# DEPARTMENT OF TRANSPORTATION

Office of the Secretary

49 CFR part 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

# 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 \[insert date 30 days from date of
publication in the Federal Register\]. Comments on Paperwork Reduction
Act matters should be received by \[insert date 60 days from date of
publication in the Federal Register\]; 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. Pe--a 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.

## 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 lassification.

### 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 §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 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 (§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 §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 (§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 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 §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 §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 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 §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 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 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.
Pe--a, 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. Pe--a, 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:

¥ 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.

¥ Efficacy of alternative remedies. This element of the narrow tailoring
standard is related to the Supreme Court\'s inquiry concerning
race-neutral programs. Under §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.

¥ 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.
(§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. (§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. (§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. (§26.53). The rule also allows
recipients that believe they can achieve equal opportunity for DBEs
through different approaches to get waivers releasing them from almost
any of the specific requirements of the rule. (§26.103). Recipients can
also get exemptions from the rule if they have unique circumstances that
make complying with the rule impractical. (§26.103).

¥ 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. (§26.67). Similarly, when a
firm\'s receipts grows beyond the small business size standards, it
loses its eligibility to participate in the program. (§26.65). Finally,
to ensure that race-conscious remedies are not used any longer than
absolutely necessary, §26.51 requires recipients to reduce the use of
contract goals and rely on race-neutral measures to the extent that they
are effective.

¥ Relationship of goals to the relevant market. The overall goal setting
provisions of §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, §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.

¥ 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 §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 §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.

¥ Inclusion of appropriate beneficiaries. The certification provisions
of Subparts D and E, and particularly the social and economic
disadvantage provisions of §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

## §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.

## §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.

## §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 §124.3). The definitions of the designated
groups included in the definition of \"socially 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.

## §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.

## §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 §26.9(c) and (d), are now included as a separate
section at §26.15.

## §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
§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 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.

## §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.

## §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.

## §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.

## §26.23 What is the requirement for a policy statement?

## §26.25 What is the requirement for a liaison officer?

## §26.27 What efforts must recipients make concerning DBE financial institutions?

There were no substantive comments concerning §§26.23-26.27, and the
Department is adopting them as proposed.

## §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 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.

## §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.

## §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.

## §26.35 What role do business development and mentor-protege programs have in the DBE program?

In the SNPRM, both mentor-protŽgŽ 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 §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-protŽgŽ plan as a model. A few comments voiced suspicion of
mentor-protŽgŽ plans, on the basis that they allowed fronts and frauds
into the program.

The final rule makes the use of BDPs and mentor-protŽgŽ 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-protŽgŽ 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-protŽgŽ program requires close
monitoring to guard against abuse, which further limits the number of
DBEs they can assist. Even with these limits, a mentor-protŽgŽ 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-protŽgŽ programs. Only firms that a recipient has already
certified as DBEs (necessarily including a determination that they are
independent firms) can participate as protŽgŽs. This is intended to
preclude non-DBE firms from creating captive DBE firms to serve as
protŽgŽs. A non-DBE mentor firm cannot get credit for more than half its
goal on any contract by using its own protŽgŽ. Moreover, a non-DBE
mentor firm cannot get DBE credit for using its own protŽgŽ on more than
every other contract performed by the protŽgŽ. That is, if Mentor Firm X
uses ProtŽgŽ 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-protŽgŽ relationships feasible, the rule provides that
mentors and protŽgŽs are not treated as affiliates of one another for
size determination purposes. Mentor-protŽgŽ 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.

## §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.

## §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.

## §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 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
§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.

## 

## §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 chose 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 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 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:

Base = \[.10 (DBEs in SIC 15) + .40(DBEs in 16) + .25(DBEs in 17) + .25
(DBEs in 07,42,87) \] x 100

Figure CBPs in SIC 15 CBPs in 16 CBPs in 17 CBPs in 07,42,87

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

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.

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 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 proposal\'s 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.

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, 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.

## 

## §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 faith toward the objective of meeting the goal, it is
subject to a finding of noncompliance and possible sanctions. For
example, if a recipient refuses to establish a goal or, having
established one, does little or nothing to work toward attaining it, it
would be reasonable for the Department to find the recipient in
noncompliance. Like all compliance provisions of the rule, this
provision is subject to the \"court order\" exception recently created
by statute (see §26.101 (b)).

##  

## §26.49 How are overall goals established for transit vehicle manufacturers?

This provision basically continues in effect the existing transit
vehicle manufacturer (TVM) provisions of the rule. The SNPRM proposed to
change the existing rule in two respects. FHWA or FAA recipients could
avail themselves of similar provisions, if they chose. The final rule
retains this flexibility. Also, it was proposed that FTA, rather than
manufacturers, would set TVM goals. The few comments we received on this
section objected to the latter change. Consequently, we will not adopt
the proposed change and will continue to require the TVMs themselves to
set their own goals based on the principles outlined in §26.45 of this
rule.

## 

## §26.51 What means do recipients use to meet overall goals?

One of the key points of both the SNPRM and this final rule is that, in
meeting overall goals, recipients have to give priority to race-neutral
means. By race-neutral means (a term which, for purposes of this rule,
includes gender neutrality), we mean outreach, technical assistance,
procurement process modification, etc. \-- measures which can be used to
increase opportunities for all small businesses, not just DBEs, and do
not involve setting specific goals for the use of DBEs on individual
contracts. Contract goals, on the other hand, are race-conscious
measures.

In the context of these definitions, it is important to note that awards
of contracts to DBEs are not necessarily race-conscious actions.
Whenever a DBE receives a prime contract because it is the lowest
responsible bidder, the resulting DBE participation was achieved through
race-neutral means. Similarly, when a DBE receives a subcontract on a
project that does not have a contract goal, its participation was also
achieved through race-neutral means. Finally, even on projects that do
carry contract goals, when a prime awards a particular subcontract to a
DBE because it has proven in the past that it does the best or quickest
work, or because it submitted the lowest quote, the resulting DBE
participation has, in fact, been achieved through race-neutral means. We
also note that the use of race-neutral measures (e.g., outreach,
technical assistance) specifically to increase the participation of DBEs
does not convert these measures into race-conscious measures.

A number of non-DBE contractors commented that race-neutral measures
should not only be given priority, but must be tried and fail before any
use of contract goals can occur. This, they asserted, is essential for a
program to be narrowly tailored. The law on this point is fairly clear,
and does not support the commenters\' contention. The extent to which
race-neutral alternatives were considered and deemed inadequate to
remedy the problem is the relevant narrow tailoring question. Both in
past legislation and when considering TEA-21, Congress did consider
race-neutral alternatives. In fact, as described above, throughout the
debate, Member after Member gave examples of how state and local
race-neutral programs without goals fail to overcome the discriminatory
barriers that face DBEs. Congress\' careful consideration and conclusion
that race-neutral means are insufficient, buttressed by this rule\'s
emphasis on achieving as much of the goal as possible through
race-neutral means, satisfies this part of the narrow tailoring
requirement.

No one opposed the use of race-neutral means, though a number of DBEs
and recipients stressed that these means, standing alone, were
insufficient to address discrimination and its effects. Most recipients
and non-DBE contractors supported the use of race-neutral measures,
though some recipients said that increased use of these measures would
require additional resources.

The relationship between race-conscious and race-neutral measures in the
final rule is very important. The recipient establishes an overall goal.
The recipient estimates, in advance, what part of that goal it can meet
through the use of race-neutral means. This projection, and the basis
for it, would be provided to the concerned operating administration at
the same time as the overall goal, and is subject to OA approval.

The requirement of the rule is that the recipient get the maximum
feasible DBE participation through race-neutral means. The recipient
uses race-conscious measures (e.g., sets contract goals) to get the
remainder of the DBE participation it needs to meet the overall goal. If
the recipient expects to be able to meet its entire overall goal through
race-neutral means, it could, with OA approval, implement its program
without any use of contract goals.

For example, suppose Recipient X establishes an 11 percent overall goal
for Fiscal Year 2000. This is the amount of DBE participation that X has
determined it would have if the playing field were level. Recipient X
projects that, using a combination of race-neutral means, it can achieve
5 percent DBE participation. Recipient X then sets contract goals on
some of its contracts throughout the year to bring in an additional 6
percent DBE participation. Recipients would keep data separately on the
DBE participation obtained through those contracts that either did or
did not involve the use of contract goals. Recipients would use this and
other data to adjust their use of race-neutral means and contract goals
during the remainder of the year and in future years. For example, if
Recipient X projected being able to attain 5 percent DBE participation
through race-neutral measures, but was only able to obtain 1 percent
from the race-neutral measures it used, Recipient X would increase its
future use of contract goals. On the other hand, if Recipient X exceeded
its prediction that it would get 5 percent DBE participation from
race-neutral measures and actually obtained 10 percent DBE participation
from the contracts on which there were no contract goals, it would
reduce its future use of contract goals. A recipient that was
consistently able to meet its overall goal using only race-neutral
measures would never need to use contract goals.

Most recipients and non-DBE contractors agreed with the SNPRM\'s
proposal that (contrary to the part 23 provision on this subject)
contract goals not be required on all contracts. This provision is
retained in the final rule. We believe that this provision provides
recipients the ability to achieve the objective of a narrowly tailored
program. The rule also reiterates that the contract goal need not be set
at the same level as the overall goal. To express this more clearly, let
us return to the above example of Recipient X. Just because Recipient X
has an overall goal of 11 percent, it does not have to set a contract
goal on each contract. Nor does it have to establish an 11 percent goal
on each contract on which it does set a contract goal. Indeed, since X
has projected that it can achieve almost half of its overall goal
through race-neutral means, it would most likely set contract goals on
some contracts but not on others. On contracts with a contract goal, the
goal might be 4 percent one time, 18 percent another time, 9 percent
another time, depending on the actual work involved in each contract,
the location of the work and the subcontracting opportunities available.
The idea is for X to set contract goals that, cumulatively over the
year, bring in 6 percent DBE participation, which, added to the 5
percent participation X projects achieving from race-neutral measures,
ends up meeting the 11 percent overall goal.

The SNPRM asked for comment on evaluation credits as an additional
race-conscious measure that recipients could use to meet overall goals.
The vast majority of the many comments on this subject opposed the use
of evaluation credits, on both legal (e.g., as contrary to narrow
tailoring) and policy (e.g., as confusing and subjective) grounds. A
smaller number of commenters favored at least giving recipients
discretion to use this tool. While the Department does not agree with
the contention that evaluation credits are legally suspect, we do agree
with much of the sentiment against using them in the DBE program,
particularly the practical difficulties they might involve when applied
to subcontracting (which constitutes the main source of DBE
participation in the program). As a result, the final rule does not
contain an evaluation credits provision.

The SNPRM proposed certain mechanisms for determining when it was
appropriate to ratchet back the use of contract goals. Most commenters
said they found these particular mechanisms complicated and confusing.
The Department believes that, as a matter of narrow tailoring, it is
important to have concrete mechanisms in place to ensure that
race-conscious measures like contract goals are used only to the extent
necessary to ensure a level playing field. The final rule contains
examples of four such mechanisms.

The first mechanism applies to a situation in which a recipient
estimates that it can meet its overall goal exclusively through the use
of race-neutral goals. In this case, the recipient simply does not set
contract goals during the year. The second mechanism takes this approach
one step further. If the recipient meets its overall goal two years in a
row using only race-neutral measures, the recipient continues to use
only race-neutral measures in future years, without having to project
each year how much of its overall goal it anticipates meeting through
race-neutral and race-conscious means, respectively. However, if in any
year the recipient does not meet its overall goal, the recipient must
make the projection for the following year, using race-conscious means
as needed to meet the goal.

The third mechanism applies to recipients who exceed their overall goals
for two years in a row while using contract goals. In the third year,
when setting their overall goal and making their projection of the
amount of DBE participation they will achieve through race-neutral
means, they would determine the average percentage by which they
exceeded their overall goals in the two previous years. They would then
use that percentage to reduce their reliance on contract goals in the
coming year, as noted in the regulatory text example. The rationale for
this reduction is that the recipient\'s overall goal represents its best
estimation of the participation level expected for DBEs in the absence
of discrimination. By exceeding that goal consistently, the recipient
may be relying too heavily on race-conscious measures. Scaling back the
use of contract goals - while keeping careful track of DBE participation
rates on projects without contract goals - will ensure that the
recipient\'s DBE program remains narrowly tailored to overcoming the
continuing effects of discrimination.

The fourth mechanism operates within a given year. If a recipient
determines part way through the year that it will exceed (or fall short
of) its overall goal, and it is using contract goals during that year,
it would scale back its use of contract goals (or increase it use of
race-neutral means and/or contract goals) during the remainder of the
year to ensure that it is using an appropriate balance of means to meet
its \"level playing field\" objectives.

There were also a number of comments on how contract goals should be
expressed. Most favored continuing the existing practice of adding
together the Federal and local shares of a contract and expressing the
contract goal as a percentage of the sum because it works well and
avoids confusion. A few comments favored expressing contract goals as a
percentage of only the Federal share of a contract. Ultimately, we
believe that it is not necessary for the Department to dictate which
method to use. Recipients may continue to use whichever method they feel
works best and allows them to accurately track the participation of DBEs
in their program. Recipients need only ensure that they are consistent
and clearly express the method they are using, and report to the
Department the total federal aid dollars spent and the federal aid
dollars spent with DBEs.

As a last note on this topic, FAA recipients are reminded that funds
derived from passenger facility charges (PFCs) are not covered by this
part and should not be counted as part of the Federal share in any goal
calculation. If a recipient chooses to express its contract goals as a
percentage of the combined Federal and local share, it may include the
PFC funds as part of the local share.

## 

## §26.53 What are the good faith efforts procedures recipients follow in situations where there are contract goals?

There was little disagreement about the main point of this section. When
a recipient sets a contract goal, the basic obligation of bidders is to
make good faith efforts (GFE) to meet it. They can demonstrate these
efforts in either of two ways, which are equally valid. First, they can
meet the goal, by documenting that they have obtained commitments for
enough DBE participation to meet the goal. Second, even though they have
not met the goal, they can document that they have made good faith
efforts to do so. The Department emphasizes strongly that this
requirement is an important and serious one. A refusal by a recipient to
accept valid showings of good faith is not acceptable under this rule.

Appendix A discusses in greater detail the kinds of good faith efforts
bidders are expected to make. There was a good deal of comment
concerning its contents. Non-minority contractors recited that good
faith efforts standards should be \"objective, measurable, realistically
achievable, and standardized.\" Not one of these comments provided any
examples or suggestions of what \"objective, measurable, realistically
achievable, and standardized\" standards would look like, however.
Certainly a one-size-fits-all checklist is neither desirable nor
possible. What constitutes a showing of adequate good faith efforts in a
particular procurement is an intrinsically fact-specific judgment that
recipients must make. Circumstances of procurements vary widely, and GFE
determinations must fit each individual situation as closely as
possible.

The proposed good faith efforts appendix suggested that one of the
factors recipients could take into account is the behavior of bidders
other than the apparent successful bidder. For example, if the latter
failed to meet the contract goal, but other bidders did, that could
suggest that the apparent successful bidder had not exerted sufficient
efforts to get DBE participation. Recipients who commented on this issue
favored the concept; non-DBE contractors opposed it. The final rule\'s
Appendix A makes clear that recipients are not to use a \"conclusive
presumption\" approach, in which the apparent successful bidder is
summarily found to have failed to make good faith efforts simply because
another bidder was able to meet the goal. However, the track record of
other bidders can be a relevant factor in a GFE determination, in more
than one way. If other bidders have met the goal, and the apparent
successful bidder has not, this at least raises the question of whether
the apparent successful bidder\'s efforts were adequate. It does not, by
itself, prove that the apparent successful bidder did not make a good
faith effort to get DBE participation, however. On the other hand, if
the apparent successful bidder \-- even if it failed to meet the goal
\-- got as much or more DBE participation than other bidders, then this
fact would support the apparent successful bidder\'s showing of GFE. The
revised Appendix makes these points.

The proposed good faith efforts appendix also expanded on language in
part 23 concerning price-based decisions by prime contractors. The
existing language provides that a recipient can use, as evidence of a
bidder\'s failure to make good faith efforts, the recipient\'s rejection
of a DBE subcontractor\'s \"reasonable price\" offer. The SNPRM added
that a recipient could set a price differential from 1-10 percent to
evaluate bidders\' efforts. If a bidder did not meet the goal and
rejected a DBE offer within the range, the recipient could view the
bidder as not making good faith efforts. This was an attempt to provide
additional, quantified, guidance to recipients on this issue.

Comment was mixed on this issue. Non-DBE prime contractors generally
opposed the price differential idea, saying that it encouraged
deviations from the traditional low bid system. It should be noted,
however, that subcontracts are typically awarded outside any formal low
bid system. Some recipients thought that it was a bad idea to designate
a range, because it would limit their discretion, while others liked the
additional definiteness of the range. Most recipients supported the
\"reasonable price\" concept in general, even if they had their doubts
about the value of a range. Some DBE organizations favored the range
approach.

Taking all the comments into consideration, the Department has decided
to retain language similar to that of part 23, without reference to any
specific range. Appendix A now provides that the fact that some
additional costs may be involved in finding and using DBEs is not in
itself sufficient reason for a bidder\'s failure to meet a DBE contract
goal, as long as such costs are reasonable. Along with this emphasis on
the reasonableness of the cost necessarily comes the fact that prime
contractors are not expected to bear unreasonable costs. The
availability of a good faith efforts waiver of the contract goal helps
to ensure that a prime contractor will not be in a position where it has
to accept an excessive or unreasonable bid from a DBE subcontractor. At
the same time, any burden that a non-DBE subcontractor might face is
also limited by the reasonableness of competing bids. This approach
retains flexibility for recipients while avoiding the concerns
commenters expressed about a particular range.

The SNPRM proposed that recipients would have to provide for an
administrative review of decisions that a bidder\'s GFE showing was
inadequate. The purpose of the provision was to ensure that recipients
did not arbitrarily dismiss bidders\' attempts to show that they made
good faith efforts. The provision was meant to emphasize the seriousness
with which the Department takes the GFE requirement and to help respond
to allegations that some recipients administered the program in a
quota-like fashion. The SNPRM also asked whether such a mechanism should
be operated entirely by the recipient or whether a committee including
representatives of DBE and non-DBE contractors should be involved.

A number of recipients, and a few contractors, opposed the idea on the
basis of concern about administrative burdens on recipients and
potential delays in the procurement process. A greater number of
commenters, largely non-DBE contractors but also including recipients
and DBEs, supported the proposal as ensuring greater fairness in the
process. A significant majority of all commenters said that the
recipient should operate the system on its own, because a committee
would make the process more cumbersome and raise conflict of interest
issues.

The Department will adopt this proposal, which should add to the
fairness of the system and make allegations of de facto quota operations
less likely. The Department intends that reconsideration be administered
by recipients. The regulation does not call for a committee involving
non-recipient personnel. The Department intends that the process be
informal and timely. The recipient could ensure that the process be
completed within a brief period (e.g., 5-10 days) to minimize any
potential delay in procurements. The bidder would have an opportunity to
meet with the reconsideration official, but a formal hearing is not
required. To ensure fairness, the reconsideration official must be
someone who did not participate in the original decision to reject the
bidder\'s showing. The recipient would have to provide a written
decision on reconsideration, but there would be no provision for
administrative appeals to DOT.

A point raised by several non-DBE commenters was that DBEs should have
to make good faith efforts (even when they were not acting as prime
contractors). The commenters suggested things like providing capacity
statements and documenting that they have bid on contracts. This point
is unrelated to the subject of this section, which has to do with what
efforts bidders for prime contracts have to make to show that they have
made to obtain DBE subcontractors. It is difficult to see what purpose
the additional paperwork burdens these commenters\' requests would
serve.

One of the most hotly debated issues among commenters was whether DBE
firms bidding on prime contracts should have to meet goals and make good
faith efforts to employ DBE subcontractors. Under part 23, DBE prime
contractors did not have to meet goals or make good faith efforts. The
rationale for this position was that, as DBEs, 100 percent of the work
of these contractors counted toward recipients\' contract goals, which
the firms automatically met.

A significant majority of commenters on this issue \-- particularly
non-DBE contractors but also including some recipients and a few DBEs
\-- argued that DBE primes should meet goals and make GFE the same as
other contractors. Failing to do so, they said, went beyond providing a
level playing field to the point of providing an unfair advantage for
DBE bidders for prime contracts. This change would also increase
opportunities for DBE subcontractors, they said. One comment suggested
requiring DBE prime contractors to meet goals or make GFE, but stressed
that work they performed with their own forces as well as work awarded
to DBE subcontractors should count toward goals.

Supporters of the current system said that many prime contracts
performed by DBEs are too small to permit subcontracting (of course,
goals need be set only on contracts with subcontracting possibilities).
Moreover, these commenters \-- mostly DBEs and recipients \-- said that
there was already inequity as between DBEs and non-DBEs, and requiring
DBEs to meet the same requirements simply maintained the inequity. There
was also some support for a third option the Department included in the
SNPRM, in which DBEs would have to meet goals and make GFE to the extent
that work they proposed to perform with their own forces was
insufficient to meet goals.

The Department believes that, in a rule aimed at providing a level
playing field for DBEs, it is appropriate to impose the same
requirements on all bidders for prime contracts. Consequently, part 26
will depart from the part 23 approach and require DBE prime contractors
to meet goals and make good faith efforts on the same basis as other
prime contractors. However, in recognition of the DBE bidders\' status
as DBEs, we will permit them to count toward goals the work that they
commit to performing with their own forces, as well as the work that
they commit to be performed by DBE subcontractors. DBE bidders on prime
contracts will be expected to make the same outreach efforts as other
bidders and to document good faith efforts in situations where they do
not fully meet contract goals.

Under part 23 and the SNPRM, recipients have a choice between handling
bidder compliance with contract goals and good faith efforts
requirements as a matter of responsiveness or responsibility. Some
recipients and other contractors recounted successful experience with
one approach or the other, and suggested reasons why everyone should
follow each approach (e.g., responsiveness as a deterrent to
bid-shopping; responsibility as a more flexible and cost-effective
approach). Both approaches have their merits, and the Department
believes the best course is to maintain the existing recipient
discretion on this issue.

