. The recipient would divide the
number of available ready, willing and able DBEs by the number for all
firms. The difference is that instead of measuring availability by DBE
certifications and Census data, the recipient would measure
availability by the number of firms that have directly participated in,
or attempted to participate in, DOT-assisted contracting in the recent
past. This approach has its roots in Alternative 3 from the SNPRM. Of
fundamental importance to this approach is that the recipient would
need to include all firms that have sought DOT-assisted contracts,
regardless of whether they did so by bidding on a prime contract or
quoting a job as a subcontractor. Because most DOT recipients derive
the substantial majority of their DBE participation through
subcontracting, it is absolutely essential that all DBE and non-DBE
firms that quote subcontracts be included in the bidders list.\2\
Bidders lists are a very focussed measure of ready, willing and able
firms because they filter the pool of available firms by requiring a
demonstration of their ability to participate in the process through
tracking and identifying contracting opportunities, understanding the
requirements of a particular job and assembling a bid for it. Another
attractive feature of the bidding ``filter'' is that it applies equally
to both DBEs and non-DBEs.
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\2\ To prevent any confusion, it is important to note that the
DBE program does not use the so-called ``benchmarking'' system
employed in direct Federal procurement. The benchmarking system
relies on a unique database created specifically for use in the
federal procurement program.
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The third example included in the final rule for setting a base
figure is using data derived from a disparity study. As was discussed
in the SNPRM, the Department is not requiring recipients to do a
disparity study, but is only making clear that use of disparity study
data by recipients that have them or choose to conduct them is a valid
means of setting a goal. Disparity studies generally contain a wide
array of statistical data, as well as anecdotal data and analysis that
can be particularly useful in the goal setting process. We list
disparity studies here, not because they are needed to justify
operating the DBE program--Congress has already established the
compelling need for the DBE program--but because the data a good
disparity study provides can be an excellent guide for a recipient to
use to set a narrowly tailored goal.
The Department will not set out specific requirements for what data
or analysis is required before a disparity study can be used for
setting a goal, because we believe that the design and conduct of the
study is best left to the local officials and the professional
organizations with which they contract to conduct the studies. Instead,
we again offer simple general principles that should apply to all
studies used for goal setting. Any study data relied on in the goal
setting process should be as recent as possible and be focussed on the
transportation contracting industry. When setting the goal, first use
the study's statistical evidence to set a base figure for the relative
availability of DBEs. Other study information, whether it is anecdotal
data, analysis or statistical information about related
[[Page 5111]]
fields, should be included when making adjustments to the base figure
(discussed in more detail below), but not included in the base figure
for the relative availability of DBEs.
The last specific example included in the rule is using the goal of
another recipient as the base figure for goal setting. This option was
also included in the SNPRM. It is intended to avoid duplicative work
and to lighten the burden the goal setting process might put on smaller
recipients. It is important to note that a recipient could only use
another recipient's goal if it was set in accordance with this rule and
the other recipient performed similar contracting in a similar market
area. Using another recipient's approved goal would only satisfy the
first step of the goal setting process. It would serve as the base
figure, and could not be used to skip over step two of the process. The
recipient would need to examine the same additional evidence it would
otherwise use to determine whether to adjust its goal from the base
figure, as well as being required to make adjustments to account for
differences in its local market or contracting program.
The final rule also maintains the option of devising an alternative
method of calculating a base figure for the goal setting process.
Explicitly listing this option serves to emphasize the point that the
options in the rule are examples meant as guidelines intended to ensure
maximum flexibility for recipients. Recipients can use this option to
take advantage of their unique expertise or any unique source of data
that they have that may not be available to other recipients. The
concerned operating administration will review and approve the
proposals of recipients that believe they can calculate a base figure
that will better reflect their relevant market than any of the examples
provided in this rule. Approval will be contingent on the proposals
following the same principles that apply to any recipient: the
methodology must be based on demonstrable data of relevant market
conditions and be designed to reach a goal that the recipient would
expect DBEs to achieve in the absence of discrimination.
Step 2: Adjusting the Base Figure
As alluded to above, measuring the relative availability of DBEs to
derive a base figure is only the first step of the goal setting
process. To ensure that they arrive at goals that truly and accurately
reflect the participation they would expect absent the effects of
discrimination, recipients must go beyond the formulaic measurement of
current availability to account for other evidence of conditions
affecting DBEs. To accomplish this second step, recipients must first
survey their jurisdiction to determine what types of relevant evidence
is available to them. Then, relying on their own knowledge of their
contracting markets they must review the evidence to determine whether
either an up or down adjustment from the base figure is needed.
