On October 2, 2014, the United States Department of Transportation (USDOT) issued a final rule impacting USDOT’s Disadvantaged Business Enterprise (DBE) regulations that has been in the works for over two years. The rule, first proposed on September 6, 2012, makes several changes to both the administration and the implementation of the DBE program regulations. Given the number of changes, this post will be broken up into two parts. Part one will focus on the new application forms as well as the changes related to economic disadvantage and size standards:
- New Certification Application Form: With the final rule, USDOT revised the DBE application form. The changes are for the most part minor, but remove some irrelevant language, update the document checklist, and provide a new chart for owners to indicate how often control-oriented tasks are performed. Washington’s Office of Minority and Women’s Business Enterprises (OMWBE) already uses something similar as part of their application materials. Although USDOT has yet to post the pdf version that can be electronically filled out, a copy of the new form can be found here.
- New Personal Net Worth Form and Related Requirements: Similar to the new application form, the PNW form is also new. The current Personal Net Worth (PNW) form used by DBE agencies, including Washington’s OMWBE, is a form created by the Small Business Administration (SBA). The SBA form provides limited space for the applicant to fill out information and in many cases was confusing, especially with respect to whether or not to include a spouse’s assets or how to account for community property in community property states such as Washington. With the new rule, USDOT created a new DBE program specific PNW form. This new form must be used without modification, but USDOT cautions certifiers to “exercise judgment and restraint when requesting reasonable supporting documentation.” Finally, USDOT specifically did not require submission of the PNW form by the spouse (which now includes domestic partners and civil unions) of the disadvantaged owner not involved in the operation of the business. Certifiers, however, may request this on a case-by-case basis and not as a routine matter. As the PNW form is a constant source of confusion, this is a welcome change. Again, USDOT has yet to post a pdf version, but a copy of the new form can be found here.
- Determination of Economic Disadvantage (49 CFR 26.67): The DBE regulations state that all individuals with a PNW less than $1.32 million are presumed to be economically disadvantaged. This presumption, however, can be rebutted if the person technically falls below the cap, but is too wealthy to be considered disadvantaged. As an example, a person with a very expensive house, yacht, or extensive real property holdings might not be found to economically disadvantaged. This vague guidance, however, allowed for arbitrary decisions by the certifying agencies. Accordingly, USDOT included in the Final Rule, specific factors recipients may consider in evaluating the economic disadvantaged status of an applicant, including whether the applicant’s (1) average adjusted gross income over three years exceeds $350,000, (2) income was unusual (e.g., inheritance), (3) earnings were offset by losses, (4) income was reinvested in the firm, and (5) total assets have a fair market value over $6 million. USDOT, however, stresses that these factors should not be addressed in every application but merely guidance for specific cases where the certifying agency has reason to believe the presumption should not apply. USDOT also clarifies in the rule that proper decertification hearing procedures must be used for rebutting the presumption. Finally, USDOT formally codified the guidance that transfers of assets by the disadvantaged owner within the past two years (excluding certain transfers to immediate family members) will be counted as part of the disadvantaged owner’s PNW. Hopefully, these more specific examples and procedures will help prevent certifying agencies from taking broad license with the economic disadvantage rebuttal option.
- Size Standard (49 CFR 26.65): The final rule also increases the overall size limit for DBE firms. To determine size, the DBE program utilizes SBA’s “Table of Small Business Standards” to define the government’s limits for what constitutes a small business. Notably, this table was recently updated in July of 2014 (previous post can be found here). As the definition of “small” varies by industry and scope of work, this table is based on the 2012 North American Industry Classification System (NAICS), which assigns six-digit codes to businesses based on their primary activity. In turn, each NAICS code is assigned either a revenue limit (based on average annual receipts) or average employment (number of employees). For example, the NAICS code for framing contractors is 238130, and provided for a $15 million average revenue limit. Thus, any framing business with an average revenue (over the past three years) of less than $15 million met the definition of a “small business.” In addition to the SBA size standards, however, the DBE Program also includes an overall cap at $22.41 million (on average for the past three years) for all entities in the DBE Program, meaning that even if the SBA’s NAICS code size standard for that firm’s primary activity was adjusted to $36.5 million, a DBE firm’s average revenue must still fall under $22.41 million to remain eligible for the DBE Program. With this final rule, this cap increases from $22.41 million to $23.98 million, providing a little more breathing room for those small businesses approaching the cap. Finally, USDOT clarifies that if a firm is certified under multiple NAICS codes, this size analysis is based on the firm’s primary industry classification.
Part two of this post will focus on the other DBE regulation changes focusing on ownership, control, goal setting, and decertification. If you have any questions about how your firm is impacted by these changes or whether you are eligible for the DBE program, please do not hesitate to contact Lindsay Taft at 206-529-3017.