Some recipients use so-called \"design-build\" or \"turnkey\" contracts,
in which the design and construction of an entire project is contracted
out to a master contractor. The master contractor then lets
subcontracts, which are often equivalent to the prime contracts that the
recipient would let if it were designing and building the project
directly. In a sense, the master contractor stands in the shoes of the
recipient.

On design-build contracts, the normal process for setting contract goals
does not fit the contract award process well. At the time of the award
of the master contract, neither the recipient nor the master contractor
knows in detail what the project will look like or exactly what
contracting opportunities there will be, let alone the identity of DBEs
who may subsequently be involved. In these situations, the recipient may
alter the normal process, setting a project goal to which the master
contractor commits. Later, when the master contractor is letting
subcontracts, it will set contract goals as appropriate, standing in the
shoes of the recipient. The recipient will exercise oversight of this
process.

The final issue in this section has to do with replacement of DBEs that
drop out of a contract. What actions, if any, should a prime contractor
have to take when a DBE is unable to complete a subcontract, for
whatever reason? Should it matter whether or not the DBE\'s
participation is needed to achieve the prime contractor\'s goal?

Comment on this issue came mostly from recipients, with some non-DBE
contractors and a few DBEs providing their views. A majority of the
commenters believed that replacement of a fallen-away DBE with another
DBE (or making a good faith effort toward that end) should be required
only when needed to ensure that the prime contractor continued to meet
its contract goal. Others said that, since using DBEs to which the prime
had committed at the time of award was a contractual requirement,
replacement or good faith efforts should be required regardless of the
prime\'s ability to meet the goal without the lost DBE\'s participation.

The Department believes that, in a narrowly tailored rule, it is not
appropriate to require DBE participation at a level exceeding that
needed to ensure a level playing field. Consequently, we will require a
prime contractor to replace a fallen-away DBE (or to demonstrate that it
has made good faith efforts toward that end) only to the extent needed
to ensure that the prime contractor is able to achieve the contract goal
established by the recipient for the procurement. The Department will
also retain the SNPRM provision - supported by most commenters who
mentioned it \-- that a prime contractor may not terminate a DBE firm
for convenience and then perform the work with its own forces without
the recipient\'s written consent. This provision is intended to prevent
abuse of the program by a prime contractor who would commit to using a
DBE and then bump the DBE off the project in favor of doing the work
itself.

## 

## §26.55 How is DBE participation counted toward goals?

In a narrowly tailored program, it is important that DBE credit be
awarded only for work actually being performed by DBEs themselves. The
necessary implication of this principle is that when a DBE prime
contractor or subcontractor subcontracts work to another firm, the work
counts toward DBE goals only if the other firm is itself a DBE. This
represents a change from the existing rule and the SNPRM, which said
that all the work of a DBE\'s contract (implicitly including work
subcontracted to non-DBEs) counts toward goals. A few comments urged
such a change. The new language is also consistent with the way that the
final rule treats goals for DBE prime contractors.

The value of work performed by DBEs themselves is deemed to include the
cost of materials and supplies purchased, and equipment leased, by the
DBE from non-DBE sources. For example, if a DBE steel erection firm buys
steel from a non-DBE manufacturer, or leases a crane from a non-DBE
construction firm, these costs count toward DBE goals. There is one
exception: if a DBE subcontractor buys supplies or leases equipment from
the prime contractor on its contract, these costs do not count toward
DBE goals. Several comments from prime contractors suggested these costs
should count, but this situation is too problematic, in our view, from
an independence and commercially useful function (CUF) point of view to
permit DBE credit.

One of the most difficult issues in this section concerns how to count
DBE credit for the services of DBE trucking firms. The SNPRM proposed
that, to be performing a CUF, a DBE trucking firm had to own 50 percent
of the trucks it used in connection with a contract. A number of
comments said that this requirement was out of step with industry
practice, which commonly involves companies leasing trucks from
owner-operators and other sources for purposes of a project. In response
to these comments, the Department revisited this issue and reviewed the
trucking CUF policies of a number of states. The resulting provision
requires DBEs to have overall control of trucking operations and own at
least one truck, but permits leasing from a variety of sources under
controlled conditions, with varying consequences for DBE credit awarded.

A DBE need not provide all the trucks on a contract to receive credit
for transportation services, but it must control the trucking operations
for which it seeks credit. It must have at least one truck and driver of
its own, but it can lease the trucks of others, both DBEs and non-DBEs,
including owner operators. For work done with its own trucks and
drivers, and for work with DBE lessees, the firm receives credit for all
transportation services provided. For work done with non-DBE lessees,
the firm gets credit only for the fees or commissions it receives for
arranging the transportation services, since the services themselves are
being performed by non-DBEs.

When we say that a DBE firm must own at least one of the trucks it uses
on a contract, we intend for recipients to have a certain amount of
discretion for handling unexpected circumstances, beyond the control of
the firm. For example, suppose firm X starts the contract with one truck
it owns. The truck is disabled by an accident or mechanical problem part
way through the contract. Recipients need not conclude that the firm has
ceased to perform a commercially useful function.

Most commenters who addressed the issue agreed with the SNPRM proposal
that a DBE does not perform a CUF unless if performs at least 30 percent
of the work of a contract with its own forces (a few commenters
suggested 50 percent). This provision has been retained. A commenter
suggested that the use of two-party checks by a DBE and another firm
should not automatically preclude there being a CUF. While we do not
believe it is necessary to include rule text language on this point, we
agree with the commenter. As long as the other party acts solely as a
guarantor, and the funds do not come from the other party, we do not
object to this practice where it is a commonly-recognized way of doing
business. Recipients who accept this practice should monitor its use
closely to avoid abuse.

One commenter noted an apparent inconsistency between counting 100
percent of the value of materials and supplies used by a DBE
construction contractor (e.g., in the context of a furnish and install
contract) and counting only 60 percent of the value of goods obtained by
a non-DBE contractor from a DBE regular dealer. The two situations are
treated differently, but there is a policy reason for the difference.
There is a continuing concern in the program that, if non-DBEs are able
to meet DBE goals readily by doing nothing more than obtaining supplies
made by non-DBE manufacturers through DBE regular dealers, the non-DBEs
will be less likely to hire DBE subcontractors for other purposes. As a
policy matter, the Department does not want to reduce incentives to use
DBE subcontractors, so we have not permitted 100 percent credit for
supplies in this situation. Giving 100 percent credit for materials and
supplies when a DBE contractor performs a furnish and install contract
does not create the same type of disincentive, so the policy concern
does not apply. In our experience, the 60 percent credit has been an
effective incentive for the use of DBE regular dealers, so those firms
are not unduly burdened.

##  

## §26.61 How are burdens of proof allocated in the certification process?

This section, which states a \"preponderance of evidence\" standard for
applicants\' demonstration to recipients concerning group membership,
ownership, control, and business size, received favorable comment from
all commenters who addressed it. We are retaining it with only one
change, a reference to the fact that, in the final rule, recipients will
collect information concerning the economic status of prospective DBE
owners.

## 

## §26.63 What rules govern group membership determinations?

There were several comments on details of this provision. One commenter
suggested that tribal registration be used as an identifier for Native
Americans. The suggestion is consistent with long-standing DOT guidance;
however this section of the regulation is meant to set out general rules
applicable to all determinations of group membership, not to enumerate
means of making the determination for specific groups. The same
commenter suggested that if someone knowingly misrepresents himself as a
group member, he should not be given further consideration for
eligibility. Misrepresentation of any kind on an application is a
serious matter. Indeed, misrepresentation of material facts in an
application can be grounds for debarment or even criminal prosecution.
While it would certainly be appropriate for recipients to take action
against someone who so misrepresented himself, the regulatory text on
group membership is not the place to make a general point about the
consequences of misrepresentation.

Some commenters wanted further definition of what \"a long period of
time\" means. We believe it would be counterproductive to designate a
number of years that would apply in all cases, since circumstances are
likely to differ. The point is to avoid \"certification conversions\" in
which an individual suddenly discovers, not long before the application
process, ancestry or culture with which he previously has had little
involvement.

We are adopting the SNPRM provision without substantive change.

## 

## §26.65 What rules govern business size determinations?

By statute, the Department is mandated to apply SBA small business size
standards to determining whether a firm is a small business. The
Department is also mandated to apply the statutory size cap (\$16.6
million in the current legislation, which the Department adjusts for
inflation from time to time). Consequently, the Department cannot adopt
the variety of comments we received to adjust size standards or the
gross receipts cap to take differences among industries or regions into
account. We are adopting the proposed language, using the new statutory
gross receipts cap. As under part 23, a firm must fit under both the
relevant SBA size standard and the generally applicable DOT statutory
cap to be eligible for certification.

A few comments asked for additional guidance for situations in which a
firm is working in more than one SIC code, and the SBA size standards
for the different SIC codes are different. First, size determinations
are made for the firm as a whole, not for one division or another.
Second, suppose the size of Firm X (e.g., determined through looking at
the firm\'s gross receipts) is \$5 million, and X is seeking
certification as a DBE in SIC code yyyy and zzzz, whose SBA small
business size standards are \$3.5 and \$7 million, respectively. Firm X
would be a small business that could be certified as a DBE, and that
could receive DBE credit toward goals, in SIC code zzzz but not in SIC
code yyyy. This approach to the issue of differing standards being
involved with the same firm fits in well with the general requirement of
part 26 that certification be for work in particular SIC codes.

## 

## §26.67 What rules determine social and economic disadvantage?

The statutes governing the DBE program continue to state that members of
certain designated groups are presumed to be both socially and
economically disadvantaged. Therefore, the Department is not adopting
comments suggesting that one or both of the presumptions be eliminated
from the DBE rule. While the rule does specify that applicants who are
members of the designated groups do have to submit a signed
certification that they are, in fact, socially and economically
disadvantaged, this requirement should not be read as making simple
\"self-certification\" sufficient to establish disadvantage. As has been
the case since the beginning of the DBE program, the presumptions of
social and economic disadvantage are rebuttable.

The Department is making an important change in this provision in
response to comments about how to rebut the presumption of economic
disadvantage. Recipient comments unanimously said that recipients should
collect financial information, such as statements of personal net worth
(PNW) and income tax returns, in order to determine whether the
presumption of economic disadvantage really applies to individual
applicants. Particularly in the context of a narrowly tailored program,
in which it is important to ensure that the benefits are focussed on
genuinely disadvantaged people (not just anyone who is a member of a
designated group), we believe that these comments have merit. While
charges by opponents of the program that fabulously wealthy persons
could readily participate under part 23 have been exceedingly hyperbolic
and inaccurate (e.g., references to the Sultan of Brunei as a potential
DBE), it is appropriate to give recipients this tool to make sure that
non-disadvantaged persons do not participate.

For this reason, part 26 requires recipients to obtain a signed and
notarized statement of personal net worth from all persons who claim to
own and control a firm applying for DBE certification and whose
ownership and control are relied upon for DBE certification. These
statements must be accompanied by appropriate supporting documentation
(e.g., tax returns, where relevant). The rule does not prescribe the
exact supporting documentation that should be provided, and recipients
should strive for a good balance between the need for thorough
examination of applicants\' PNW and the need to limit paperwork burdens
on applicants. For reasons of avoiding a retroactive paperwork burden on
firms that are now certified, the rule does not require recipients to
obtain this information from currently certified firms. These firms
would submit the information the next time they apply for renewal or
recertification. The final rule\'s provisions on calculating personal
net worth are derived directly from SBA regulations on this subject (see
13 CFR §124.104(c)(2), as amended on June 30, 1998).

One of the primary concerns of DBE firms commenting about submitting
personal financial information is ensuring that the information remains
confidential. In response to this concern, the rule explicitly requires
that this material be kept confidential. It may be provided to a third
party only with the written consent of the individual to whom the
information pertains. This provision is specifically intended to
pre-empt any contrary application of state or local law (e.g., a state
freedom of information act that might be interpreted to require a state
transportation agency to provide to a requesting party the personal
income tax return of a DBE applicant who had provided the return as
supporting documentation for his PNW statement). There is one exception
to this confidentiality requirement. If there is a certification appeal
in which the economic disadvantage of an individual is at issue (e.g.,
the recipient has determined that he or she is not economically
disadvantaged and the individual seeks DOT review of the decision), the
personal financial information would have to be provided to DOT as part
of the administrative record. The Department would treat the information
as confidential.

Creating a clear and definitive standard for determining when an
individual has overcome the economic disadvantage that the DBE program
is meant to remedy has long been a contentious issue. In 1992, the
Department proposed to use a personal net worth standard of \$750,000 to
rebut the presumption of disadvantage for members of the designated
groups. In 1997, the Department proposed a similar idea, though rather
than use the \$750,000 figure, the SNPRM asked the public for input on
what the specific amount should be. Finally, as discussed in detail
above, the issue of ensuring that wealthy individuals do not participate
in the DBE program was a central part of the 1998 Congressional debate.

Public comment on both proposals was sharply divided. Roughly equal
numbers of commenters thought \$750,000 was too high as thought it was
too low. Commenters proposed figures ranging from \$250,000 to \$2
million. Others supported the \$750,000 level, which is based on the
SBA\'s threshold for participation in the SDB program (it is also the
retention level for the 8(a) program). One theme running through a
number of comments was that recipients should have discretion to vary
the threshold depending on such factors as the local economy or the type
of firms involved. Some comments opposed the idea of a PNW threshold
altogether or suggested an alternative approach (e.g., based on Census
data about the distribution of wealth).

Others commented that rebutting the presumption did not go far enough,
pointing out that the only way to ensure that wealthy people did not
participate in the program was for the threshold to act as a complete
bar on the eligibility of an individual to participate in the program.
Congress appears to share this concern. While they differed on the
effectiveness of past DOT efforts, both proponents and opponents of the
program agreed that preventing the participation of wealthy individuals
was central to ensuring the constitutionality of the DBE program.

The Department agrees and, in light of the comments and the intervening
TEA-21 debate, is adopting the clearest and most effective standard
available: when an individual\'s personal net worth exceeds the
\$750,000 threshold, the presumption of economic disadvantage is
conclusively rebutted and the individual is no longer eligible to
participate in the DBE program. The Department is using the \$750,000
figure because it is a well established and effective part of the SBA
programs and is a reasonable middle ground in view of the wide range of
comments calling for higher or lower thresholds. Using a figure any
lower, as some commenters noted, could penalize success and make growth
for DBEs difficult (since, for example, banks and insurers frequently
look to the personal assets of small business owners in making lending
and bonding decisions). Operating the threshold as a cap on eligibility
for all applicants also serves to treat men and women, minorities and
non-minorities equally.

When a recipient determines, from the PNW statement and supporting
information, that an individual\'s personal net worth exceeds \$750,000,
the recipient must deem the individual\'s presumption of economic
disadvantage to have been conclusively rebutted. No hearing or other
proceeding is called for in this case. When this happens in the course
of an application for DBE eligibility, the certification process for the
applicant firm stops, unless other socially and economically
disadvantaged owners can account for the required 51 percent ownership
and control. A recipient cannot count the participation of the owner
whose presumption of economic disadvantage has been conclusively
rebutted toward the ownership and control requirements for DBE
eligibility.

There may be other situations in which a recipient has a reasonable
basis (e.g., from information in its own files, as the result of a
complaint from a third party) for believing that an individual who
benefits from the statutory presumptions is not really socially and/or
economically disadvantaged. In these cases, the recipient may begin a
proceeding to rebut the presumptions. For example, if a recipient had
reason to believe that the owner of a currently-certified firm had
accumulated personal assets well in excess of \$750,000, it might begin
such a proceeding. The recipient has the burden of proving, by a
preponderance of evidence, that the individual is not disadvantaged.
However, the recipient may require the individual to produce relevant
information.

It is possible that, at some time in the future, SBA may consider
changing the \$750,000 cap amount. The Department anticipates working
closely with SBA on any such matter and seeking comment on any potential
changes to this rule that would be coordinated with changes SBA proposes
for Federal procurement programs in this area.

Under part 23, recipients had to accept 8(a)-certified firms (except for
those who exceeded the statutory gross receipts cap). The SNPRM proposed
some modifications of this requirement. Recipients were concerned that
in some situations information used for 8(a) certification could be
inaccurate or out of date. They noted differences between 8(a) and DBE
certification standards and procedures. They asked for the ability to
look behind 8(a) certifications and make their own certification
decisions.

In response to these comments, the Department is providing greater
discretion to recipients. Under part 26, recipients can treat 8(a)
certifications as they do certifications made by other DOT recipients. A
recipient can accept such a certification in lieu of conducting its own
certification process or it can require the firm to go through part or
all of its own application process. Because SBA is beginning a
certification process for firms participating in the small and
disadvantaged business (SDB) program, we will treat certified SDB firms
in the same way. If an SDB firm is certified by SBA or an organization
recognized by SBA as a certifying authority, a recipient may accept this
certification instead of doing its own certification. (This does not
apply to firms whose participation in the SDB program is based on a
self-certification.) We note that this way of handling SBA program
certifications is in the context of the development by DOT recipients of
uniform certification programs. If a unified certification program (UCP)
accepts a firm\'s 8(a) or 8(d) certification, then the firm will be
certified for all DOT recipients in the state.

People who are not presumed socially and economically disadvantaged can
still apply for DBE certification. To do so, they must demonstrate to
the recipient that they are disadvantaged as individuals. Using the
guidance provided in Appendix E, recipients must make case-by-case
decisions concerning such applications. It should be emphasized that the
DBE program is a disadvantage-based program, not one limited to members
of certain designated groups. For this reason, recipients must take
these applications seriously and consider them fairly. The applicant has
the burden of proof concerning disadvantage, however.

## 

## §26.69 What rules govern determinations of ownership?

Commenters on the ownership provisions of the SNPRM addressed a variety
of points. Most commenters agreed that the general burden of proof on
applicants should be the preponderance of the evidence. A few commenters
thought that this burden should also apply in situations where a firm
was formerly owned by a non-disadvantaged individual. For some of these
situations, the SNPRM proposed the higher \"clear and convincing
evidence\" standard, because of the heightened opportunities for abuse
involved. The Department believes this safeguard is necessary, and we
will retain the higher standard in these situations.

Commenters asked for more guidance in evaluating claims that a
contribution of expertise from disadvantaged owners should count toward
the required 51 percent ownership. They cited the potential for abuse.
The Department believes that there may be circumstances in which
expertise can be legitimately counted toward the ownership requirement.
For example, suppose someone with a great deal of expertise in a
computer-related field, without whom the success of his or her high-tech
start-up business would not be feasible, receives substantial capital
from a non-disadvantaged source.

We have modified the final rule provision to reflect a number of
considerations. Situations in which expertise must be recognized for
this purpose are limited. The expertise must be outstanding and in a
specialized field: everyday experience in administration, construction,
or a professional field is unlikely to meet this test. (This is not a
\"sweat equity\" provision.) We believe that it is fair that the
critical expertise of this individual be recognized in terms of the
ownership determination. At the same time, the individual must have a
significant financial stake in the company. This program focuses on
entrepreneurial activity, not simply expertise. While we will not
designate a specific percentage of ownership that such an individual
must have, entrepreneurship without a reasonable degree financial risk
is inconceivable.

The SNPRM\'s proposals on how to treat assets obtained through
inheritance, divorce, and gifts were somewhat controversial. Most
comments agreed with the proposal that assets acquired through death or
divorce be counted. One commenter objected to the provision that such
assets always be counted, saying that the owner should have to make an
additional demonstration that it truly owned the assets before the
recipient counted them. We do not see the point of such an additional
showing. If a white male business owner dies, and his widow inherits the
business, the assets are clearly hers, and the deceased husband will
play no further role in operating the firm. Likewise, assets a woman
obtains through a divorce settlement are unquestionably hers. Absent a
term of a divorce settlement or decree that limits the customary
incidents of ownership of the assets or business (a contingency for
which the proposed provision provided), there is no problem for which an
additional showing of some sort by the owner would be a useful remedy.

A majority of comments on the issue of gifts opposed the SNPRM proposal,
saying that gifts should not be counted toward ownership at all. The
main reason was that allowing gifts would make it easier for fronts to
infiltrate the program. Some comments also had a flavor of opposition to
counting what commenters saw as unearned assets. The Department
understands these concerns. If a non-disadvantaged individual who
provides a gift is no longer connected with the business, or a
disadvantaged individual makes the gift, the issue of the firm being a
potential front is much reduced. Where a non-disadvantaged individual
makes a gift and remains involved with the business, the concern about
potential fronts is greater.

For this reason, the SNPRM erected a presumption that assets acquired by
gift in this situation would not count. The applicant could overcome
this presumption only by showing, through clear and convincing evidence
\-- a high standard of proof \-- that the transfer was not for the
purpose of gaining DBE certification and that the disadvantaged owner
really controls the company. This provides effective safeguards against
fraud, without going to the unfair extreme of creating a conclusive
presumption that all gifts are illegitimate. Also, for purposes of
ownership, all assets are created equal. If the money that one invests
in a company is really one\'s own, it does not matter whether it comes
from the sweat of one\'s brow, a bank loan, a gift or inheritance, or
hitting the lottery. As long as there are sufficient safeguards in place
to protect against fronts \-- and we believe the rule provides them \--
the origin of the assets is unimportant. We are adopting the proposed
provisions without change.

Commenters were divided about how to handle marital property, especially
in community property states. Some commenters believed that such assets
should not be counted at all. This was based, in part, on the concern
that allowing such assets to be counted could make it difficult to
screen out interspousal gifts designed to set up fronts, even if
irrevocable transfers of assets were made. Other commenters said they
thought the proposal was appropriate, and some of these thought the
requirement for irrevocable transfers was unfair.

The Department is adopting the proposed language. In a community
property state, or elsewhere where property is jointly held between
spouses, the wife has a legal interest in a portion of the property. It
is really hers. It would be inappropriate to treat this genuine property
interest as if it did not exist for purposes of DBE ownership.