One universally available form of evidence that all recipients
should consider is the proven capacity of DBEs to perform work on DOT-
assisted contracts. All recipients have been tracking and reporting the
dollar volume of work that is contracted and subcontracted to DBEs each
year. Viewed in isolation, the past achievements of DBEs do not reflect
the availability of DBEs relative to all available businesses, but it
is an important and current measure of the ability of DBEs to perform
on DOT-assisted contracts.
Though not universally available, there are hundreds of existing
disparity studies that contain a wealth of statistical and anecdotal
evidence on the utilization of disadvantaged businesses. In addition to
being a possible source of data for Step 1 of the goal setting process,
disparity studies should be considered during Step 2 of the process.
The base figure from Step 1 is intended to determine the relative
availability of DBEs. The data and analysis in a disparity study can
help a recipient determine whether those existing businesses are under-
or over-utilized. If a recipient has a study with disparity ratios
showing that existing DBEs are receiving significantly less work than
expected, an upward adjustment from the base figure is called for.
Similarly, if the disparity ratio shows overutilization, a downward
adjustment to the base figure would be warranted. The anecdotal
evidence and analysis of contracting requirements and conditions that
may have a discriminatory impact on DBEs are also important sources
that should be examined when determining what adjustment to make to the
base figure.\3\ Finally, disparity studies that are conducted within a
recipient's jurisdiction should be examined even if they were not done
specifically for the recipient. For example, a state highway agency may
find useful data and analysis in either a statewide disparity study
covering other agencies or in a disparity study examining contracting
in a county or city within the state.
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\3\ It is important to note that adjusting the goal is only part
of the response a recipient should make to evidence of
discriminatory barriers for DBEs. All recipients have a primary
responsibility to ensure non-discrimination in their progrms and
should act aggressively to remove any discriminatory barriers in
their programs.
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If a recipient uses another recipient's goal as its base figure
under Step 1 of the goal setting process, it will have to make
additional adjustments to ensure that its final goal is narrowly
tailored to its market and contracting program. For example, if a local
transit or airport authority adopts a statewide goal as its base
figure, it must determine the extent that local relative availability
of DBEs differs from the relative availability of DBEs in the
contracting area relied on by the state. The local recipient would also
need to examine the differences in the type of contracting work in its
program and determine whether there are significant differences in the
relative availability of DBEs in any fields that are unique to its
program--or unique to the program of the other recipient. Similarly, if
one local recipient used the goal of another local recipient in the
same market as its base figure, it would also need to adjust for
differences in the contracting fields used by the two programs.
Finally, the rule contains a brief list of other types of data a
recipient could consider when adjusting its base figure to arrive at an
overall goal. The list is by no means intended to be exhaustive.
Instead, it is meant as a guide to the types of information a recipient
should look for in Step 2 of the goal setting process. There is a wide
array of relevant local, regional and national information about the
utilization of disadvantaged businesses. Recipients are encouraged to
cast as wide a net as they can to carefully examine their contracting
programs and the public and private markets in which they operate.
Additional Goal Setting Issues
The Department proposed, in both the 1992 NPRM and the 1997 SNPRM,
that overall goals be calculated as a percentage of DOT funds a
recipient expects to expend in DOT-assisted contracts. This is
different from the existing part 23 rule, which asked recipients to set
overall goals on the basis of all funds, including state and local
funds, to be expended in DOT-assisted contracts. This change is for
accounting and administrative convenience and is not intended to have a
substantive effect on the program. While not the subject of many
comments, those who did comment on the proposal favored the change. The
final rule adopts this approach.
A few recipients commented that public participation concerning
goal setting was bothersome. Nevertheless,
[[Page 5112]]
we view it as an essential part of the goal setting process. There are
many stakeholders involved in setting goals, and it is reasonable that
they should be involved in the process and have an opportunity for
comment. The part 23 provision requiring getting a state governor's
approval of a goal of less than 10 percent has been eliminated, both
because overall goals are no longer tied to the national 10 percent
goal and to reduce administrative burdens.
The goal setting provision of the final rule continues to direct
recipients to set one annual overall goal for DBEs, rather than group-
specific goals separating minority and women-owned businesses.
Section 26.47 Can Recipients Be Penalized for Failing To Meet Overall
Goals?
This is a new section of the regulation, the purpose of which is to
clarify the Department's views on the situations in which it is
appropriate to impose sanctions on recipients with respect to goals.
The provision states explicitly what has long been the Department's
policy: no recipient is sanctioned, or found in noncompliance, simply
because it fails to meet its overall goal. In fact, through the history
of the DBE program, the Department never has sanctioned a recipient for
failing to obtain a particular amount of DBE participation.
On the other hand, if a recipient fails to set an overall goal
which the concerned operating administration approves, or fails to
operate its program in good fai |