To ensure the integrity of the program, it is necessary to put
safeguards in place. The regulation does so. First, recipients would not
count more assets toward DBE ownership than state law treats as
belonging to the wife (the final rule provision adds language to this
effect). Second, the irrevocable transfer requirement prevents the
husband from being in a position to continue to claim any ownership
rights in the assets. If an irrevocable transfer of assets constitutes a
gift from a non-disadvantaged spouse who remains involved in the
business, then the presumption/clear and convincing evidence mechanism
discussed above for gifts would apply to the transaction. If recipients
in community property states wanted to establish a mechanism for
allocating assets between spouses that was consistent with state law,
but did not require court involvement or other more formal procedures,
they could propose doing so as part of their DBE programs, subject to
operating administration approval.

Most commenters supported the SNPRM\'s proposal concerning trusts,
particularly the distinction drawn between revocable living and
irrevocable trusts. One commenter favored counting revocable living
trusts when the same disadvantaged individual is both the grantor and
beneficiary. The Department believes there is merit in making this
exception. If the same disadvantaged individual is grantor, beneficiary,
and trustee (i.e., an individual puts his own money in a revocable
living trust for tax planning or other legitimate purposes and he alone
plays the roles of grantor, beneficiary, and trustee), the situation
seems indistinguishable for DBE program purposes from the situation of
the same individual controlling his assets without the trust. In all
other situations, revocable living trusts would not count.

Some comments asked for clarification of the 51 percent ownership
requirement, a subject on which the Department has received a number of
questions over the years. The Department has clarified this requirement,
with respect to corporations, by stating that socially and economically
disadvantaged individuals must own 51 percent of each class of voting
stock of a corporation, as well as 51 percent of the aggregate stock. A
similar point applies to partnerships and limited liability companies.
This latter type of company was not mentioned in the SNPRM, but a
commenter specifically requested clarification concerning it. (We have
also noted, in §26.83, that limited liability companies must report
changes in management responsibility to recipients. This is intended to
include situations where management responsibility is rotated among
members.) These clarifications are consistent with SBA regulations.

There are some ownership issues (e.g., concerning stock options and
distribution of dividends) that SBA addresses in some detail in its
regulations (see 13 CFR §124.105 (c), (e), (f)) that were not the
subject of comments to the DOT SNPRM. These issues have not been
prominent in DOT certification practice, to the best of our knowledge,
so we are not adding them to the rule. However, we would use the SBA
provisions as guidance in the event such issues arise.

§26.71 What rules govern determinations concerning control?

Commenters generally agreed with the proposed provisions concerning
expertise and delegation of responsibilities, 51 percent control of
voting stock, and differences in remuneration. A few commenters
expressed concern about having to make judgments concerning expertise.
However, this expertise standard, as a matter of interpretation, has
been part of the DBE program since the mid-1980s. We do not believe that
articulating it in the regulatory text should cause problems, and we
believe it is a very reasonable and understandable approach to expertise
issues. The provision concerning 51 percent ownership of voting stock,
as discussed above, has been relocated in the ownership section of the
rule. The Department has added three useful clarifications of the
general requirement that disadvantaged owners must control the firm
(e.g., by serving as president or CEO, controlling a corporate board).
These clarifications are based on SBA\'s regulations (see 13 CFR
§124.106(a)(2), (b), (d)(1)). The Department intends to use other
material in 13 CFR §124.106 as guidance on control matters, when
applicable. Otherwise, the Department is adopting these provisions as
proposed.

There was some concern about the proposal concerning licensing. Some
recipients thought that it would be better to require a license as proof
of control in the case of all licensed occupations. We do not think it
is justifiable for the DBE program to require more than state law does.
If state law allows someone to run a certain type of business (e.g.,
electrical contractors, engineers) without personally having a license
in that occupation, then we do not think it is appropriate for the
recipient to refuse to consider that someone without a license may be
able to control the business. The rule is very explicit in saying that
the recipient can consider the presence or absence of a license in
determining whether someone really has sufficient ability to control a
firm.

Family-owned firms have long been a concern in the program. The SNPRM
provided explicitly that if the threads of control in a family-run
business cannot be disentangled, such that the recipient can
specifically find that a woman or other disadvantaged individual
independently controls the business, the recipient may not certify the
firm. A business that is controlled by the family as a group, as
distinct from controlled individually by disadvantaged individuals, is
not eligible. Notwithstanding this provision, a few recipients commented
that certifying any businesses in which non-disadvantaged family members
participate would open the program to fronts. We do not agree.
Non-disadvantaged individuals can participate in any DBE firm, as long
as disadvantaged individuals control the firm. It is not fair and does
not achieve any reasonable program objective to say that an unrelated
white male may perform functions in a DBE while the owner\'s brother may
never do so.

Commenters generally supported the provision calling for recipients to
certify firms only for types of work in which disadvantaged owners had
the ability to control the firm\'s operations. One commenter suggested
that recipients, while not requiring recertification of firms seeking to
perform additional types of work as DBEs (e.g., work in other than their
primary industrial classification), should have to approve a written
request from firms in this position. We do believe it is necessary for
recipients to verify that disadvantaged owners can control work in an
additional area, and we have added language to this effect. Recipients
will have discretion about how to administer this verification process.

Commenters asked for additional clarification about the eligibility of
people who work only part-time in a firm. We have done so by adding
examples of situations that do not lead to eligibility (part-time
involvement in a full-time firm and absentee ownership) and a situation
that may, depending on circumstances, be compatible with eligibility
(running a part-time firm all the time it is operating). It should be
noted that this provision does not preclude someone running a full-time
firm from having outside employment. Outside employment is incompatible
with eligibility only when it interferes with the individual\'s ability
to control the DBE firm on a full-time basis.

One commenter brought to the Department\'s attention the situation of
DBEs who use \"employee leasing companies.\" According to the commenter,
employee leasing companies fill a number of administrative functions for
employers, such as payroll, personnel, forwarding of taxes to
governmental entities, and drug testing. Typically, the employees of the
underlying firm are transferred to the payroll of the employee leasing
firm, which in turn leases them back to the underlying employer. The
underlying employer continues to hire, fire, train, assign, direct,
control etc. the employees with respect their on-the-job duties. While
the employee leasing firm sends payments to the IRS, Social Security,
and state tax authorities on behalf of the underlying employer, it is
the latter who is remains responsible for paying the taxes.

For practical and legal purposes, the underlying employer retains an
employer-employee relationship with the leased employees. The employee
leasing company does not get involved in the operations of the
underlying employer. In this situation, the use of an employee leasing
company by a DBE does not preclude the DBE from meeting the control
requirements of this rule. Nor does the employee leasing company become
an affiliate of the DBE for business size purposes. Case-by-case
judgement, of course, remains necessary. Should an employee leasing
company in fact exercise control over the on-the-job activities of
employees of the DBE, then the ability of the DBE to meet control
requirements would be compromised.

One commenter said, as a general matter, that independence and control
should be considered separately. We view independence as an aspect of
control: if a firm is not independent of some other business, then the
other firm, not the disadvantaged owners, exercise control. While
independence is an aspect of control that recipients must review, we do
not see any benefit in separating consideration of the two concepts.

A recent court decision (Jack Wood Construction Co, Inc. v. U.S.
Department of Transportation, 12 F.Supp.2d 25 (D.D.C., 1998)) overturned
a DOT Office of Civil Rights certification appeal decision that upheld a
denial of certification based on lack of control. The court, reading
existing part 23 closely, said that a non-disadvantaged individual who
was an employee, but not an owner, of a firm could disproportionately
control the affairs of a firm without making it ineligible. The court
also said that the existing rule language did not make it necessary for
a disadvantaged owner to have both technical and managerial competence
to control a firm. Part 26 solves both problems that the court found to
exist in part 23\'s control provisions (see §26.71(e)-(g)).

## 

## §26.73 What are other rules affecting certification?

There were relatively few comments on this section. One commenter
disagreed with the proposal to continue the provision that a firm owned
by a DBE firm, rather than by socially and economically disadvantaged
individuals, was not eligible. The argument against this provision, as
we understand it, is that precluding a DBE firm from being owned by, for
example, a holding company that is in turn owned by disadvantaged
individuals would deny those individuals a financing and tax planning
tool available to other businesses.

This argument has merit in some circumstances. The purpose of the DBE
program is to help create a level playing field for DBEs. It would be
inconsistent with the program\'s intent to deny DBEs a financial tool
that is generally available to other businesses. The Department will
allow this exception. Recipients must be careful, however, to ensure
that certifying a firm under this exception does not have the effect of
allowing the firm, or its parent company, to evade any of the
requirements or restrictions of the certification process. The
arrangement must be consistent with local business practices and must
not have the effect of diluting actual ownership by disadvantaged
individuals below the 51 percent requirement. All other certification
requirements, including control by disadvantaged individuals and size
limits, would continue to apply.

Another commenter suggested a firm should not be certified as a DBE if
its owners have interests in non-DBE businesses. We believe that a per
se rule to this effect would be too draconian. If owners of a DBE \--
whether disadvantaged individuals or not \-- also have interests in
other businesses, the recipient can look at the relationships among the
businesses to determine if the DBE is really independent.

One commenter opposed basing certification on the present status of
firms, seeking discretion to deny certification based on the history of
the firm. We believe there is no rational or legal basis for denying
certification to a firm on the basis of what it was in the past. Is it a
small business presently owned and controlled by socially and
economically disadvantaged individuals? If so, it would be contrary to
the statute, and to the intent of the program, to deny certification
because at some time \-- perhaps years \-- in the past, it was not owned
and controlled by such individuals. The rule specifies that recipients
may consider whether a firm has engaged in a pattern of conduct evincing
an intent to evade or subvert the program.

The final provision of this section concerns firms owned by Alaska
Native Corporations (ANCs), Indian tribes, and Native Hawaiian
Organizations. Like the NPRM, it provides that firms owned by these
entities can be eligible DBEs, even though their ownership does not
reside, as such, in disadvantaged individuals. These firms must meet the
size standards applicable to other firms, including affiliation (lest
large combinations of tribal or ANC-owned corporations put other DBEs at
a strong competitive disadvantage). Also, they must be controlled by
socially and economically disadvantaged individuals. For example, if a
tribe or ANC owns a company, but its daily business operations are
controlled by a non-disadvantaged white male, the firm would not be
eligible.

Commenters pointed us to the following provision of the Alaska Native
Claims Settlement Act (ANCSA):

\(e\) Minority and economically disadvantaged status

\(1\) For all purposes of Federal law, a Native Corporation shall be
considered to be a corporation owned and controlled by Natives and a
minority and economically disadvantaged business enterprise if the
Settlement Common Stock of the corporation and other stock of the
corporation held by holders of Settlement Common Stock and by Natives
and descendants of Natives, represents a majority of both the total
equity of the corporation and the total voting power of the corporation
for the purposes of electing directors.

\(2\) For all purposes of Federal law, direct and indirect subsidiary
corporations, joint ventures, and partnerships of a Native Corporation
qualifying pursuant to paragraph (1) shall be considered to be entities
owned and controlled by Natives and a minority and economically
disadvantaged business enterprise if the shares of stock or other units
of ownership interest in any such entity held by such Native Corporation
and by the holders of its Settlement Common Stock represent a majority
of both -

\(A\) the total equity of the subsidiary corporation, joint venture, or
partnership; and

\(B\) the total voting power of the subsidiary corporation, joint
venture, or partnership for the purpose of electing directors, the
general partner, or principal officers. (43 U.S.C. 1626(e)).

The question for the Department is whether, reading this language
together with the language of the Department\'s DBE statutes, DOT must
alter these provisions.

The DOT DBE statute (TEA-21 version) provides as follows:

\(b\) Disadvantaged Business Enterprises.\--

\(1\) General rule.\--Except to the extent that the Secretary

determines otherwise, not less than 10 percent of the amounts

made available for any program under titles I, III, and V of

this Act shall be expended with small business concerns owned

and controlled by socially and economically disadvantaged

individuals.

\(2\) Definitions.\--In this subsection, the following

definitions apply:

\(A\) Small business concern.\--The term \`\`small business

concern\'\' has the meaning such term has under section 3 of

the Small Business Act (15 U.S.C. 632); except that such term

shall not include any concern or group of concerns controlled

by the same socially and economically disadvantaged

individual or individuals which has average annual gross

receipts over the preceding 3 fiscal years in excess of

\$16,600,000, as adjusted by the Secretary for inflation.

\(B\) Socially and economically disadvantaged individuals.\--

The term \`\`socially and economically disadvantaged

individuals\'\' has the meaning such term has under section

8(d) of the Small Business Act (15 U.S.C. 637(d)) and

relevant subcontracting regulations promulgated pursuant

thereto; except that women shall be presumed to be socially

and economically disadvantaged individuals for purposes of

this subsection.

\* \* \* \*

\(4\) Uniform certification.\--The Secretary shall establish

minimum uniform criteria for State governments to use in

certifying whether a concern qualifies for purposes of this

subsection. Such minimum uniform criteria shall include but

not be limited to on-site visits, personal interviews,

licenses, analysis of stock ownership, listing of

equipment, analysis of bonding capacity, listing of work

completed, resume of principal owners, financial capacity,

and type of work preferred.

While the language §1626(e) is broad, the terms used in the two statutes
are not identical. Section 1626(e) refers to \"minority and economically
disadvantaged business enterprise\[s\]\", while the Department\'s
statutes refer to \"small business concerns owned and controlled by
socially and economically disadvantaged individuals.\" Requirements
applicable to the former need not necessarily apply to the latter.

The legislative history of §1626(e) lends support to distinguishing the
two statutes. The following excerpt from House Report 102-673 suggests
that the intent of Congress in enacting this provision was to focus on
direct Federal procurement programs:

\[The statute\] amends section \[1626(e)\] of ANCSA to clarify that
Alaska Native Corporations are minority and economically disadvantaged
business enterprises for the purposes of implementing the SBA
programs\...This section would further clarify that Alaska Native
Corporations and their subsidiary companies are minority and
economically disadvantaged business enterprises for purposes of
qualifying for participation in federal contracting and subcontracting
programs, the largest of which include the SBA 8(a) program and the
Department of Defense Small and Disadvantaged Business Program. These
programs were established to increase the participation of certain
segments of the population that have historically been denied access to
Federal procurement activities. While this section eliminates the need
for Alaska Native Corporations or their subsidiaries to prove their
\"economic\" disadvantage the corporations would still be required to
meet size requirements as small businesses. This will continue to be
determined on a case-by-case basis. (Id. at 19.)

This statute, in other words, was meant to apply to direct Federal
procurement programs like the 8(a) program or the DOD SBD program,
rather than a program involving state and local procurements reimbursed
by DOT financial assistance.

The TEA-21 program is a more recent, more specific statute governing DOT
recipients\' programs. In contrast, the older, more general
section1626(e) evinces no specific intent to govern the DOT DBE program.
There is no evidence that Congress, in enacting section 1626(e), had any
awareness of or intent to alter the DOT DBE program.

A number of provisions of the TEA-21 statute suggest that Congress
intended to impose specific requirements for the DOT program, without
regard to other more general statutory references. For example, the
\$16.6 million size cap and the uniform certification requirements
suggest that Congress wanted the eligibility for the DOT program to be
determined in very specific ways, giving no hint that they intended
these specific requirements to be overridden in the case of ANCs.

The Department concludes that section 1626(e) is distinguishable from
the DOT DBE statutes, and that the latter govern the implementation of
the DBE program. The Department is not compelled to alter its approach
to certification in the case of ANCs.

## 

## §26.81 What are the requirements for Unified Certification Programs?

As was the case following the 1992 NPRM, a significant majority of the
large number of commenters addressing the issue favored implementing the
proposed UCP requirement, which the final rule retains largely as
proposed. A few commenters suggested that airports be included in UCPs
for concession purposes as well as for FAA-assisted contracting, because
there are not any significant differences between the certification
standards for concessionaires and contractors (the only exception is
size standards, which are easy to apply). We agree, and the final rule
does not make an exception for concessions (regardless of the CFR part
in which the concessions provisions appear). Some commenters wanted
either a longer or shorter implementation period than the SNPRM
proposed, but we believe the proposal is a good middle ground between
the goal of establishing UCPs as soon as possible and the time
recipients will need to resolve organizational, operational, and funding
issues.

There were a number of comments and questions about details of the UCP
provision. One recipient wondered whether a UCP may or must be separate
from a recipient and what the legal liability implications of various
arrangements might be. As far as the rule is concerned, a UCP can either
be situated within a recipient\'s organization or elsewhere. Recipients
can take state law concerning liability into account in determining how
best to structure a UCP in their state. Another recipient asked if
existing UCPs could be exempted from submitting plans for approval.
Rather than being exempted, we believe that it would be appropriate for
such UCPs to submit their existing plans. They would have to change them
only to the extent needed to conform to the requirements of the rule.

Some commenters asked about the relationship of UCPs to recipients. For
example, should a recipient be able certify a firm that the UCP had not
certified (or whose application the UCP had not yet acted on) or refuse
to recognize the UCP certification of a firm the recipient did not think
should be eligible? In both cases, the answer is no. Allowing this kind
of discretion would fatally undermine the \"one-stop shopping\"
rationale of UCPs. However, a recipient could, like any other party,
initiate a third-party challenge to a UCP certification action, the
result of which could be appealed to DOT.

We would emphasize that the form of the UCP is a matter for negotiation
among DOT recipients in a state, and this regulation does not prescribe
its organization. A number of models are available, including single
state agencies, consortia of recipients that hire a contractor or share
the workload among themselves, mandatory reciprocity among recipients,
etc. It might be conceivable for a UCP to be a \"virtual entity\" that
is not resident in any particular location. What matters is that the UCP
meet the functional requirements of this rule and actually provide
one-stop shopping service to applicants. The final rule adds a provision
to clarify that UCPs \-- even when not part of a recipient\'s own
organization \-- must comply with all provisions of this rule concerning
certification and nondiscrimination. Recipients cannot use a UCP that
does not do so. For example, if a UCP fails to comply with part 26
certification standards and procedures, or discriminates against certain
applicants, the Secretary reserves the right to direct recipients not to
use the UCP, effectively \"decertifying\" the UCP for purposes of
DOT-assisted programs. In this case, which we hope will never happen,
the Department would work with recipients in the state on interim
measures and replacement of the erring UCP.

The SNPRM proposed \"pre-certification.\" That is, the UCP would have to
certify a firm before the firm became eligible to participate as a DBE
in a contract. The application could not be submitted as a last-minute
request in connection with a procurement action, which could lead to
hasty and inaccurate certification decisions. Commenters were divided on
this issue, with most expressing doubts about the concept. The
Department believes that avoiding last-minute (and especially post-bid
opening) applications is important to an orderly and accurate
certification process, so we are retaining this requirement. However, we
are modifying the timing of the requirement, by requiring that
certification take place before the bid/offer due date, rather than
before the issuance of the solicitation. The certification action must
be completed by this date in order for the firm\'s proposed work on the
particular contract to be credited toward DBE goals. It is not enough
for the application to have been submitted by the deadline.

The SNPRM proposed that, once UCPs were up and running, a UCP in State A
would not have to process an application from a firm whose principal
place of business was in State B unless State B had first certified the
firm. Most commenters supported this proposal, one noting that it would
help eliminate problems of having to make costly out-of-state site
visits. It would also potentially reduce confusion caused by multiple,
and potentially conflicting, outcomes in certification decisions. One
commenter was concerned that this provision would lead to \"free-rider\"
problems among recipients. The Department will be alert to this
possibility, but we do not see it as precluding going forward with this
provision. We have added a provision making explicit that when State B
has certified a firm, it would have an obligation to send copies of the
information and documents it had on the firm to State A when the firm
applied there.

All save one of the comments on mandatory reciprocity opposed the
concept. That is, commenters favored UCPs being able to choose whether
or not to accept certification decisions made by other UCPs. The
Department urges UCPs to band together in multistate or regional
alliances, but we believe that it is best to leave reciprocity
discretionary. Mandatory reciprocity, even among UCPs, could lead to
forum shopping problems.

UCPs will have a common directory, which will have to be maintained in
electronic form (i.e., on the internet). One commenter suggested that
this electronic directory be updated daily. We think this comment has
merit, and the final rule will require recipients to keep a running
update of the electronic directory, making changes as they occur.

## 

## §26.83 What procedures do recipients follow in making certification decisions?

Commenters generally supported this certification process section, and
we are adopting it with only minor changes. Commenters suggested that
provision for electronic filing of applications be discretionary rather
than mandatory. We agree, and the final rule does not mandate
development of electronic filing systems. Some commenters remained
concerned about site visits and asked for more guidance on the subject.
We intend to provide future guidance on this subject.

Most commenters who addressed the subject favored the development of a
mandatory, nationwide, standard DOT application form for DBE
eligibility. A number of commenters supplied the forms they use as
examples. We believe that this is a good idea, which will help avoid
confusion among applicants in a nationwide program. However, we have not
yet developed a form for this purpose. The final rule reserves a
requirement for recipients to use a uniform form. We intend to work on
developing such a form during the next year, in consultation with
recipients and applicants. Meanwhile, recipients can continue to use
existing forms, modified as necessary to conform to the requirements of
this part.

The SNPRM said recipients could charge a reasonable fee to applicants. A
majority of commenters, both recipients and DBEs, opposed the idea of a
fee or said it should be capped at a low figure. Fees are not mandatory,
and they would be limited, under the final rule, to modest application
fees (not intended to recover the cost of the certification process).
However, if a recipient wants to charge a modest application fee, we do
not see that it is inconsistent with the nature of the program to allow
it to do so. Fee waivers would be required if necessary (i.e., a firm
who showed they could not afford it). All fees would have to be approved
by the concerned OA as part of the DBE program approval process, which
would preclude excessive fees.

Given that reciprocity is discretionary among recipients, we thought it
would be useful to spell out the options a recipient has when presented
by an applicant with the information that another recipient has
certified the firm. The recipient may accept the other recipient\'s
certification without any additional procedures. The recipient can make
an independent decision based, in whole or in part, on the information
developed by the first recipient (e.g., application forms, supporting
documents, reports of site visits). The recipient may make the applicant
start an entire new application process. The choice among these options
is up to the recipient. (As noted above, UCPs will have these same
options.)

Most commenters on the subject supported the three-year term for
certifications. Some wanted a shorter or longer period. We believe the
three-year term is appropriate, particularly given the safeguards of
annual and update affidavits that the rule provides. In response to a
few comments that recipients should have longer than the proposed 21
days after a change in circumstances to submit an update affidavit, we
have extended the period to 30 days. If recipients want to have a longer
term in their DBE programs than the three years provided in the rule,
they can do so, with the Department\'s approval, as part of their DBE
programs.

A few recipients said that the 90-day period for making decisions on
applications (with the possibility of a 60-day extension) was too short.
Particularly since this clock does not begin ticking until a complete
application, including necessary supporting documentation, is received
from the applicant, we do not think this time frame is unreasonable. We
would urge recipients and applicants to work together to resolve minor
errors or data gaps during the assembly of the package, before this time
period begins to run.

##  

## §26.85 What rules govern recipients\' denials of initial requests for certification?

A modest number of commenters addressed this section, most of whom
supported it as proposed. One commenter noted that it was appropriate to
permit minor errors to be corrected in an application without invoking
the 12-month reapplication waiting period. We agree, and we urge
recipients to follow such a policy. Most commenters thought 12 months
was a good length for a reapplication period. A few opposed the idea of
a waiting period or thought a shorter period was appropriate. The rule
keeps 12 months, but permits recipients to seek DOT approval, through
the DBE program review process, for shorter periods.

## 

## §26.87 What procedures does a recipient use to remove a DBE\'s eligibility?

As long ago as 1983, the Department (in the preamble to the first DBE
rule) strongly urged recipients to use appropriate due process
procedures for decertification actions. Recipient procedures are still
inconsistent and, in some cases, inadequate, in this respect. Quite
recently, for example, litigation forced one recipient to rescind a
decertification of an apparently ineligible firm because it had failed
to provide administrative due process. We believe that proper due
process procedures are crucial to maintaining the integrity of this
program. The majority of commenters agreed, though a number of
commenters had concerns about particular provisions of the SNPRM
proposal.

Some recipients, for example, thought separation of functions was an
unnecessary requirement, or too burdensome, particularly for small
recipients. We believe separation of functions is essential: there
cannot be a fair proceeding if the same party acts as prosecutor and
judge. We believe that the burdens are modest, particularly in the
context of state DOTs and statewide UCPs. We acknowledge that for small
recipients, like small airports and transit authorities, small staffs
may create problems in establishing separation of functions (e.g., if
there is only one person in the organization who is knowledgeable about
the DBE program). For this reason, the rule will permit small recipients
to comply with this requirement to the extent feasible until UCPs are in
operation (at which time the UCPs would have to ensure separation of
functions in all such cases). The organizational scheme for providing
separation of functions will be part of each recipient\'s DBE program.
In the case of a small recipient, if the DBE program showed that other
alternatives (e.g., the airport using the transit authority\'s DBE
officer as the decisionmaker in decertification actions, and vice-versa)
were unavailable, the Department could approve something less than ideal
separation of functions for the short term before the UCP becomes
operational. In reviewing certification appeals from such recipients,
the Department would take into account the absence of separation of
functions.

It is very important that the decisionmaker be someone who is familiar
with the DBE certification requirements of this part. The decisionmaker
need not be an administrative law judge or some similar official; a
knowledgeable program official is preferable to an ALJ who lacks
familiarity with the program.

Another aspect of the due process requirements that commenters addressed
was the requirement for a record of the hearing, which some commenters
found to be burdensome. We want to emphasize that, while recipients have
to keep a hearing record (including a verbatim record of the hearing),
they do not need to produce a transcript unless there is an appeal. A
hearing record is essential, because DOT appellate review is a review of
the administrative record.

Some commenters suggested deleting two provisions. One of these allowed
recipients to impose a sort of administrative temporary restraining
order on firms pending a final decertification decision. The other
allowed the effect of a decertification decision to be retroactive to
the date of the complaint. The Department agrees that these two
provisions could lead to unfairness, and so we have deleted them.

## 

## §26.89 What is the process for certification appeals to the Department of Transportation?

Several commenters addressed this section, supporting it with a few
requests for modification. Some commenters wanted a time limit for DOT
consideration of appeals. We have added a provision saying that if DOT
takes longer than 180 days from the time we receive a complete package,
we will write everyone concerned with an explanation of the delay and a
new target date for completion. Some commenters thought a different time
limit for appeals to the Department (e.g., 180 days) would be
beneficial. We believe that 90 days is enough time for someone to decide
whether a decision of a recipient or UCP should be appealed and write a
letter to DOT. This time period starts to run from the date of the final
recipient decision on the matter. DOT can accept late-filed appeals on
the basis of a showing of good cause (e.g., factors beyond the control
of the appellant). Some recipients thought that more time might be
necessary to compile an administrative record, so we have permitted DOT
to grant extensions for good cause. Generally, however, the Department
will adhere to the 90-day time period in order to prevent delays in the
appeals process. As a clarification, we have added a provision that all
recipients involved must provide administrative record material to DOT
when there is an appeal. For example, State A has relied on the
information gathered by State B to certify Firm X. A competitor files an
ineligibility complaint with State A, which decertifies the firm. Firm X
appeals to the Department. Both State A and State B must provide their
administrative record materials to DOT for purposes of the appeal. (The
material would be provided the to Departmental Office of Civil Rights.)

## 

## §26.91 What actions do recipients take following DOT certification appeal

decisions?

There were few comments concerning this section. Some comments suggested
DOT appeal decisions should have mandatory nationwide effect. That is if
DOT upheld the decertification action of Recipient A, Recipients B, C,
D, E, etc. should automatically decertify the firm. This approach is
inconsistent with the administrative review of the record approach this
rule takes for appeals to DOT.

A DOT decision that A\'s decertification was supported by substantial
evidence is not a DOT decision that the firm is ineligible. It is only a
finding that A had enough evidence to decertify the firm. Other results
might also be supported by substantial evidence. Nevertheless, when the
Department takes action on an appeal, other recipients would be well
advised to review their own decisions to see if any new proceedings are
appropriate. One comment suggested the Department should explain a
refusal to accept a complaint. This is already the Department\'s
practice.

The SNPRM included a proposal to permit direct third-party complaints to
the Department. There were few comments on this proposal, which would
have continued an existing DOT practice. Some of these comments
suggested dropping this provision, saying it made more sense to have all
certification matters handled at the recipient level in the first
instance. Others raised procedural issues (e.g., the possibility of the
Department holding de novo hearings). The Department has reconsidered
this proposal, and we have decided to delete it. We believe it will
avoid administrative confusion and simplify procedures for everyone if
all certification actions begin at the recipient level, with DOT
appellate review on the administrative record.

SUBPART F - COMPLIANCE AND ENFORCEMENT

There were very few comments concerning this subpart, which we are
adopting as proposed. One section has been added to reflect language in
TEA-21 that prohibits sanctions against recipients for noncompliance in
situations where compliance is precluded by a final Federal court order
finding the program unconstitutional.

DBE PARTICIPATION IN AIRPORT CONCESSIONS

The Department proposed a number of changes to its airport concessions
DBE program rule in the 1997 SNPRM. We received a substantial number of
comments on these proposals. The Department is continuing to work on its
responses to these comments, as well as on refinements of the rule to
ensure that it is narrowly tailored. This work is not complete. Rather
than postpone issuance of the rest of the rule pending completion of
this work, we are not issuing final concessions provisions at this time.
The existing concessions provisions of 49 CFR part 23 will remain in
place pending completion of the revised rule.

REGULATORY ANALYSES AND NOTICES

Executive Order 12866

This rule is a significant rule under Executive Order 12866, because of
the substantial public interest concerning and policy importance of
programs to ensure nondiscrimination in Federally-assisted contracting.
It also affects a wide variety of parties, including recipients in three
important DOT financial assistance programs and the DBE and non-DBE
contractors that work for them. It has been reviewed by the Office of
Management and Budget. It is also a significant rule for purposes of the
Department\'s Regulatory Policies and Procedures.

We do not believe that the rule will have significant economic impacts,
however. In evaluating the potential economic impact of this rule, we
begin by noting that it does not create a new program. It simply revises
the rule governing an existing program. The economic impacts of the DBE
program are created by the existing regulation and the statutes that
mandate it, not by these revisions. The changes that we propose in this
program are likely to have some positive economic impacts. For example,
\"one-stop shopping\" and clearer standards in certification are likely
to reduce costs for small businesses applying for DBE certification, as
well as reducing administrative burdens on recipients.

The rule\'s \"narrow tailoring\" changes are likely to be neutral in
terms of their overall economic impact. These could have some
distributive impacts (e.g., if the proposed goal-setting mechanism
results in changes in DBE goals, a different mix of firms may work on
recipients\' contracts), but there would probably not be net gains or
losses to the economy. There could be some short-term costs to
recipients owing to changes in program administration resulting from
\"narrow tailoring,\" however.

In any event, the economic impacts are quite speculative and appear
nearly impossible to quantify. Comments did not provide, and the
Department does not have, any significant information that would allow
the Department to estimate any such impacts.

Regulatory Flexibility Act Analysis

The DBE program is aimed at improving contracting opportunities for
small businesses owned and controlled by socially and economically
disadvantaged individuals. Virtually all the businesses it affects are
small entities. There is no doubt that a DBE rule always affects a
substantial number of small entities.

This rule, while improving program administration and facilitating DBE
participation (e.g., by making the certification process clearer) and
responding to legal developments, appears essentially cost-neutral with
respect to small entities in general (as noted above, the one-stop
shopping feature is intended to benefit small entities seeking to
participate). It does not impose new burdens or costs on small entities,
compared to the existing rule. It does not affect the total funds or
business opportunities available to small businesses that seek to work
in DOT financial assistance programs. To the extent that the proposals
in this rule (e.g., with respect to changes in the methods used to set
overall goals) lead to different goals than the existing rule, some
small firms may gain, and others lose, business.

There is no data of which the Department is aware that would permit us,
at this time, to measure the distributive effects of the revisions on
various types of small entities. It is likely that any attempt to gauge
these effects would be highly speculative. For this reason, we are not
able to make a quantitative, or even a precise qualitative, estimate of
these effects.

### Paperwork Reduction Act

A number of provisions of this rule involve information collection
requirements subject to the Paperwork Reduction Act of 1995 (PRA). One
of these provisions, concerning a report of DBE achievements that
recipients make to the Department, is the subject of an existing OMB
approval under the PRA.

With one exception, the other information collection requirements of the
rule continue existing part 23 requirements, major elements of the DBE
program that recipients and contractors have been implementing since
1980 or 1983. While the final rule modifies these requirements in some
ways, the Department believes the overall burden of these requirements
will remain the same or shrink. These requirements are the following:

¥ Firms applying for DBE certification must provide information to
recipients to allow them to make eligibility decisions. Currently
certified firms must provide information to recipients to allow them

to review the firms\' continuing eligibility. (After the UCP
requirements of the rule are implemented, the burdens of the
certification provisions should be substantially reduced.)

¥ When contractors bid on prime contracts that have contract goals,

they must document their DBE participation and/or the good faith efforts
they have made to meet the contract goals. (Given the final rule\'s
emphasis on race-neutral measures, it is likely the burden in this area
will be reduced.)

¥ Recipients must maintain a directory of certified DBE firms. (Once
UCPs are implemented, there will be 52 consolidated directories rather
than the hundreds now required, reducing burdens substantially.)

¥ Recipients must calculate overall goals and transmit them to the

Department for approval. (The process of setting overall goals is more
flexible, but may also be more complex, than under part 23. As they make
their transition to the final rule\'s goal-setting process during the
first years of implementation, recipients may temporarily expend more
hours than in the past on information-related tasks.)

¥ Recipients must have a DBE program approved by the Department. (The
final rule include a one-time requirement to submit a revised program
document making changes to conform to the new regulation.)

The Department estimates that these program elements will result in a
total of approximately 1.58 million burden hours to recipients and
contractors combined during the first year of implementation and
approximately 1.47 million annual burden hours thereafter.

The final rule also includes one new information collection element. It
calls for recipients to collect and maintain data concerning both DBE
and non-DBE bidders on DOT-assisted contracts. This information is
intended to assist recipients in making more precise determinations of
the availability of DBEs and the shape of the \"level playing field\"
the maintenance of which is a major objective of the rule. The
Department estimates that this requirement will add 254,595 burden hours
in the first year of implementation. This figure is projected to decline
to 193,261 hours in the second year and to 161,218 hours in the third
and subsequent years.

Both as the result of comments and what the Department learns as it
implements the DBE program under part 26, it is possible for the
Department\'s information needs and the way we meet them to change.
Sometimes the way we collect information can be changed informally
(e.g., by guidance telling recipients they need not repeat information
that does not change significantly from year to year). In other
circumstances, a technical amendment to the regulation may be needed. In
any case, the Department will remain sensitive to situations in which
modifying information collection requirements becomes appropriate.

As required by the PRA, the Department has submitted an information
collection approval request to OMB. Organizations and individuals
desiring to submit comments on information collection requirements
should direct them to the Department\'s docket for this rulemaking. You
may also submit copies of your comments to the Office of Information and
Regulatory Affairs (OIRA), OMB, Room 10235, New Executive Office
Building, Washington, DC, 20503; Attention: Desk Officer for U.S.
Department of Transportation.

The Department considers comments by the public on information
collections for several purposes:

¥ Evaluating the necessity of information collections for the proper
performance of the Department\'s functions, including whether the
information has practical utility.

¥ Evaluating the accuracy of the Department\'s estimate of the burden of
the information collections, including the validity of the methods and
assumptions used.

¥ Enhancing the quality, usefulness, and clarity of the information to
be collected.

¥ Minimizing the burden of the collection of information on respondents,
including through the use of electronic and other methods.

The Department points out that, with the exception of the bid data
collection, all the information collection elements discussed in this
section of the preamble have not only been part of the Department\'s DBE
program for many years, but have also been the subject of extensive
public comment following the 1992 NPRM and 1997 SNPRM. Among the over
900 comments received in response to these notices were a number
addressing administrative burden issues surrounding these program
elements. In this final rule, the Department has responded to these
comments.

OMB is required to make a decision concerning information collections
within 30-60 days of the publication of this notice. Therefore, for best
effect, comments should be received by DOT/OMB within 30 days of
publication. Following receipt of OMB approval, the Department will
publish a Federal Register notice containing the applicable OMB approval
numbers.

Federalism

The rule does not have sufficient Federalism impacts to warrant the
preparation of a Federalism assessment. While the rule concerns the
activities of state and local governments in DOT financial assistance
programs, the rule does not significantly alter the role of state and
local governments vis-a-vis DOT from the present part 23. The
availability of program waivers could allow greater flexibility for
state and local participants, however.

List of Subjects

49 CFR Part 23

Administrative practice and procedure, Airports, Civil rights,
Concessions, Government Contracts, Grant programs - transportation,

Minority business, Reporting and recordkeeping requirements

49 CFR part 26

Administrative practice and procedure, Airports, Civil rights,
Concessions, Government Contracts, Grant programs - transportation,
Highways and roads, Mass transportation, Minority business, Reporting
and recordkeeping requirements

ISSUED THIS 8th DAY OF JANUARY, 1999, AT WASHINGTON, D.C.

\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_

Rodney E. Slater

Secretary of Transportation

# Administrative Changes/Amendments

For the reasons set forth in the preamble, the Department amends 49 CFR,
Subtitle A, as follows:

PART 23 - PARTICIPATION BY DISADVANTAGED BUSINESS ENTERPRISE IN AIRPORT
CONCESSIONS

1\. Revise the heading of 49 CFR part 23 as set forth above.

2\. Revise the authority citation for 49 CFR part 23 to read as follows:

Authority: 42 U.S.C. 200d et seq.; 49 U.S.C. 47107 and 47123; Executive
Order 12138, 3 CFR, 1979 Comp., p. 393.

3\. Remove and reserve subparts A, C, D, and E of part 23.

4\. Amend §23.89 as follows:

a\. In the definition of \"disadvantaged business,\" remove the words
\"§23.61 of subpart D of this part\" and add the words \"49 CFR part
26\"; and remove the words \"§23.61\" in the last line of the definition
and add the words \"49 CFR part 26\".

b\. In the definition of \"small business concern,\" paragraph (b),

remove the words \"§23.43(d)\" and add the words \"§23.43(d) in effect
prior to \[insert date 30 days from date of publication in the Federal
Register\] (see 49 CFR Part 1 to 99 revised as of October 1, 1998.)\".

c\. In the definition of \"socially and economically disadvantaged
individuals,\" remove the words \"§23.61 of subpart D of this part\" and
add \"49 CFR part 26\".

5\. Amend §23.93(a) introductory text by removing the words \"§23.7\"
and adding the words \"§26.7\".

6\. Amend 49 CFR 23.95(a)(1) by removing the words \"based on the
factors listed in §23.45(g)(5)\" and adding the words \"consistent with
the process for setting overall goals set forth in 49 CFR 26.45\".

7\. In addition, amend §23.95 as follows:

a\. In paragraph (f)(1), remove the words \"§23.51\" and add the words
\"49 CFR part 26, subpart E\";

b\. In paragraph (f)(2), remove the words \"Except as provided in
§23.51(c ), each\" and add \"Each\";

c\. Remove paragraph (f)(5);

d\. In paragraph (g)(1), remove the words \"§23.53\" and add the words
\"49 CFR part 26, subpart D\".

8\. Amend §23.97 by removing the words \"§23.55\" and adding the words
\"49 CFR 26.89\".

9\. Remove §23.111.

10\. Add a new 49 CFR part 26, to read as follows:

# PART 26 - PARTICIPATION BY DISADVANTAGED BUSINESS ENTERPRISES IN DEPARTMENT OF TRANSPORTATION FINANCIAL ASSISTANCE PROGRAMS

Subpart A - General

Sec.

26.1 What are the objectives of this part?

26.3 To whom does this part apply?

26.5 What do the terms used in this part mean?

26.7 What discriminatory actions are forbidden?

26.9 How does the Department issue guidance and interpretations under
this part?

26.11 What records do recipients keep and report?

26.13 What assurances must recipients and contractors make?

26.15 How can recipients apply for exemptions or waivers?

Subpart B - Administrative Requirements for DBE Programs for Federally-

Assisted Contracting

26.21 Who must have a DBE program?

26.23 What is the requirement for a policy statement?

26.25 What is the requirement for a liaison officer?

26.27 What efforts must recipients make concerning DBE financial

institutions?

26.29 What prompt payment mechanisms may recipients have?

26.31 What requirements pertain to the DBE directory?

26.33 What steps must a recipient take to address overconcentration of
DBEs in certain types of work?

26.35 What role do business development and mentor-protŽgŽ programs have
in the DBE program?

26.37 What are a recipient\'s responsibilities for monitoring the
performance of other program participants?

Subpart C - Goals, Good Faith Efforts, and Counting

26.41 What is the role of the statutory 10 percent goal in this program?

26.43 Can recipients use set-asides or quotas as part of this program?

26.45 How do recipients set overall goals?

26.47 Can recipients be penalized for failing to meet overall goals?

26.49 How are overall goals established for transit vehicle
manufacturers?

26.51 What means do recipients use to meet overall goals?

26.53 What are the good faith efforts procedures recipients follow in
situations where there are contract goals?

26.55 How is DBE participation counted toward goals?

\]

Subpart D - Certification Standards

26.61 How are burdens of proof allocated in the certification process?

26.63 What rules govern group membership determinations?

26.65 What rules govern business size determinations?

26.67 What rules govern determinations of social and economic
disadvantage?

26.69 What rules govern determinations of ownership?

26.71 What rules govern determinations concerning control?

26.73 What are other rules affecting certification?

Subpart E - Certification Procedures

26.81 What are the requirements for Unified Certification Programs?

26.83 What procedures do recipients follow in making certification
decisions?

26.85 What rules govern recipients\' denials of initial requests for
certification?

26.87 What procedures does a recipient use to remove a DBE\'s
eligibility?

26.89 What is the process for certification appeals to the Department of
Transportation?

26.91 What actions do recipients take following DOT certification appeal
decisions?

Subpart F - Compliance and Enforcement

26.101 What compliance procedures apply to recipients?

26.103 What enforcement actions apply in FHWA and FTA programs?

26.105 What enforcement actions apply in FAA Programs?

26.107 What enforcement actions apply to firms participating in the DBE
program?

26.109 What are the rules governing information, confidentiality,
cooperation, and intimidation or retaliation?

Appendix A to part 26 - Guidance Concerning Good Faith Efforts

Appendix B to part 26 - Forms \[Reserved\]

Appendix C to part 26 - DBE Business Development Program Guidelines

Appendix D to part 26 - Mentor-ProtŽgŽ Program Guidelines

Appendix E to part 26 - Individual Determinations of Social and Economic

Disadvantage

Authority: 23 U.S.C. 324; 42 U.S.C. 2000d, et seq.); 49 U.S.C 1615,
47107, 47113, 47123;: Sec. 1101(b), Pub. L. 105-178, 112 Stat. 107,113.

SUBPART A - GENERAL

## 

## §26.1 What are the objectives of this part?

This part seeks to achieve several objectives:

\(a\) To ensure nondiscrimination in the award and administration of
DOT-assisted contracts in the Department\'s highway, transit, and
airport financial assistance programs;

\(b\) To create a level playing field on which DBEs can compete fairly
for DOT-assisted contracts;

\(c\) To ensure that the Department\'s DBE program is narrowly tailored
in accordance with applicable law;

\(d\) To ensure that only firms that fully meet this part\'s eligibility
standards are permitted to participate as DBEs;

\(e\) To help remove barriers to the participation of DBEs in
DOT-assisted contracts;

\(f\) To assist the development of firms that can compete successfully
in the marketplace outside the DBE program; and

\(g\) To provide appropriate flexibility to recipients of Federal
financial assistance in establishing and providing opportunities for
DBEs.

§26.3 To whom does this part apply?

\(a\) If you are a recipient of any of the following types of funds,
this part applies to you:

\(1\) Federal-aid highway funds authorized under Titles I (other than
Part B) and V of the Intermodal Surface Transportation Efficiency Act of
1991 (ISTEA), Pub. L. 102-240, 105 Stat. 1914, or Titles I, III, and V
of the Transportation Equity Act for the 21st Century (TEA-21), Pub. L.
105-178, 112 Stat. 107.

\(2\) Federal transit funds authorized by Titles I, III, V and VI of
ISTEA, Pub. L. 102-240 or by Federal transit laws in Title 49, U.S.
Code, or Titles I, III, and V of the TEA-21, Pub. L. 105-178.

\(3\) Airport funds authorized by 49 U.S.C. 47101, et seq.

\(b\) \[Reserved\]

\(c\) If you are letting a contract, and that contract is to be
performed entirely outside the United States, its territories and
possessions, Puerto Rico, Guam, or the Northern Marianas Islands, this
part does not apply to the contract.

\(d\) If you are letting a contract in which DOT financial assistance
does not participate, this part does not apply to the contract.

## 

## §26.5 What do the terms used in this part mean? 

Affiliation has the same meaning the term has in the Small Business
Administration (SBA) regulations, 13 CFR part 121.

\(1\) Except as otherwise provided in 13 CFR part 121, concerns are
affiliates of each other when, either directly or indirectly:

\(i\) One concern controls or has the power to control the other; or

\(ii\) A third party or parties controls or has the power to control
both; or

\(iii\) An identity of interest between or among parties exists such
that affiliation may be found.

\(2\) In determining whether affiliation exists, it is necessary to
consider all appropriate factors, including common ownership, common
management, and contractual relationships. Affiliates must be considered
together in determining whether a concern meets small business size
criteria and the statutory cap on the participation of firms in the DBE
program.

Alaska Native means a citizen of the United States who is a person

of one-fourth degree or more Alaskan Indian (including Tsimshian

Indians not enrolled in the Metlaktla Indian Community), Eskimo, or

Aleut blood, or a combination of those bloodlines. The term includes,

in the absence of proof of a minimum blood quantum, any citizen whom a

Native village or Native group regards as an Alaska Native if their

father or mother is regarded as an Alaska Native.

Alaska Native Corporation (ANC) means any Regional Corporation,

Village Corporation, Urban Corporation, or Group Corporation organized

under the laws of the State of Alaska in accordance with the Alaska

Native Claims Settlement Act, as amended (43 U.S.C. 1601, et seq.).
\"Compliance\" means that a recipient has correctly implemented the
requirements of this part.

Contract means a legally binding relationship obligating a seller to
furnish supplies or services (including, but not limited to,
construction and professional services) and the buyer to pay for them.

Contractor means one who participates, through a contract or subcontract
(at any tier), in a DOT-assisted highway, transit, or airport program.

Department or DOT means the U.S. Department of Transportation, including
the Office of the Secretary, the Federal Highway Administration (FHWA),
the Federal Transit Administration (FTA), and the Federal Aviation
Administration (FAA).

Disadvantaged business enterprise or DBE means a for-profit small
business concern \--

\(1\) That is at least 51 percent owned by one or more individuals who
are both socially and economically disadvantaged or, in the case of a
corporation, in which 51 percent of the stock is owned by one or more
such individuals; and

\(2\) Whose management and daily business operations are controlled by
one or more of the socially and economically disadvantaged individuals
who own it.

DOT-assisted contract means any contract between a recipient and a
contractor (at any tier) funded in whole or in part with DOT financial
assistance, including letters of credit or loan guarantees, except a
contract solely for the purchase of land.

Good faith efforts means efforts to achieve a DBE goal or other
requirement of this part which, by their scope, intensity, and
appropriateness to the objective, can reasonably be expected to fulfill
the program requirement.

Immediate family member means father, mother, husband, wife, son,
daughter, brother, sister, grandmother, grandfather, grandson,
granddaughter, mother-in-law, or father-in-law.

Indian tribe means any Indian tribe, band, nation, or other

organized group or community of Indians, including any ANC, which is

recognized as eligible for the special programs and services provided

by the United States to Indians because of their status as Indians, or

is recognized as such by the State in which the tribe, band, nation,

group, or community resides. See definition of \`\`tribally-owned

concern\'\' in this section.

Joint venture means an association of a DBE firm and one or more other
firms to carry out a single, for-profit business enterprise, for which
the parties combine their property, capital, efforts, skills and
knowledge, and in which the DBE is responsible for a distinct, clearly
defined portion of the work of the contract and whose share in the
capital contribution, control, management, risks, and profits of the
joint venture are commensurate with its ownership interest.

Native Hawaiian means any individual whose ancestors were natives,

prior to 1778, of the area which now comprises the State of Hawaii.

Native Hawaiian Organization means any community service

organization serving Native Hawaiians in the State of Hawaii which is a

not-for-profit organization chartered by the State of Hawaii, is

controlled by Native Hawaiians, and whose business activities will

principally benefit such Native Hawaiians.

Noncompliance means that a recipient has not correctly implemented the
requirements of this part.

Operating Administration or OA means any of the following parts of DOT:
the Federal Aviation Administration (FAA), Federal Highway
Administration (FHWA), and Federal Transit Administration (FTA). The
\"Administrator\" of an operating administration includes his or her
designees.

Personal net worth means the net value of the assets of an individual
remaining after total liabilities are deducted. An individual\'s
personal net worth does not include: The individual\'s ownership
interest in an applicant or participating DBE firm or the individual\'s
equity in his or her primary place of residence. An individual\'s
personal net worth includes only his or her own share of assets held
jointly or as community property with the individual\'s spouse.

Primary industry classification means the four digit Standard Industrial
Classification (SIC) code designation which best describes the primary
business of a firm. The SIC code designations are described in the
Standard Industry Classification Manual . As the North American
Industrial Classification System (NAICS) replaces the SIC system,
references to SIC codes and the SIC Manual are deemed to refer to the
NAICS manual and applicable codes. The SIC Manual and the NAICS Manual
are available through the National Technical Information Service (NTIS)
of the U. S. Department of Commerce (Springfield, VA, 22261). NTIS also
makes materials available through its web site (www.ntis.gov/naics).

Primary recipient means a recipient which DOT financial assistance and
passes some or all of it on to another recipient.

Principal place of business means the business location where the
individuals who manage the firm\'s day-to-day operations spend most
working hours and where top management\'s business records are kept. If
the offices from which management is directed and where business records
are kept are in different locations, the recipient will determine the
principal place of business for DBE program purposes.

Program means any undertaking on a recipient\'s part to use DOT
financial assistance, authorized by the laws to which this part applies.

Race-conscious measure or program is one that is focused specifically on
assisting only DBEs, including women-owned DBEs.

Race-neutral measure or program is one that is, or can be, used to
assist all small businesses. For the purposes of this part, race-neutral
includes gender-neutrality.

Recipient is any entity, public or private, to which DOT financial
assistance is extended, whether directly or through another recipient,
through the programs of the FAA, FHWA, or FTA, or who has applied for
such assistance.

Secretary means the Secretary of Transportation or his/her designee.

Set-aside means a contracting practice restricting eligibility for the
competitive award of a contract solely to DBE firms.

Small Business Administration or SBA means the United States Small
Business Administration.

Small business concern means, with respect to firms seeking to
participate as DBEs in DOT-assisted contracts, a small business concern
as defined pursuant to section 3 of the Small Business Act and Small
Business Administration regulations implementing it (13 CFR part 121)
that also does not exceed the cap on average annual gross receipts
specified in §26.65(b).

Socially and economically disadvantaged individual means any individual
who is a citizen (or lawfully admitted permanent resident) of the United
States and who is \--

\(1\) Any individual who a recipient finds to be a socially and
economically disadvantaged individual on a case-by-case basis.

\(2\) Any individual in the following groups, members of which are
rebuttably presumed to be socially and economically disadvantaged:

\(i\) \"Black Americans,\" which includes persons having origins in any
of the Black racial groups of Africa;

\(ii\) \"Hispanic Americans,\" which includes persons of Mexican, Puerto
Rican, Cuban, Dominican, Central or South American, or other Spanish or
Portuguese culture or origin, regardless of race;

\(iii\) \"Native Americans,\" which includes persons who are American
Indians, Eskimos, Aleuts, or Native Hawaiians;

\(iv\) \"Asian-Pacific Americans,\" which includes persons whose origins
are from Japan, China, Taiwan, Korea, Burma (Myanmar), Vietnam, Laos,
Cambodia (Kampuchea), Thailand, Malaysia, Indonesia, the Philippines,
Brunei, Samoa, Guam, the U.S. Trust Territories of the Pacific Islands
(Republic of Palau), the Commonwealth of the Northern Marianas Islands,
Macao, Fiji, Tonga, Kirbati, Juvalu, Nauru, Federated States of
Micronesia, or Hong Kong;

\(v\) \"Subcontinent Asian Americans,\" which includes persons whose
origins are from India, Pakistan, Bangladesh, Bhutan, the Maldives
Islands, Nepal or Sri Lanka;

\(vi\) Women;

\(vii\) Any additional groups whose members are designated as socially
and economically disadvantaged by the SBA, at such time as the SBA
designation becomes effective.

Tribally-owned concern means any concern at least 51 percent owned

by an Indian tribe as defined in this section.

You refers to a recipient, unless a statement in the text of this part
or the context requires otherwise (i.e., \'You must do XYZ\' means that
recipients must do XYZ).

##  

## §26.7 What discriminatory actions are forbidden?

\(a\) You must never exclude any person from participation in, deny any
person the benefits of, or otherwise discriminate against anyone in
connection with the award and performance of any contract covered by
this part on the basis of race, color, sex, or national origin.

\(b\) In administering your DBE program, you must not, directly or
through contractual or other arrangements, use criteria or methods of
administration that have the effect of defeating or substantially
impairing accomplishment of the objectives of the program with respect
to individuals of a particular race, color, sex, or national origin.

## 

## §26.9 How does the Department issue guidance and interpretations under this part?

\(a\) This part applies instead of subparts A and C through E of 49 CFR
part 23 in effect prior to \[insert date 30 days from date of
publication in the Federal Register\] (See 49 CFR Parts 1 to 99, revised
as of October 1, 1998.) Only guidance and interpretations (including
interpretations set forth in certification appeal decisions) consistent
with this part 26 and issued after \[insert date 30 days from date of
publication in the Federal Register\] have definitive, binding effect in
implementing the provisions of this part and constitute the official
position of the Department of Transportation.

\(b\) The Secretary of Transportation, Office of the Secretary of
Transportation, FHWA, FTA, and FAA may issue written interpretations of
or written guidance concerning this part. Written interpretations and
guidance are valid and binding, and constitute the official position of
the Department of Transportation, only if they are issued over the
signature of the Secretary of Transportation or if they contain the
following statement:

The General Counsel of the Department of Transportation has reviewed
this document and approved it as consistent with the language and intent
of 49 CFR part 26.

## 

## §26.11 What records do recipients keep and report?

\(a\) \[Reserved\]

\(b\) You must continue to provide data about your DBE program to the
Department as directed by DOT operating administrations.

\(c\) You must create and maintain a bidders list, consisting of all
firms bidding on prime contracts and bidding or quoting subcontracts on
DOT-assisted projects. For every firm, the following information must be
included:

\(1\) Firm name;

\(2\) Firm address;

\(3\) Firm\'s status as a DBE or non-DBE;

\(4\) The age of the firm; and

\(5\) The annual gross receipts of the firm.

## 

## §26.13 What assurances must recipients and contractors make?

\(a\) Each financial assistance agreement you sign with a DOT operating
administration (or a primary recipient) must include the following
assurance:

The recipient shall not discriminate on the basis of race, color,
national origin, or sex in the award and performance of any DOT-assisted
contract or in the administration of its DBE program or the requirements
of 49 CFR part 26. The recipient shall take all necessary and reasonable
steps under 49 CFR part 26 to ensure nondiscrimination in the award and
administration of DOT-assisted contracts. The recipient\'s DBE program,
as required by 49 CFR part 26 and as approved by DOT, is incorporated by
reference in this agreement. Implementation of this program is a legal
obligation and failure to carry out its terms shall be treated as a
violation of this agreement. Upon notification to the recipient of its
failure to carry out its approved program, the Department may impose
sanctions as provided for under part 26 and may, in appropriate cases,
refer the matter for enforcement under 18 U.S.C. 1001 and/or the Program
Fraud Civil Remedies Act of 1986 (31 U.S.C. 3801 et seq.).

\(b\) Each contract you sign with a contractor (and each subcontract the
prime contractor signs with a subcontractor) must include the following
assurance:

The contractor, sub recipient or subcontractor shall not discriminate on
the basis of race, color, national origin, or sex in the performance of
this contract. The contractor shall carry out applicable requirements of
49 CFR part 26 in the award and administration of DOT-assisted
contracts. Failure by the contractor to carry out these requirements is
a material breach of this contract, which may result in the termination
of this contract or such other remedy as the recipient deems
appropriate.

## 

## §26.15 How can recipients apply for exemptions or waivers?

\(a\) You can apply for an exemption from any provision of this part. To
apply, you must request the exemption in writing from the Office of the
Secretary of Transportation, FHWA, FTA, or FAA. The Secretary will grant
the request only if it documents special or exceptional circumstances,
not likely to be generally applicable, and not contemplated in
connection with the rulemaking that established this part, that make
your compliance with a specific provision of this part impractical. You
must agree to take any steps that the Department specifies to comply
with the intent of the provision from which an exemption is granted. The
Secretary will issue a written response to all exemption requests.

\(b\) You can apply for a waiver of any provision of Subpart B or C of
this part including, but not limited to, any provisions regarding
administrative requirements, overall goals, contract goals or good faith
efforts. Program waivers are for the purpose of authorizing you to
operate a DBE program that achieves the objectives of this part by means
that may differ from one or more of the requirements of Subpart B or C
of this part. To receive a program waiver, you must follow these
procedures:

\(1\) You must apply through the concerned operating administration. The
application must include a specific program proposal and address how you
will meet the criteria of paragraph (b)(2) of this section. Before
submitting your application, you must have had public participation in
developing your proposal, including consultation with the DBE community
and at least one public hearing. Your application must include a summary
of the public participation process and the information gathered through
it.

\(2\) Your application must show that \--

\(i\) There is a reasonable basis to conclude that you could achieve a
level of DBE participation consistent with the objectives of this part
using different or innovative means other than those that are provided
in Subpart B or C of this part;

\(ii\) Conditions in your jurisdiction are appropriate for implementing
the proposal;

\(iii\) Your proposal would prevent discrimination against any
individual or group in access to contracting opportunities or other
benefits of the program; and

\(iv\) Your proposal is consistent with applicable law and program
requirements of the concerned operating administration\'s financial
assistance program.

\(3\) The Secretary has the authority to approve your application. If
the Secretary grants your application, you may administer your DBE
program as provided in your proposal, subject to the following
conditions:

\(i\) DBE eligibility is determined as provided in Subparts D and E of
this part, and DBE participation is counted as provided in §26.49;

\(ii\) Your level of DBE participation continues to be consistent with
the objectives of this part;

\(iii\) There is a reasonable limitation on the duration of the your
modified program; and

\(iv\) Any other conditions the Secretary makes on the

grant of the waiver.

\(4\) The Secretary may end a program waiver at any time and require you
to comply with this part\'s provisions. The Secretary may also extend
the waiver, if he or she determines that all requirements of paragraphs
(b)(2) and (3) of this section continue to be met. Any such extension
shall be for no longer than period originally set for the duration of
the program.

SUBPART B - ADMINISTRATIVE REQUIREMENTS FOR DBE PROGRAMS FOR
FEDERALLY-ASSISTED CONTRACTING

## 

## §26.21 Who must have a DBE program? 

\(a\) If you are in one of these categories and let DOT-assisted
contracts, you must have a DBE program meeting the requirements of this
part:

\(1\) All FHWA recipients receiving funds authorized by a statute to
which this part applies;

\(2\) FTA recipients that receive \$250,000 or more in FTA planning,
capital, and/or operating assistance in a Federal fiscal year;

\(3\) FAA recipients that receive a grant of \$250,000 or more for
airport planning or development.

\(b\) (1) You must submit a DBE program conforming to this part by
\[insert date 210 days from date of publication in the Federal
Register\] to the concerned operating administration (OA). Once the OA
has approved your program, the approval counts for all of your
DOT-assisted programs (except that goals are reviewed and approved by
the particular operating administration that provides funding for your
DOT-assisted contracts).

\(2\) You do not have to submit regular updates of your DBE programs, as
long as you remain in compliance. However, you must submit significant
changes in the program for approval.

\(c\) You are not eligible to receive DOT financial assistance unless
DOT has approved your DBE program and you are in compliance with it and
this part. You must continue to carry out your program until all funds
from DOT financial assistance have been expended.

## 

## §26.23 What is the requirement for a policy statement?

You must issue a signed and dated policy statement that expresses your
commitment to your DBE program, states its objectives, and outlines
responsibilities for its implementation. You must circulate the
statement throughout your organization and to the DBE and non-DBE
business communities that perform work on your DOT-assisted contracts.

##  

## §26.25 What is the requirement for a liaison officer?

You must have a DBE liaison officer, who shall have direct, independent
access to your Chief Executive Officer concerning DBE program matters.
The liaison officer shall be responsible for implementing all aspects of
your DBE program. You must also have adequate staff to administer the
program in compliance with this part.

## 

## §26.27 What efforts must recipients make concerning DBE financial institutions?

You must thoroughly investigate the full extent of services offered by
financial institutions owned and controlled by socially and economically
disadvantaged individuals in your community and make reasonable efforts
to use these institutions. You must also encourage prime contractors to
use such institutions.

##  

## §26.29 What prompt payment mechanisms must recipients have?

\(a\) You must establish, as part of your DBE program, a contract clause
to require prime contractors to pay subcontractors for satisfactory
performance of their contracts no later than a specific number of days
from receipt of each payment you make to the prime contractor. This
clause must also require the prompt return of retainage payments from
the prime contractor to the subcontractor within a specific number of
days after the subcontractor\'s work is satisfactorily completed.

\(1\) This clause may provide for appropriate penalties for failure to
comply, the terms and conditions of which you set.

\(2\) This clause may also provide that any delay or postponement of
payment among the parties may take place only for good cause, with your
prior written approval.

\(b\) You may also establish, as part of your DBE program, any of the
following additional mechanisms to ensure prompt payment:

\(1\) A contract clause that requires prime contractors to include in
their subcontracts language providing that prime contractors and
subcontractors will use appropriate alternative dispute resolution
mechanisms to resolve payment disputes. You may specify the nature of
such mechanisms.

\(2\) A contract clause providing that the prime contractor will not be
reimbursed for work performed by subcontractors unless and until the
prime contractor ensures that the subcontractors are promptly paid for
the work they have performed.

\(3\) Other mechanisms, consistent with this part and applicable state
and local law, to ensure that DBEs and other contractors are fully and
promptly paid.

##  

## §26.31 What requirements pertain to the DBE directory?

You must maintain and make available to interested persons a directory
identifying all firms eligible to participate as DBEs in your program.
In the listing for each firm, you must include its address, phone
number, and the types of work the firm has been certified to perform as
a DBE. You must revise your directory at least annually and make updated
information available to contractors and the public on request.

## 

## §26.33 What steps must a recipient take to address overconcentration of DBEs in certain types of work?

\(a\) If you determine that DBE firms are so overconcentrated in a
certain type of work as to unduly burden the opportunity of non-DBE
firms to participate in this type of work, you must devise appropriate
measures to address this overconcentration.

\(b\) These measures may include the use of incentives, technical
assistance, business development programs, mentor-protŽgŽ programs, and
other appropriate measures designed to assist DBEs in performing work
outside of the specific field in which you have determined that non-DBEs
are unduly burdened. You may also consider varying your use of contract
goals, to the extent consistent with §26.51, to unsure that non-DBEs are
not unfairly prevented from competing for subcontracts.

\(c\) You must obtain the approval of the concerned DOT operating
administration for your determination of overconcentration and the
measures you devise to address it. Once approved, the measures become
part of your

DBE program.

##  

## §26.35 What role do business development and mentor-protŽgŽ programs have in the DBE program?

\(a\) You may or, if an operating administration directs you to, you
must establish a DBE business development program (BDP) to assist firms
in gaining the ability to compete successfully in the marketplace
outside the DBE program. You may require a DBE firm, as a condition of
receiving assistance through the BDP, to agree to terminate its
participation in the DBE program after a certain time has passed or
certain objectives have been reached. See Appendix C of this part for
guidance on administering BDP programs.

\(b\) As part of a BDP or separately, you may establish a
\"mentor-protŽgŽ\" program, in which another DBE or non-DBE firm is the
principal source of business development assistance to a DBE firm.

\(1\) Only firms you have certified as DBEs before they are proposed for
participation in a mentor-protŽgŽ program are eligible to participate in
the mentor-protŽgŽ program.

\(2\) During the course of the mentor-protŽgŽ relationship, you must:

\(i\) Not award DBE credit to a non-DBE mentor firm for using its own
protŽgŽ firm for more than one half of its goal on any contract let by
the recipient, and

\(ii\) Not award DBE credit to a non-DBE mentor firm for using its own
protŽgŽ firm for more than every other contract performed by the protŽgŽ
firm.

\(3\) For purposes of making determinations of business size

under this part, you must not treat protŽgŽ firms as affiliates of

mentor firms, when both firms are participating under an approved

mentor-protŽgŽ program. See Appendix D of this part for guidance
concerning the operation of mentor-protŽgŽ programs.

\(c\) Your BDPs and mentor-protŽgŽ programs must be approved by the
concerned operating administration before you implement them. Once
approved, they become part of your DBE program.

## 

## §26.37 What are a recipient\'s responsibilities for monitoring the performance of other program participants? 

\(a\) You must implement appropriate mechanisms to ensure compliance
with the part\'s requirements by all program participants (e.g.,
applying legal and contract remedies available under Federal, state and
local law). You must set forth these mechanisms in your DBE program.

\(b\) Your DBE program must also include a monitoring and enforcement
mechanism to verify that the work committed to DBEs at contract award is
actually performed by the DBEs. This mechanism must provide for a
running tally of actual DBE attainments (e.g., payments actually made to
DBE firms) and include a provision ensuring that DBE participation is
credited toward overall or contract goals only when payments are
actually made to DBE firms.

SUBPART C - GOALS, GOOD FAITH EFFORTS, AND COUNTING

## 

## §26.41 What is the role of the statutory 10 percent goal in this program?

\(a\) The statutes authorizing this program provide that, except to the
extent the Secretary determines otherwise, not less than 10 percent of
the authorized funds are to be expended with DBEs.

\(b\) This 10 percent goal is an aspirational goal at the national
level, which the Department uses as a tool in evaluating and monitoring
DBEs\' opportunities to participate in DOT-assisted contracts.

\(c\) The national 10 percent goal does not authorize or require
recipients to set overall or contract goals at the 10 percent level, or
any other particular level, or to take any special administrative steps
if their goals are above or below 10 percent.

## 

## §26.43 Can recipients use set-asides or quotas as part of this program?

\(a\) You are not permitted to use quotas for DBEs on DOT-assisted
contracts subject to this part.

\(b\) You may not set-aside contracts for DBEs on DOT-assisted contracts
subject to this part, except that, in limited and extreme circumstances,
you may use set-asides when no other method could be reasonably expected
to redress egregious instances of discrimination.

## 

## §26.45 How do recipients set overall goals? 

\(a\) You must set an overall goal for DBE participation in your
DOT-assisted contracts.

\(b\) Your overall goal must be based on demonstrable evidence of the
availability of ready, willing and able DBEs relative to all businesses
ready, willing and able to participate on your DOT-assisted contracts
(hereafter, the \"relative availability of DBEs\"). The goal must
reflect your determination of the level of DBE participation you would
expect absent the effects of discrimination. You cannot simply rely on
either the 10 percent national goal, your previous overall goal or past
DBE participation rates in your program without reference to the
relative availability of DBEs in your market.

\(c\) Step 1. You must begin your goal setting process by determining a
base figure for the relative availability of DBEs. The following are
examples of approaches that you may take toward determining a base
figure. These examples are provided as a starting point for your goal
setting process. Any percentage figure derived from one of these
examples should be considered a basis from which you begin when
examining all evidence available in your jurisdiction. These examples
are not intended as an exhaustive list. Other methods or combinations of
methods to determine a base figure may be used, subject to approval by
the concerned operating administration.

\(1\) Use DBE Directories and Census Bureau Data. Determine the number
of ready, willing and able DBEs in your market from your DBE directory.
Using the Census Bureau\'s County Business Pattern (CBP) database,
determine the number of all ready, willing and able businesses available
in your market that perform work in the same SIC codes. (Information
about the CBP database may be obtained from the Census Bureau at their
web site, www. census.gov/epcd/cbp/view/ cbpview.html.) Divide the
number of DBEs by the number of all businesses to derive a base figure
for the relative availability of DBEs in your market.

\(2\) Use a bidders list. Determine the number of DBEs that have bid or
quoted on your DOT-assisted prime contracts or subcontracts in the
previous year. Determine the number of all businesses that have bid or
quoted on prime or subcontracts in the same time period. Divide the
number of DBE bidders and quoters by the number for all businesses to
derive a base figure for the relative availability of DBEs in your
market.

\(3\) Use data from a disparity study. Use a percentage figure derived
from data in a valid, applicable disparity study.

\(4\) Use the goal of another DOT recipient. If another DOT recipient in
the same, or substantially similar, market has set an overall goal in
compliance with this rule, you may use that goal as a base figure for
your goal.

\(5\) Alternative methods. Subject to the approval of the DOT operating
administration, you may use other methods to determine a base figure for
your overall goal. Any methodology you choose must be based on
demonstrable evidence of local market conditions and be designed to
ultimately attain a goal that is rationally related to the relative
availability of DBEs in your market.

\(d\) Step 2. Once you have calculated a base figure, you must examine
all of the evidence available in your jurisdiction to determine what
adjustment, if any, is needed to the base figure in order to arrive at
your overall goal.

\(1\) There are many types of evidence that must be considered when
adjusting the base figure. These include:

\(i\) The current capacity of DBEs to perform work in your DOT-assisted
contracting program, as measured by the volume of work DBEs have
performed in recent years;

\(ii\) Evidence from disparity studies conducted anywhere within your
jurisdiction, to the extent it is not already accounted for in your base
figure; and

\(iii\) If your base figure is the goal of another recipient, you must
adjust it for differences in your local market and your contracting
program.

\(2\) You may also consider available evidence from related fields that
affect the opportunities for DBEs to form, grow and compete. These
include, but are not limited to:

\(i\) Statistical disparities in the ability of DBEs to get the
financing, bonding and insurance required to participate in your
program;

\(ii\) Data on employment, self-employment, education, training and
union apprenticeship programs, to the extent you can relate it to the
opportunities for DBEs to perform in your program.

\(3\) If you attempt to make an adjustment to your base figure to
account for the continuing effects of past discrimination (often called
the \"but for\" factor) or the effects of an ongoing DBE program, the
adjustment must be based on demonstrable evidence that is logically and
directly related to the effect for which the adjustment is sought.

\(e\) Once you have determined a percentage figure in accordance with
paragraphs (c) and (d) of this section, you should express your overall
goal as follows:

\(1\) If you are an FHWA recipient, as a percentage of all Federal-aid
highway funds you will expend in FHWA-assisted contracts in the
forthcoming fiscal year;

\(2\) If you are an FTA or FAA recipient, as a percentage of all FTA or
FAA funds (exclusive of FTA funds to be used for the purchase of transit
vehicles) that you will expend in FTA or FAA-assisted contracts in the
forthcoming fiscal year. In appropriate cases, the FTA or FAA
Administrator may permit you to express your overall goal as a
percentage of funds for a particular grant or project or group of grants
and/or projects.

\(f\) (1) If you set overall goals on a fiscal year basis, you must
submit them to the applicable DOT operating administration for review on
August 1 of each year, unless the Administrator of the concerned
operating administration establishes a different submission date.

\(2\) If you are an FTA or FAA recipient and set your overall goal on a
project or grant basis, you must submit the goal for review at a time
determined by the FTA or FAA Administrator.

\(3\) You must include with your overall goal submission a description
of the methodology you used to establish the goal, including your base
figure and the evidence with which it was calculated, and the
adjustments you made to the base figure and the evidence relied on for
the adjustments. You should also include a summary listing of the
relevant available evidence in your jurisdiction and, where applicable,
an explanation of why you did not use that evidence to adjust your base
figure. You must also include your projection of the portions of the
overall goal you expect to meet through race-neutral and race-conscious
measures, respectively (see §26.51(c)).

\(4\) You are not required to obtain prior operating administration
concurrence with the your overall goal. However, if the operating
administration\'s review suggests that your overall goal has not been
correctly calculated, or that your method for calculating goals is
inadequate, the operating administration may, after consulting with you,
adjust your overall goal or require that you do so. The adjusted overall
goal is binding on you.

\(5\) If you need additional time to collect data or take other steps to
develop an approach to setting overall goals, you may request the
approval of the concerned operating administration for an interim goal
and/or goal-setting mechanism. Such a mechanism must:

\(i\) Reflect the relative availability of DBEs in your local market to
the maximum extent feasible given the data available to you; and

\(ii\) Avoid imposing undue burdens on non-DBEs.

\(g\) In establishing an overall goal, you must provide for public
participation. This public participation must include:

\(1\) Consultation with minority, women\'s and general contractor
groups, community organizations, and other officials or organizations
which could be expected to have information concerning the availability
of disadvantaged and non-disadvantaged businesses, the effects of
discrimination on opportunities for DBEs, and your efforts to establish
a level playing field for the participation of DBEs.

\(2\) A published notice announcing your proposed overall goal,
informing the public that the proposed goal and its rationale are
available for inspection during normal business hours at the your
principal office for 30 days following the date of the notice, and
informing the public that you and the Department will accept comments on
the goals for 45 days from the date of the notice. The notice must
include addresses to which comments may be sent, and you must publish it
in general circulation media and available minority-focused media and
trade association publications.

\(h\) Your overall goals must provide for participation by all certified
DBEs and must not be subdivided into group-specific goals.

## 

## §26.47 Can recipients be penalized for failing to meet overall goals?

\(a\) You cannot be penalized, or treated by the Department as being in
noncompliance with this rule, because your DBE participation falls short
of your overall goal, unless you have failed to administer your program
in good faith.

\(b\) If you do not have an approved DBE program or overall goal, or if
you fail to implement your program in good faith, you are in
noncompliance with this part.

## 

## §26.49 How are overall goals established for transit vehicle manufacturers?

\(a\) If you are an FTA recipient, you must require in your DBE program
that each transit vehicle manufacturer, as a condition of being
authorized to bid or propose on FTA-assisted transit vehicle
procurements, certify that it has complied with the requirements of this
section. You do not include FTA assistance used in transit vehicle
procurements in the base amount from which your overall goal is
calculated.

\(b\) If you are a transit vehicle manufacturer, you must establish and
submit for FTA\'s approval an annual overall percentage goal. In setting
your overall goal, you should be guided, to the extent applicable, by
the principles underlying §26.45. The base from which you calculate this
goal is the amount of FTA financial assistance included in transit
vehicle contracts you will perform during the fiscal year in question.
You must exclude from this base funds attributable to work performed
outside the United States and its territories, possessions, and
commonwealths. The requirements and procedures of this part with respect
to submission and approval of overall goals apply to you as they do to
recipients.

\(c\) As a transit vehicle manufacturer, you may make the certification
required by this section if you have submitted the goal this section
requires and FTA has approved it or not disapproved it.

\(d\) As a recipient, you may, with FTA approval, establish
project-specific goals for DBE participation in the procurement of
transit vehicles in lieu of complying through the procedures of this
section.

\(e\) If you are an FHWA or FAA recipient, you may, with FHWA or FAA
approval, use the procedures of this section with respect to
procurements of vehicles or specialized equipment. If you choose to do
so, then the manufacturers of this equipment must meet the same
requirements (including goal approval by FHWA or FAA) as transit vehicle
manufacturers must meet in FTA-assisted procurements.

## 

## §26.51 What means do recipients use to meet overall goals?

\(a\) You must meet the maximum feasible portion of your overall goal by
using race-neutral means of facilitating DBE participation. Race-neutral
DBE participation includes any time a DBE wins a prime contract through
customary competitive procurement procedures, is awarded a subcontract
on a prime contract that does not carry a DBE goal, or even if there is
a DBE goal, wins a subcontract from a prime contractor that did not
consider its DBE status in making the award (e.g., a prime contractor
that uses a strict low bid system to award subcontracts).

\(b\) Race-neutral means include, but are not limited to, the following:

\(1\) Arranging solicitations, times for the presentation of bids,
quantities, specifications, and delivery schedules in ways that
facilitate DBE, and other small businesses, participation (e.g.,
unbundling large contracts to make them more accessible to small
businesses, requiring or encouraging prime contractors to subcontract
portions of work that they might otherwise perform with their own
forces);

\(2\) Providing assistance in overcoming limitations such as inability
to obtain bonding or financing (e.g., by such means as simplifying the
bonding process, reducing bonding requirements, eliminating the impact
of surety costs from bids, and providing services to help DBEs, and
other small businesses, obtain bonding and financing);

\(3\) Providing technical assistance and other services;

\(4\) Carrying out information and communications programs on
contracting procedures and specific contract opportunities (e.g.,
ensuring the inclusion of DBEs, and other small businesses, on recipient
mailing lists for bidders; ensuring the dissemination to bidders on
prime contracts of lists of potential subcontractors; provision of
information in languages other than English, where appropriate);

\(5\) Implementing a supportive services program to develop and improve
immediate and long-term business management, record keeping, and
financial and accounting capability for DBEs and other small businesses;

\(6\) Providing services to help DBEs, and other small businesses,
improve long-term development, increase opportunities to participate in
a variety of kinds of work, handle increasingly significant projects,
and achieve eventual self-sufficiency;

\(7\) Establishing a program to assist new, start-up firms, particularly
in fields in which DBE participation has historically been low;

\(8\) Ensuring distribution of your DBE directory, through print and
electronic means, to the widest feasible universe of potential prime
contractors; and

\(9\) Assisting DBEs, and other small businesses, to develop their
capability to utilize emerging technology and conduct business through
electronic media.

\(c\) Each time you submit your overall goal for review by the concerned
operating administration, you must also submit your projection of the
portion of the goal that you expect to meet through race-neutral means
and your basis for that projection. This projection is subject to
approval by the concerned operating administration, in conjunction with
its review of your overall goal.

\(d\) You must establish contract goals to meet any portion of your
overall goal you do not project being able to meet using race-neutral
means.

\(e\) The following provisions apply to the use of contract goals:

\(1\) You may use contract goals only on those DOT-assisted contracts
that have subcontracting possibilities.

\(2\) You are not required to set a contract goal on every DOT-assisted
contract. You are not required to set each contract goal at the same
percentage level as the overall goal. The goal for a specific contract
may be higher or lower than that percentage level of the overall goal,
depending on such factors as the type of work involved, the location of
the work, and the availability of DBEs for the work of the particular
contract. However, over the period covered by your overall goal, you
must set contract goals so that they will cumulatively result in meeting
any portion of your overall goal you do not project being able to meet
through the use of race-neutral means.

\(3\) Operating administration approval of each contract goal is not
necessarily required. However, operating administrations may review and
approve or disapprove any contract goal you establish.

\(4\) Your contract goals must provide for participation by all
certified DBEs and must not be subdivided into group-specific goals.

\(f\) To ensure that your DBE program continues to be narrowly tailored
to overcome the effects of discrimination, you must adjust your use of
contract goals as follows:

\(1\) If your approved projection under paragraph (c) of this section
estimates that you can meet your entire overall goal for a given year
through race-neutral means, you must implement your program without
setting contract goals during that year.

EXAMPLE to paragraph (f)(1): Your overall goal for Year I is 12 percent.
You estimate that you can obtain 12 percent or more DBE participation
through the use of race-neutral measures, without any use of contract
goals. In this case, you do not set any contract goals for the contracts
that will be performed in Year I.

\(2\) If, during the course of any year in which you are using contract
goals, you determine that you will exceed your overall goal, you must
reduce or eliminate the use of contract goals to the extent necessary to
ensure that the use of contract goals does not result in exceeding the
overall goal. If you determine that you will fall short of your overall
goal, then you must make appropriate modifications in your use of
race-neutral and/or race-conscious measures to allow you to meet the
overall goal.

EXAMPLE to paragraph (f)(2): In Year II, your overall goal is 12
percent. You have estimated that you can obtain 5 percent DBE
participation through use of race-neutral measures. You therefore plan
to obtain the remaining 7 percent participation through use of DBE
goals. By September, you have already obtained 11 percent DBE
participation for the year. For contracts let during the remainder of
the year, you use contract goals only to the extent necessary to obtain
an additional one percent DBE participation. However, if you determine
in September that your participation for the year is likely to be only 8
percent total, then you would increase your use of race-neutral and/or
race-conscious means during the remainder of the year in order to
achieve your overall goal.

\(3\) If the DBE participation you have obtained by race-neutral means
alone meets or exceeds your overall goals for two consecutive years, you
are not required to make a projection of the amount of your goal you can
meet using such means in the next year. You do not set contract goals on
any contracts in the next year. You continue using only race-neutral
means to meet your overall goals unless and until you do not meet your
overall goal for a year.

EXAMPLE to paragraph (f)(3): Your overall goal for Years I and Year II
is 10 percent. The DBE participation you obtain through race-neutral
measures alone is 10 percent or more in each year. (For this purpose, it
does not matter whether you obtained additional DBE participation
through using contract goals in these years.) In Year III and following
years, you do not need to make a projection under paragraph (c) of this
section of the portion of your overall goal you expect to meet using
race-neutral means. You simply use race-neutral means to achieve your
overall goals. However, if in Year VI your DBE participation falls short
of your overall goal, then you must make a paragraph (c) projection for
Year VII and, if necessary, resume use of contract goals in that year.

\(4\) If you obtain DBE participation that exceeds your overall goal in
two consecutive years through the use of contract goals (i.e., not
through the use of race-neutral means alone), you must reduce your use
of contract goals proportionately in the following year.

EXAMPLE to paragraph (f)(4): In Years I and II, your overall goal is 12
percent, and you obtain 14 and 16 percent DBE participation,
respectively. You have exceeded your goals over the two-year period by
an average of 25 percent. In Year III, your overall goal is again 12
percent, and your paragraph (c) projection estimates that you will
obtain 4 percent DBE participation through race-neutral means and 8
percent through contract goals. You then reduce the contract goal
projection by 25 percent (i.e., from 8 to 6 percent) and set contract
goals accordingly during the year. If in Year III you obtain 11 percent
participation, you do not use this contract goal adjustment mechanism
for Year IV, because there have not been two consecutive years of
exceeding overall goals.

\(g\) In any year in which you project meeting part of your goal through
race-neutral means and the remainder through contract goals, you must
maintain data separately on DBE achievements in those contracts with and
without contract goals, respectively. You must report this data to the
concerned operating administration as provided in §26.11.

##  

## §26.53 What are the good faith efforts procedures recipients follow in

situations where there are contract goals?

\(a\) When you have established a DBE contract goal, you must award the
contract only to a bidder/offeror who makes good faith efforts to meet
it. You must determine that a bidder/offeror has made good faith efforts
if the bidder/offeror does either of the following things:

\(1\) Documents that it has obtained enough DBE participation to meet
the goal; or

\(2\) Documents that it made adequate good faith efforts to meet the
goal, even though it did not succeed in obtaining enough DBE
participation to do so. If the bidder/offeror does document adequate
good faith efforts, you must not deny award of the contract on the basis
that the bidder/offeror failed to meet the goal. See Appendix A of this
part for guidance in determining the adequacy of a bidder/offeror\'s
good faith efforts.

\(b\) In your solicitations for DOT-assisted contracts for which a
contract goal has been established, you must require the following:

\(1\) Award of the contract will be conditioned on meeting the
requirements of this section;

\(2\) All bidders/offerors will be required to submit the following
information to the recipient, at the time provided in paragraph (b)(3)
of this section:

\(i\) The names and addresses of DBE firms that will participate in the
contract;

\(ii\) A description of the work that each DBE will perform;

\(iii\) The dollar amount of the participation of each DBE firm
participating;

\(iv\) Written documentation of the bidder/offeror\'s commitment to use
a DBE subcontractor whose participation it submits to meet a contract
goal;

\(v\) Written confirmation from the DBE that it is participating in the
contract as provided in the prime contractor\'s commitment; and

\(vi\) If the contract goal is not met, evidence of good faith efforts
(see Appendix A of this part); and

\(3\) At your discretion, the bidder/offeror must present the
information required by paragraph (b)(2) of this section \--

\(i\) Under sealed bid procedures, as a matter of responsiveness, or
with initial proposals, under contract negotiation procedures; or

\(ii\) At any time before you commit yourself to the performance of the
contract by the bidder/offeror, as a matter of responsibility.

\(c\) You must make sure all information is complete and accurate and
adequately documents the bidder/offeror\'s good faith efforts before
committing yourself to the performance of the contract by the
bidder/offeror.

\(d\) If you determine that the apparent successful bidder/offeror has
failed to meet the requirements of paragraph (a) of this section, you
must, before awarding the contract, provide the bidder/offeror an
opportunity for administrative reconsideration.

\(1\) As part of this reconsideration, the bidder/offeror must have the
opportunity to provide written documentation or argument concerning the
issue of whether it met the goal or made adequate good faith efforts to
do so.

\(2\) Your decision on reconsideration must be made by an official who
did not take part in the original determination that the bidder/offeror
failed to meet the goal or make adequate good faith efforts to do so.

\(3\) The bidder/offeror must have the opportunity to meet in person
with your reconsideration official to discuss the issue of whether it
met the goal or made adequate good faith efforts to do so.

\(4\) You must send the bidder/offeror a written decision on
reconsideration, explaining the basis for finding that the bidder did or
did not meet the goal or make adequate good faith efforts to do so.

\(5\) The result of the reconsideration process is not administratively
appealable to the Department of Transportation.

\(e\) In a \"design-build\" or \"turnkey\" contracting situation, in
which the recipient lets a master contract to a contractor, who in turn
lets subsequent subcontracts for the work of the project, a recipient
may establish a goal for the project. The master contractor then
establishes contract goals, as appropriate, for the subcontracts it
lets. Recipients must maintain oversight of the master contractor\'s
activities to ensure that they are conducted consistent with the
requirements of this part.

\(f\) (1) You must require that a prime contractor not terminate for
convenience a DBE subcontractor listed in response to paragraph (b)(2)
of this section (or an approved substitute DBE firm) and then perform
the work of the terminated subcontract with its own forces or those of
an affiliate, without your prior written consent.

\(2\) When a DBE subcontractor is terminated, or fails to complete its
work on the contract for any reason, you must require the prime
contractor to make good faith efforts to find another DBE subcontractor
to substitute for the original DBE. These good faith efforts shall be
directed at finding another DBE to perform at least the same amount of
work under the contract as the DBE that was terminated, to the extent
needed to meet the contract goal you established for the procurement.

\(3\) You must include in each prime contract a provision for
appropriate administrative remedies that you will invoke if the prime
contractor fails to comply with the requirements of this section.

\(g\) You must apply the requirements of this section to DBE
bidders/offerors for prime contracts. In determining whether a DBE
bidder/offeror for a prime contract has met a contract goal, you count
the work the DBE has committed to performing with its own forces as well
as the work that it has committed to be performed by DBE subcontractors
and DBE suppliers.

## 

## §26.55 How is DBE participation counted toward goals?

\(a\) When a DBE participates in a contract, you count only the value of
the work actually performed by the DBE toward DBE goals.

\(1\) Count the entire amount of that portion of a construction contract
(or other contract not covered by paragraph (a)(2) of this section) that
is performed by the DBE\'s own forces. Include the cost of supplies and
materials obtained by the DBE for the work of the contract, including
supplies purchased or equipment leased by the DBE (except supplies and
equipment the DBE subcontractor purchases or leases from the prime
contractor or its affiliate).

\(2\) Count the entire amount of fees or commissions charged by a DBE
firm for providing a bona fide service, such as professional, technical,
consultant, or managerial services, or for providing bonds or insurance
specifically required for the performance of a DOT-assisted contract,
toward DBE goals, provided you determine the fee to be reasonable and
not excessive as compared with fees customarily allowed for similar
services.

\(3\) When a DBE subcontracts part of the work of its contract to
another firm, the value of the subcontracted work may be counted toward
DBE goals only if the DBE\'s subcontractor is itself a DBE. Work that a
DBE subcontracts to a non-DBE firm does not count toward DBE goals.

\(b\) When a DBE performs as a participant in a joint venture, count a
portion of the total dollar value of the contract equal to the distinct,
clearly defined portion of the work of the contract that the DBE
performs with its own forces toward DBE goals.

\(c\) Count expenditures to a DBE contractor toward DBE goals only if
the DBE is performing a commercially useful function on that contract.

\(1\) A DBE performs a commercially useful function when it is
responsible for execution of the work of the contract and is carrying
out its responsibilities by actually performing, managing, and
supervising the work involved. To perform a commercially useful
function, the DBE must also be responsible, with respect to materials
and supplies used on the contract, for negotiating price, determining
quality and quantity, ordering the material, and installing (where
applicable) and paying for the material itself. To determine whether a
DBE is performing a commercially useful function, you must evaluate the
amount of work subcontracted, industry practices, whether the amount the
firm is to be paid under the contract is commensurate with the work it
is actually performing and the DBE credit claimed for its performance of
the work, and other relevant factors.

\(2\) A DBE does not perform a commercially useful function if its role
is limited to that of an extra participant in a transaction, contract,
or project through which funds are passed in order to obtain the
appearance of DBE participation. In determining whether a DBE is such an
extra participant, you must examine similar transactions, particularly
those in which DBEs do not participate.

\(3\) If a DBE does not perform or exercise responsibility for at least
30 percent of the total cost of its contract with its own work force, or
the DBE subcontracts a greater portion of the work of a contract than
would be expected on the basis of normal industry practice for the type
of work involved, you must presume that it is not performing a
commercially useful function.

\(4\) When a DBE is presumed not to be performing a commercially useful
function as provided in paragraph (c)(3) of this section, the DBE may
present evidence to rebut this presumption. You may determine that the
firm is performing a commercially useful function given the type of work
involved and normal industry practices.

\(5\) Your decisions on commercially useful function matters are subject
to review by the concerned operating administration, but are not
administratively appealable to DOT.

\(d\) Use the following factors in determining whether a DBE trucking
company is performing a commercially useful function:

\(1\) The DBE must be responsible for the management and supervision of
the entire trucking operation for which it is responsible on a
particular contract, and there cannot be a contrived arrangement for the
purpose of meeting DBE goals.

\(2\) The DBE must itself own and operate at least one fully licensed,
insured, and operational truck used on the contract.

\(3\) The DBE receives credit for the total value of the transportation
services it provides on the contract using trucks its owns, insures, and
operates using drivers it employs.

\(4\) The DBE may lease trucks from another DBE firm, including an
owner-operator who is certified as a DBE. The DBE who leases trucks from
another DBE receives credit for the total value of the transportation
services the lessee DBE provides on the contract.

\(5\) The DBE may also lease trucks from a non-DBE firm, including an
owner-operator. The DBE who leases trucks from a non-DBE is entitled to
credit only for the fee or commission it receives as a result of the
lease arrangement. The DBE does not receive credit for the total value
of the transportation services provided by the lessee, since these
services are not provided by a DBE.

\(6\) For purposes of this paragraph (d), a lease must indicate that the
DBE has exclusive use of and control over the truck. This does not
preclude the leased truck from working for others during the term of the
lease with the consent of the DBE, so long as the lease gives the DBE
absolute priority for use of the leased truck. Leased trucks must
display the name and identification number of the DBE.

\(e\) Count expenditures with DBEs for materials or supplies toward DBE
goals as provided in the following:

\(1\) (i) If the materials or supplies are obtained from a DBE
manufacturer, count 100 percent of the cost of the materials or supplies
toward DBE goals.

\(ii\) For purposes of this paragraph (e)(1), a manufacturer is a firm
that operates or maintains a factory or establishment that produces, on
the premises, the materials, supplies, articles, or equipment required
under the contract and of the general character described by the
specifications.

\(2\) (i) If the materials or supplies are purchased from a DBE regular
dealer, count 60 percent of the cost of the materials or supplies toward
DBE goals.

\(ii\) For purposes of this section, a regular dealer is a firm that
owns, operates, or maintains a store, warehouse, or other establishment
in which the materials, supplies, articles or equipment of the general
character described by the specifications and required under the
contract are bought, kept in stock, and regularly sold or leased to the
public in the usual course of business.

\(A\) To be a regular dealer, the firm must be an established, regular
business that engages, as its principal business and under its own name,
in the purchase and sale or lease of the products in question.

\(B\) A person may be a regular dealer in such bulk items as petroleum
products, steel, cement, gravel, stone, or asphalt without owning,
operating, or maintaining a place of business as provided in this
paragraph (e)(2)(ii) if the person both owns and operates distribution
equipment for the products. Any supplementing of regular dealers\' own
distribution equipment shall be by a long-term lease agreement and not
on an ad hoc or contract-by-contract basis.

\(C\) Packagers, brokers, manufacturers\' representatives, or other
persons who arrange or expedite transactions are not regular dealers
within the meaning of this paragraph (e)(2).

\(3\) With respect to materials or supplies purchased from a DBE which
is neither a manufacturer nor a regular dealer, count the entire amount
of fees or commissions charged for assistance in the procurement of the
materials and supplies, or fees or transportation charges for the
delivery of materials or supplies required on a job site, toward DBE
goals, provided you determine the fees to be reasonable and not
excessive as compared with fees customarily allowed for similar
services. Do not count any portion of the cost of the materials and
supplies themselves toward DBE goals, however.

\(f\) If a firm is not currently certified as a DBE in accordance with
the standards of subpart D of this part at the time of the execution of
the contract, do not count the firm\'s participation toward any DBE
goals, except as provided for in §26.87(i)).

\(g\) Do not count the dollar value of work performed under a contract
with a firm after it has ceased to be certified toward your overall
goal.

\(h\) Do not count the participation of a DBE subcontractor toward the
prime contractor\'s DBE achievements or your overall goal until the
amount being counted toward the goal has been paid to the DBE.

SUBPART D - CERTIFICATION STANDARDS

## 

## §26.61 How are burdens of proof allocated in the certification process?

\(a\) In determining whether to certify a firm as eligible to
participate as a DBE, you must apply the standards of this subpart.

\(b\) The firm seeking certification has the burden of demonstrating to
you, by a preponderance of the evidence, that it meets the requirements
of this subpart concerning group membership or individual disadvantage,
business size, ownership, and control.

\(c\) You must rebuttably presume that members of the designated groups
identified in §26.67(a) are socially and economically disadvantaged.
This means that they do not have the burden of proving to you that they
are socially and economically disadvantaged. However, applicants have
the obligation to provide you information concerning their economic
disadvantage (see §26.67).

\(d\) Individuals who are not presumed to be socially and economically
disadvantaged, and individuals concerning whom the presumption of
disadvantage has been rebutted, have the burden of proving to you, by a
preponderance of the evidence, that they are socially and economically
disadvantaged. (See Appendix E of this part.)

\(e\) You must make determinations concerning whether individuals and
firms have met their burden of demonstrating group membership,
ownership, control, and social and economic disadvantage (where
disadvantage must be demonstrated on an individual basis) by considering
all the facts in the record, viewed as a whole.

## 

## §26.63 What rules govern group membership determinations?

\(a\) If you have reason to question whether an individual is a member
of a group that is presumed to be socially and economically
disadvantaged, you must require the individual to demonstrate, by a
preponderance of the evidence, that he or she is a member of the group.

\(b\) In making such a determination, you must consider whether the
person has held himself out to be a member of the group over a long
period of time prior to application for certification and whether the
person is regarded as a member of the group by the relevant community.
You may require the applicant to produce appropriate documentation of
group membership.

\(1\) If you determine that an individual claiming to be a member of a
group presumed to be disadvantaged is not a member of a designated
disadvantaged group, the individual must demonstrate social and economic
disadvantage on an individual basis.

\(2\) Your decisions concerning membership in a designated group are
subject to the certification appeals procedure of §26.89.

## 

## §26.65 What rules govern business size determinations?

\(a\) To be an eligible DBE, a firm (including its affiliates) must be
an existing small business, as defined by Small Business Administration
(SBA) standards. You must apply current SBA business size standard(s)
found in 13 CFR part 121 appropriate to the type(s) of work the firm
seeks to perform in DOT-assisted contracts.

\(b\) Even if it meets the requirements of paragraph (a) of this
section, a firm is not an eligible DBE in any Federal fiscal year if the
firm (including its affiliates) has had average annual gross receipts,
as defined by SBA regulations (see 13 CFR 121.402), over the firm\'s
previous three fiscal years, in excess of \$16.6 million. The Secretary
adjusts this amount for inflation from time to time.

## 

## §26.67 What rules determine social and economic disadvantage?

\(a\) Presumption of disadvantage.

\(1\) You must rebuttably presume that citizens of the United States (or
lawfully admitted permanent residents) who are women, Black Americans,
Hispanic Americans, Native Americans, Asian-Pacific Americans,
Subcontinent Asian Americans, or other minorities found to be
disadvantaged by the SBA, are socially and economically disadvantaged
individuals. You must require applicants to submit a signed, notarized
certification that each presumptively disadvantaged owner is, in fact,
socially and economically disadvantaged.

\(2\) (i) You must require each individual owner of a firm applying to
participate as a DBE whose ownership and control are relied upon for DBE
certification to submit a signed, notarized statement of personal net
worth, with appropriate supporting documentation.

\(ii\) In determining net worth, you must exclude an individual\'s
ownership interest in the applicant firm and the individual\'s equity in
his or her primary residence (except any portion of such equity that is
attributable to excessive withdrawals from the applicant firm). A
contingent liability does not reduce an individual\'s net worth. The
personal net worth of an individual claiming to be an Alaska Native will
include assets and income from sources other than an Alaska Native
Corporation and exclude any of the following which the individual
receives from any Alaska Native Corporation: cash (including cash
dividends on stock received from an ANC) to the extent that it does not,
in the aggregate, exceed \$2,000 per individual per annum; stock
(including stock issued or distributed by an ANC as a dividend or
distribution on stock); a partnership interest; land or an interest in
land (including land or an interest in land received from an ANC as a
dividend or distribution on stock); and an interest in a settlement
trust.

\(b\) Rebuttal of presumption of disadvantage.

\(1\) If the statement of personal net worth that an individual submits
under paragraph (a)(2) of this section shows that the individual\'s
personal net worth exceeds \$750,000, the individual\'s presumption of
economic disadvantage is rebutted. You are not required to have a
proceeding under paragraph (b)(2) of this section in order to rebut the
presumption of economic disadvantage in this case.

\(2\) If you have a reasonable basis to believe that an individual who
is a member of one of the designated groups is not, in fact, socially
and/or economically disadvantaged you may, at any time, start a
proceeding to determine whether the presumption should be regarded as
rebutted with respect to that individual. Your proceeding must follow
the procedures of §26.87.

\(3\) In such a proceeding, you have the burden of demonstrating, by a
preponderance of the evidence, that the individual is not socially and
economically disadvantaged. You may require the individual to produce
information relevant to the determination of his or her disadvantage.

\(4\) When an individual\'s presumption of social and/or economic
disadvantage has been rebutted, his or her ownership and control of the
firm in question cannot be used for purposes of DBE eligibility under
this subpart unless and until he or she makes an individual showing of
social and/or economic disadvantage. If the basis for rebutting the
presumption is a determination that the individual\'s personal net worth
exceeds \$750,000, the individual is no longer eligible for
participation in the program and cannot regain eligibility by making an
individual showing of disadvantage.

\(c\) 8(a) and SDB Firms. If a firm applying for certification has a
current, valid certification from or recognized by the SBA under the
8(a) or small and disadvantaged business (SDB) program (except an SDB
certification based on the firm\'s self-certification as an SDB), you
may accept the firm\'s 8(a) or SDB certification in lieu of conducting
your own certification proceeding, just as you may accept the
certification of another DOT recipient for this purpose. You are not
required to do so, however.

\(d\) Individual determinations of social and economic disadvantage.
Firms owned and controlled by individuals who are not presumed to be
socially and economically disadvantaged (including individuals whose
presumed disadvantage has been rebutted) may apply for DBE
certification. You must make a case-by-case determination of whether
each individual whose ownership and control are relied upon for DBE
certification is socially and economically disadvantaged. In such a
proceeding, the applicant firm has the burden of demonstrating to you,
by a preponderance of the evidence, that the individuals who own and
control it are socially and economically disadvantaged. An individual
whose personal net worth exceeds \$750,000 shall not be deemed to be
economically disadvantaged. In making these determinations, use the
guidance found in Appendix E of this part. You must require that
applicants provide sufficient information to permit determinations under
the guidance of Appendix E of this part.

##  

## §26.69 What rules govern determinations of ownership?

\(a\) In determining whether the socially and economically disadvantaged
participants in a firm own the firm, you must consider all the facts in
the record, viewed as a whole.

\(b\) To be an eligible DBE, a firm must be at least 51 percent owned by
socially and economically disadvantaged individuals.

\(1\) In the case of a corporation, such individuals must own at least
51 percent of the each class of voting stock outstanding and 51 percent
of the aggregate of all stock outstanding.

\(2\) In the case of a partnership, 51 percent of each class of
partnership interest must be owned by socially and economically
disadvantaged individuals. Such ownership must be reflected in the
firm\'s partnership agreement.

\(3\) In the case of a limited liability company, at least 51 percent of
each class of member interest must be owned by socially and economically
disadvantaged individuals.

\(c\) The firm\'s ownership by socially and economically disadvantaged
individuals must be real, substantial, and continuing, going beyond pro
forma ownership of the firm as reflected in ownership documents. The
disadvantaged owners must enjoy the customary incidents of ownership,
and share in the risks and profits commensurate with their ownership
interests, as demonstrated by the substance, not merely the form, of
arrangements.

\(d\) All securities that constitute ownership of a firm shall be held
directly by disadvantaged persons. Except as provided in this paragraph
(d), no securities or assets held in trust, or by any guardian for a
minor, are considered as held by disadvantaged persons in determining
the ownership of a firm. However, securities or assets held in trust are
regarded as held by a disadvantaged individual for purposes of
determining ownership of the firm, if -

\(1\) The beneficial owner of securities or assets held in trust is a
disadvantaged individual, and the trustee is the same or another such
individual; or

\(2\) The beneficial owner of a trust is a disadvantaged individual who,
rather than the trustee, exercises effective control over the
management, policy-making, and daily operational activities of the firm.
Assets held in a revocable living trust may be counted only in the
situation where the same disadvantaged individual is the sole grantor,
beneficiary, and trustee.

\(e\) The contributions of capital or expertise by the socially and
economically disadvantaged owners to acquire their ownership interests
must be real and substantial. Examples of insufficient contributions
include a promise to contribute capital, an unsecured note payable to
the firm or an owner who is not a disadvantaged individual, or mere
participation in a firm\'s activities as an employee. Debt instruments
from financial institutions or other organizations that lend funds in
the normal course of their business do not render a firm ineligible,
even if the debtor\'s ownership interest is security for the loan.

\(f\) The following requirements apply to situations in which expertise
is relied upon as part of a disadvantaged owner\'s contribution to
acquire ownership:

\(1\) The owner\'s expertise must be \--

\(i\) In a specialized field;

\(ii\) Of outstanding quality;

\(iii\) In areas critical to the firm\'s operations;

\(iv\) Indispensable to the firm\'s potential success;

\(v\) Specific to the type of work the firm performs; and

\(vi\) Documented in the records of the firm. These records must clearly
show the contribution of expertise and its value to the firm.

\(2\) The individual whose expertise is relied upon must have a
significant financial investment in the firm.

\(g\) You must always deem as held by a socially and economically
disadvantaged individual, for purposes of determining ownership, all
interests in a business or other assets obtained by the individual \--

\(1\) As the result of a final property settlement or court order in a
divorce or legal separation, provided that no term or condition of the
agreement or divorce decree is inconsistent with this section; or

\(2\) Through inheritance, or otherwise because of the death of the
former owner.

\(h\) (1) You must presume as not being held by a socially and
economically disadvantaged individual, for purposes of determining
ownership, all interests in a business or other assets obtained by the
individual as the result of a gift, or transfer without adequate
consideration, from any non-disadvantaged individual or non-DBE firm who
is \--

\(i\) Involved in the same firm for which the individual is seeking
certification, or an affiliate of that firm;

\(ii\) Involved in the same or a similar line of business; or

\(iii\) Engaged in an ongoing business relationship with the firm, or an
affiliate of the firm, for which the individual is seeking
certification.

\(2\) To overcome this presumption and permit the interests or assets to
be counted, the disadvantaged individual must demonstrate to you, by
clear and convincing evidence, that \--

\(i\) The gift or transfer to the disadvantaged individual was made for
reasons other than obtaining certification as a DBE; and

\(ii\) The disadvantaged individual actually controls the management,
policy, and operations of the firm, notwithstanding the continuing
participation of a non-disadvantaged individual who provided the gift or
transfer.

\(i\) You must apply the following rules in situations in which marital
assets form a basis for ownership of a firm:

\(1\) When marital assets (other than the assets of the business in
question), held jointly or as community property by both spouses, are
used to acquire the ownership interest asserted by one spouse, you must
deem the ownership interest in the firm to have been acquired by that
spouse with his or her own individual resources, provided that the other
spouse irrevocably renounces and transfers all rights in the ownership
interest in the manner sanctioned by the laws of the state in which
either spouse or the firm is domiciled. You do not count a greater
portion of joint or community property assets toward ownership than
state law would recognize as belonging to the socially and economically
disadvantaged owner of the applicant firm.

\(2\) A copy of the document legally transferring and renouncing the
other spouse\'s rights in the jointly owned or community assets used to
acquire an ownership interest in the firm must be included as part of
the firm\'s application for DBE certification.

\(j\) You may consider the following factors in determining the
ownership of a firm. However, you must not regard a contribution of
capital as failing to be real and substantial, or find a firm
ineligible, solely because \--

\(1\) A socially and economically disadvantaged individual acquired his
or her ownership interest as the result of a gift, or transfer without
adequate consideration, other than the types set forth in paragraph (h)
of this section;

\(2\) There is a provision for the co-signature of a spouse who is not a
socially and economically disadvantaged individual on financing
agreements, contracts for the purchase or sale of real or personal
property, bank signature cards, or other documents; or

\(3\) Ownership of the firm in question or its assets is transferred for
adequate consideration from a spouse who is not a socially and
economically disadvantaged individual to a spouse who is such an
individual. In this case, you must give particularly close and careful
scrutiny to the ownership and control of a firm to ensure that it is
owned and controlled, in substance as well as in form, by a socially and
economically disadvantaged individual.

##  

## §26.71 What rules govern determinations concerning control?

\(a\) In determining whether socially and economically disadvantaged
owners control a firm, you must consider all the facts in the record,
viewed as a whole.

\(b\) Only an independent business may be certified as a DBE. An
independent business is one the viability of which does not depend on
its relationship with another firm or firms.

\(1\) In determining whether a potential DBE is an independent business,
you must scrutinize relationships with non-DBE firms, in such areas as
personnel, facilities, equipment, financial and/or bonding support, and
other resources.

\(2\) You must consider whether present or recent employer/employee
relationships between the disadvantaged owner(s) of the potential DBE
and non-DBE firms or persons associated with non-DBE firms compromise
the independence of the potential DBE firm.

\(3\) You must examine the firm\'s relationships with prime contractors
to determine whether a pattern of exclusive or primary dealings with a
prime contractor compromises the independence of the potential DBE firm.

\(4\) In considering factors related to the independence of a potential
DBE firm, you must consider the consistency of relationships between the
potential DBE and non-DBE firms with normal industry practice.

\(c\) A DBE firm must not be subject to any formal or informal
restrictions which limit the customary discretion of the socially and
economically disadvantaged owners. There can be no restrictions through
corporate charter provisions, by-law provisions, contracts or any other
formal or informal devices (e.g., cumulative voting rights, voting
powers attached to different classes of stock, employment contracts,
requirements for concurrence by non-disadvantaged partners, conditions
precedent or subsequent, executory agreements, voting trusts,
restrictions on or assignments of voting rights) that prevent the
socially and economically disadvantaged owners, without the cooperation
or vote of any non-disadvantaged individual, from making any business
decision of the firm. This paragraph does not preclude a spousal
co-signature on documents as provided for in §26.69(j)(2).

\(d\) The socially and economically disadvantaged owners must possess
the power to direct or cause the direction of the management and
policies of the firm and to make day-to-day as well as long-term
decisions on matters of management, policy and operations.

\(1\) A disadvantaged owner must hold the highest officer position in
the company (e.g., chief executive officer or president).

\(2\) In a corporation, disadvantaged owners must control the board of
directors.

\(3\) In a partnership, one or more disadvantaged owners must serve as
general partners, with control over all partnership decisions.

\(e\) Individuals who are not socially and economically disadvantaged
may be involved in a DBE firm as owners, managers, employees,
stockholders, officers, and/or directors. Such individuals must not,
however, possess or exercise the power to control the firm, or be
disproportionately responsible for the operation of the firm.

\(f\) The socially and economically disadvantaged owners of the firm may
delegate various areas of the management, policymaking, or daily
operations of the firm to other participants in the firm, regardless of
whether these participants are socially and economically disadvantaged
individuals. Such delegations of authority must be revocable, and the
socially and economically disadvantaged owners must retain the power to
hire and fire any person to whom such authority is delegated. The
managerial role of the socially and economically disadvantaged owners in
the firm\'s overall affairs must be such that the recipient can
reasonably conclude that the socially and economically disadvantaged
owners actually exercise control over the firm\'s operations,
management, and policy.

\(g\) The socially and economically disadvantaged owners must have an
overall understanding of, and managerial and technical competence and
experience directly related to, the type of business in which the firm
is engaged and the firm\'s operations. The socially and economically
disadvantaged owners are not required to have experience or expertise in
every critical area of the firm\'s operations, or to have greater
experience or expertise in a given field than managers or key employees.
The socially and economically disadvantaged owners must have the ability
to intelligently and critically evaluate information presented by other
participants in the firm\'s activities and to use this information to
make independent decisions concerning the firm\'s daily operations,
management, and policymaking. Generally, expertise limited to office
management, administration, or bookkeeping functions unrelated to the
principal business activities of the firm is insufficient to demonstrate
control.

\(h\) If state or local law requires the persons to have a particular
license or other credential in order to own and/or control a certain
type of firm, then the socially and economically disadvantaged persons
who own and control a potential DBE firm of that type must possess the
required license or credential. If state or local law does not require
such a person to have such a license or credential to own and/or control
a firm, you must not deny certification solely on the ground that the
person lacks the license or credential. However, you may take into
account the absence of the license or credential as one factor in
determining whether the socially and economically disadvantaged owners
actually control the firm.

\(i\) (1) You may consider differences in remuneration between the
socially and economically disadvantaged owners and other participants in
the firm in determining whether to certify a firm as a DBE. Such
consideration shall be in the context of the duties of the persons
involved, normal industry practices, the firm\'s policy and practice
concerning reinvestment of income, and any other explanations for the
differences proffered by the firm. You may determine that a firm is
controlled by its socially and economically disadvantaged owner although
that owner\'s remuneration is lower than that of some other participants
in the firm.

\(2\) In a case where a non-disadvantaged individual formerly controlled
the firm, and a socially and economically disadvantaged individual now
controls it, you may consider a difference between the remuneration of
the former and current controller of the firm as a factor in determining
who controls the firm, particularly when the non-disadvantaged
individual remains involved with the firm and continues to receive
greater compensation than the disadvantaged individual.

\(j\) In order to be viewed as controlling a firm, a socially and
economically disadvantaged owner cannot engage in outside employment or
other business interests that conflict with the management of the firm
or prevent the individual from devoting sufficient time and attention to
the affairs of the firm to control its activities. For example, absentee
ownership of a business and part-time work in a full-time firm are not
viewed as constituting control. However, an individual could be viewed
as controlling a part-time business that operates only on evenings
and/or weekends, if the individual controls it all the time it is
operating.

\(k\) (1) A socially and economically disadvantaged individual may
control a firm even though one or more of the individual\'s immediate
family members (who themselves are not socially and economically
disadvantaged individuals) participate in the firm as a manager,
employee, owner, or in another capacity. Except as otherwise provided in
this paragraph, you must make a judgment about the control the socially
and economically disadvantaged owner exercises vis-a-vis other persons
involved in the business as you do in other situations, without regard
to whether or not the other persons are immediate family members.

\(2\) If you cannot determine that the socially and economically
disadvantaged owners \-- as distinct from the family as a whole \--
control the firm, then the socially and economically disadvantaged
owners have failed to carry their burden of proof concerning control,
even though they may participate significantly in the firm\'s
activities.

\(l\) Where a firm was formerly owned and/or controlled by a
non-disadvantaged individual (whether or not an immediate family
member), ownership and/or control were transferred to a socially and
economically disadvantaged individual, and the non-disadvantaged
individual remains involved with the firm in any capacity, the
disadvantaged individual now owning the firm must demonstrate to you, by
clear and convincing evidence, that:

\(1\) The transfer of ownership and/or control to the disadvantaged
individual was made for reasons other than obtaining certification as a
DBE; and

\(2\) The disadvantaged individual actually controls the management,
policy, and operations of the firm, notwithstanding the continuing
participation of a non-disadvantaged individual who formerly owned
and/or controlled the firm.

\(m\) In determining whether a firm is controlled by its socially and
economically disadvantaged owners, you may consider whether the firm
owns equipment necessary to perform its work. However, you must not
determine that a firm is not controlled by socially and economically
disadvantaged individuals solely because the firm leases, rather than
owns, such equipment, where leasing equipment is a normal industry
practice and the lease does not involve a relationship with a prime
contractor or other party that compromises the independence of the firm.

\(n\) You must grant certification to a firm only for specific types of
work in which the socially and economically disadvantaged owners have
the ability to control the firm. To become certified in an additional
type of work, the firm need demonstrate to you only that its socially
and economically disadvantaged owners are able to control the firm with
respect to that type of work. You may not, in this situation, require
that the firm be recertified or submit a new application for
certification, but you must verify the disadvantaged owner\'s control of
the firm in the additional type of work.

\(o\) A business operating under a franchise or license agreement may be
certified if it meets the standards in this subpart and the franchiser
or licenser is not affiliated with the franchisee or licensee. In
determining whether affiliation exists, you should generally not
consider the restraints relating to standardized quality, advertising,
accounting format, and other provisions imposed on the franchisee or
licensee by the franchise agreement or license, provided that the
franchisee or licensee has the right to profit from its efforts and
bears the risk of loss commensurate with ownership. Alternatively, even
though a franchisee or licensee may not be controlled by virtue of such
provisions in the franchise agreement or license, affiliation could
arise through other means, such as common management or excessive
restrictions on the sale or transfer of the franchise interest or
license.

\(p\) In order for a partnership to be controlled by socially and
economically disadvantaged individuals, any non-disadvantaged partners
must not have the power, without the specific written concurrence of the
socially and economically disadvantaged partner(s), to contractually
bind the partnership or subject the partnership to contract or tort
liability.

\(q\) The socially and economically disadvantaged individuals
controlling a firm may use an employee leasing company. The use of such
a company does not preclude the socially and economically disadvantaged
individuals from controlling their firm if they continue to maintain an
employer-employee relationship with the leased employees. This includes
being responsible for hiring, firing, training, assigning, and otherwise
controlling the on-the-job activities of the employees, as well as
ultimate responsibility for wage and tax obligations related to the
employees.

## 

## §26.73 What are other rules affecting certification?

\(a\) (1) Consideration of whether a firm performs a commercially useful
function or is a regular dealer pertains solely to counting toward DBE
goals the participation of firms that have already been certified as
DBEs. Except as provided in paragraph (a)(2) of this section, you must
not consider commercially useful function issues in any way in making
decisions about whether to certify a firm as a DBE.

\(2\) You may consider, in making certification decisions, whether a
firm has exhibited a pattern of conduct indicating its involvement in
attempts to evade or subvert the intent or requirements of the DBE
program.

\(b\) You must evaluate the eligibility of a firm on the basis of
present circumstances. You must not refuse to certify a firm based
solely on historical information indicating a lack of ownership or
control of the firm by socially and economically disadvantaged
individuals at some time in the past, if the firm currently meets the
ownership and control standards of this part. Nor must you refuse to
certify a firm solely on the basis that it is a newly formed firm.

\(c\) DBE firms and firms seeking DBE certification shall cooperate
fully with your requests (and DOT requests) for information relevant to
the certification process. Failure or refusal to provide such
information is a ground for a denial or removal of certification.

\(d\) Only firms organized for profit may be eligible DBEs.
Not-for-profit organizations, even though controlled by socially and
economically disadvantaged individuals, are not eligible to be certified
as DBEs.

\(e\) An eligible DBE firm must be owned by individuals who are socially
and economically disadvantaged. Except as provided in this paragraph, a
firm that is not owned by such individuals, but instead is owned by
another firm \-- even a DBE firm \-- cannot be an eligible DBE.

\(1\) If socially and economically disadvantaged individuals own and
control a firm through a parent or holding company, established for tax,
capitalization or other purposes consistent with industry practice, and
the parent or holding company in turn owns and controls an operating
subsidiary, you may certify the subsidiary if it otherwise meets all
requirements of this subpart. In this situation, the individual owners
and controllers of the parent or holding company are deemed to control
the subsidiary through the parent or holding company.

\(2\) You may certify such a subsidiary only if there is cumulatively 51
percent ownership of the subsidiary by socially and economically
disadvantaged individuals. The following examples illustrate how this
cumulative ownership provision works:

EXAMPLE 1: Socially and economically disadvantaged individuals own 100
percent of a holding company, which has a wholly-owned subsidiary. The
subsidiary may be certified, if it meets all other requirements.

EXAMPLE 2: Disadvantaged individuals own 100 percent of the holding
company, which owns 51 percent of a subsidiary. The subsidiary may be
certified, if all other requirements are met.

EXAMPLE 3: Disadvantaged individuals own 80 percent of the holding
company, which in turn owns 70 percent of a subsidiary. In this case,
the cumulative ownership of the subsidiary by disadvantaged individuals
is 56 percent (80 percent of the 70 percent). This is more than 51
percent, so you may certify the subsidiary, if all other requirements
are met.

EXAMPLE 4: Same as Example 2 or 3, but someone other than the socially
and economically disadvantaged owners of the parent or holding company
controls the subsidiary. Even though the subsidiary is owned by
disadvantaged individuals, through the holding or parent company, you
cannot certify it because it fails to meet control requirements.

EXAMPLE 5: Disadvantaged individuals own 60 percent of the holding
company, which in turn owns 51 percent of a subsidiary. In this case,
the cumulative ownership of the subsidiary by disadvantaged individuals
is about 31 percent. This is less than 51 percent, so you cannot certify
the subsidiary.

EXAMPLE 6: The holding company, in addition to the subsidiary seeking
certification, owns several other companies. The combined gross receipts
of the holding companies and its subsidiaries are greater than the size
standard for the subsidiary

seeking certification and/or the gross receipts cap of §26.65(b. Under
the rules concerning affiliation, the subsidiary fails to meet the size
standard and cannot be certified.

\(f\) Recognition of a business as a separate entity for tax or
corporate purposes is not necessarily sufficient to demonstrate that a
firm is an independent business, owned and controlled by socially and
economically disadvantaged individuals.

\(g\) You must not require a DBE firm to be prequalified as a condition
for certification unless the recipient requires all firms that
participate in its contracts and subcontracts to be prequalified.

\(h\) A firm that is owned by an Indian tribe, Alaska Native
Corporation, or Native Hawaiian organization as an entity, rather than
by Indians, Alaska Natives, or Native Hawaiians as individuals, may be
eligible for certification. Such a firm must meet the size standards of
§26.65. Such a firm must be controlled by socially and economically
disadvantaged individuals, as provided in §26.71.

SUBPART E - CERTIFICATION PROCEDURES

## 

## §26.81 What are the requirements for Unified Certification Programs?

\(a\) You and all other DOT recipients in your state must participate in
a Unified Certification Program (UCP).

\(1\) Within three years of \[insert date 30 days after date of
publication in Federal Register\], you and the other recipients in your
state must sign an agreement establishing the UCP for that state and
submit the agreement to the Secretary for approval. The Secretary may,
on the basis of extenuating circumstances shown by the recipients in the
state, extend this deadline for no more than one additional year.

\(2\) The agreement must provide for the establishment of a UCP meeting
all the requirements of this section. The agreement must specify that
the UCP will follow all certification procedures and standards of this
part, on the same basis as recipients; that the UCP shall cooperate
fully with oversight, review, and monitoring activities of DOT and its
operating administrations; and that the UCP shall implement DOT
directives and guidance concerning certification matters. The agreement
shall also commit recipients to ensuring that the UCP has sufficient
resources and expertise to carry out the requirements of this part. The
agreement shall include an implementation schedule ensuring that the UCP
is fully operational no later than 18 months following the approval of
the agreement by the Secretary.

\(3\) Subject to approval by the Secretary, the UCP in each state may
take any form acceptable to the recipients in that state.

\(4\) The Secretary shall review the UCP and approve it, disapprove it,
or remand it to the recipients in the state for revisions. A complete
agreement which is not disapproved or remanded within 180 days of its
receipt is deemed to be accepted.

\(5\) If you and the other recipients in your state fail to meet the
deadlines set forth in this paragraph (a), you shall have the
opportunity to make an explanation to the Secretary why a deadline could
not be met and why meeting the deadline was beyond your control. If you
fail to make such an explanation, or the explanation does not justify
the failure to meet the deadline, the Secretary shall direct you to
complete the required action by a date certain. If you and the other
recipients fail to carry out this direction in a timely manner, you are
collectively in noncompliance with this part.

\(b\) The UCP shall make all certification decisions on behalf of all
DOT recipients in the state with respect to participation in the DOT DBE
Program.

\(1\) Certification decisions by the UCP shall be binding on all DOT
recipients within the state.

\(2\) The UCP shall provide \"one-stop shopping\" to applicants for
certification, such that an applicant is required to apply only once for
a DBE certification that will be honored by all recipients in the state.

\(3\) All obligations of recipients with respect to certification and
nondiscrimination must be carried out by UCPs, and recipients may use
only UCPs that comply with the certification and nondiscrimination
requirements of this part.

\(c\) All certifications by UCPs shall be pre-certifications; i.e.,
certifications that have been made final before the due date for bids or
offers on a contract on which a firm seeks to participate as a DBE.

\(d\) A UCP is not required to process an application for certification
from a firm having its principal place of business outside the state if
the firm is not certified by the UCP in the state in which it maintains
its principal place of business. The \"home state\" UCP shall share its
information and documents concerning the firm with other UCPs that are
considering the firm\'s application.

\(e\) Subject to DOT approval as provided in this section, the
recipients in two or more states may form a regional UCP. UCPs may also
enter into written reciprocity agreements with other UCPs. Such an
agreement shall outline the specific responsibilities of each
participant. A UCP may accept the certification of any other UCP or DOT
recipient.

\(f\) Pending the establishment of UCPs meeting the requirements of this
section, you may enter into agreements with other recipients, on a
regional or inter-jurisdictional basis, to perform certification
functions required by this part. You may also grant reciprocity to other
recipient\'s certification decisions.

\(g\) Each UCP shall maintain a unified DBE directory containing, for
all firms certified by the UCP (including those from other states
certified under the provisions of this section), the information
required by §26.31. The UCP shall make the directory available to the
public electronically, on the internet, as well as in print. The UCP
shall update the electronic version of the directory by including
additions, deletions, and other changes as soon as they are made.

\(h\) Except as otherwise specified in this section, all provisions of
this subpart and subpart D of this part pertaining to recipients also
apply to UCPs.

##  

## §26.83 What procedures do recipients follow in making certification decisions?

\(a\) You must ensure that only firms certified as eligible DBEs under
this section participate as DBEs in your program.

\(b\) You must determine the eligibility of firms as DBEs consistent
with the standards of subpart D of this part. When a UCP is formed, the
UCP must meet all the requirements of subpart D of this part and this
subpart that recipients are required to meet.

\(c\) You must take all the following steps in determining whether a DBE
firm meets the standards of subpart D of this part:

\(1\) Perform an on-site visit to the offices of the firm. You must
interview the principal officers of the firm and review their resumes
and/or work histories. You must also perform an on-site visit to job
sites if there are such sites on which the firm is working at the time
of the eligibility investigation in your jurisdiction or local area. You
may rely upon the site visit report of any other recipient with respect
to a firm applying for certification;

\(2\) If the firm is a corporation, analyze the ownership of stock in
the firm;

\(3\) Analyze the bonding and financial capacity of the firm;

\(4\) Determine the work history of the firm, including contracts it has
received and work it has completed;

\(5\) Obtain a statement from the firm of the type of work it prefers to
perform as part of the DBE program and its preferred locations for
performing the work, if any;

\(6\) Obtain or compile a list of the equipment owned by or available to
the firm and the licenses the firm and its key personnel possess to
perform the work it seeks to do as part of the DBE program;

\(7\) Require potential DBEs to complete and submit an appropriate
application form.

\(i\) Uniform form \[reserved\]

\(ii\) You must make sure that the applicant attests to the accuracy and
truthfulness of the information on the application form. This shall be
done either in the form of an affidavit sworn to by the applicant before
a person who is authorized by state law to administer oaths or in the
form of an unsworn declaration executed under penalty of perjury of the
laws of the United States.

\(iii\) You must review all information on the form prior to making a
decision about the eligibility of the firm.

\(d\) When another recipient, in connection with its consideration of
the eligibility of a firm, makes a written request for certification
information you have obtained about that firm (e.g., including
application materials or the report of a site visit, if you have made
one to the firm), you must promptly make the information available to
the other recipient.

\(e\) When another DOT recipient has certified a firm, you have
discretion to take any of the following actions:

\(1\) Certify the firm in reliance on the certification decision of the
other recipient;

\(2\) Make an independent certification decision based on documentation
provided by the other recipient, augmented by any additional information
you require the applicant to provide; or

\(3\) Require the applicant to go through your application process
without regard to the action of the other recipient.

\(f\) Subject to the approval of the concerned operating administration
as part of your DBE program, you may impose a reasonable application fee
for certification. Fee waivers shall be made in appropriate cases.

\(g\) You must safeguard from disclosure to unauthorized persons
information gathered as part of the certification process that may
reasonably be regarded as proprietary or other confidential business
information, consistent with applicable Federal, state, and local law.

\(h\) Once you have certified a DBE, it shall remain certified for a
period of at least three years unless and until its certification has
been removed through the procedures of §26.87. You may not require DBEs
to reapply for certification as a condition of continuing to participate
in the program during this three-year period, unless the factual basis
on which the certification was made changes.

\(i\) If you are a DBE, you must inform the recipient or UCP in writing
of any change in circumstances affecting your ability to meet size,
disadvantaged status, ownership, or control requirements of this part or
any material change in the information provided in your application
form.

\(1\) Changes in management responsibility among members of a limited
liability company are covered by this requirement.

\(2\) You must attach supporting documentation describing in detail the
nature of such changes.

\(3\) The notice must take the form of an affidavit sworn to by the
owners of the firm before a person who is authorized by state law to
administer oaths or of an unsworn declaration executed under penalty of
perjury of the laws of the United States. You must provide the written
notification within 30 days of the occurrence of the change. If you fail
to make timely notification of such a change, you will be deemed to have
failed to cooperate under §26.109(c.

\(j\) If you are a DBE, you must provide to the recipient, every year on
the anniversary of the date of your certification, an affidavit sworn to
by the firm\'s owners before a person who is authorized by state law to
administer oaths or an unsworn declaration executed under penalty of
perjury of the laws of the United States. This affidavit must affirm
that there have been no changes in the firm\'s circumstances affecting
its ability to meet size, disadvantaged status, ownership, or control
requirements of this part or any material changes in the information
provided in its application form, except for changes about which you
have notified the recipient under paragraph (i) of this section. The
affidavit shall specifically affirm that your firm continues to meet SBA
business size criteria and the overall gross receipts cap of this part,
documenting this affirmation with supporting documentation of your
firm\'s size and gross receipts. If you fail to provide this affidavit
in a timely manner, you will be deemed to have failed to cooperate under
§26.109(c).

\(k\) If you are a recipient, you must make decisions on applications
for certification within 90 days of receiving from the applicant firm
all information required under this part. You may extend this time
period once, for no more than an additional 60 days, upon written notice
to the firm, explaining fully and specifically the reasons for the
extension. You may establish a different time frame in your DBE program,
upon a showing that this time frame is not feasible, and subject to the
approval of the concerned operating administration. Your failure to make
a decision by the applicable deadline under this paragraph is deemed a
constructive denial of the application, on the basis of which the firm
may appeal to DOT under §26.89.

## 

## §26.85 What rules govern recipients\' denials of initial requests for certification?

\(a\) When you deny a request by a firm, which is not currently
certified with you, to be certified as a DBE, you must provide the firm
a written explanation of the reasons for the denial, specifically
referencing the evidence in the record that supports each reason for the
denial. All documents and other information on which the denial is based
must be made available to the applicant, on request.

\(b\) When a firm is denied certification, you must establish a time
period of no more than twelve months that must elapse before the firm
may reapply to the recipient for certification. You may provide, in your
DBE program, subject to approval by the concerned operating
administration, a shorter waiting period for reapplication. The time
period for reapplication begins to run on the date the explanation
required by paragraph (a) of this section is received by the firm.

\(c\) When you make an administratively final denial of certification
concerning a firm, the firm may appeal the denial to the Department
under §26.89.

## 

## §26.87 What procedures does a recipient use to remove a DBE\'s eligibility?

\(a\) Ineligibility complaints.

\(1\) Any person may file with you a written complaint alleging that a
currently-certified firm is ineligible and specifying the alleged
reasons why the firm is ineligible. You are not required to accept a
general allegation that a firm is ineligible or an anonymous complaint.
The complaint may include any information or arguments supporting the
complainant\'s assertion that the firm is ineligible and should not
continue to be certified. Confidentiality of complainants\' identities
must be protected as provided in §26.109(b).

\(2\) You must review your records concerning the firm, any material
provided by the firm and the complainant, and other available
information. You may request additional information from the firm or
conduct any other investigation that you deem necessary.

\(3\) If you determine, based on this review, that there is reasonable
cause to believe that the firm is ineligible, you must provide written
notice to the firm that you propose to find the firm ineligible, setting
forth the reasons for the proposed determination. If you determine that
such reasonable cause does not exist, you must notify the complainant
and the firm in writing of this determination and the reasons for it.
All statements of reasons for findings on the issue of reasonable cause
must specifically reference the evidence in the record on which each
reason is based.

\(b\) Recipient-initiated proceedings. If, based on notification by the
firm of a change in its circumstances or other information that comes to
your attention, you determine that there is reasonable cause to believe
that a currently certified firm is ineligible, you must provide written
notice to the firm that you propose to find the firm ineligible, setting
forth the reasons for the proposed determination. The statement of
reasons for the finding of reasonable cause must specifically reference
the evidence in the record on which each reason is based.

\(c\) DOT directive to initiate proceeding.

\(1\) If the concerned operating administration determines that
information in your certification records, or other information
available to the concerned operating administration, provides reasonable
cause to believe that a firm you certified does not meet the eligibility
criteria of this part, the concerned operating administration may direct
you to initiate a proceeding to remove the firm\'s certification.

\(2\) The concerned operating administration must provide you and the
firm a notice setting forth the reasons for the directive, including any
relevant documentation or other information.

\(3\) You must immediately commence and prosecute a proceeding to remove
eligibility as provided by paragraph (b) of this section.

\(d\) Hearing. When you notify a firm that there is reasonable cause to
remove its eligibility as provided in paragraph (a), (b), or (c) of this
section, you must give the firm an opportunity for an informal hearing,
at which the firm may respond to the reasons for the proposal to remove
its eligibility in person and provide information and arguments
concerning why it should remain certified.

\(1\) In such a proceeding, you bear the burden of proving, by a
preponderance of the evidence, that the firm does not meet the
certification standards of this part.

\(2\) You must maintain a complete record of the hearing, by any means
acceptable under state law for the retention of a verbatim record of an
administrative hearing. If there is an appeal to DOT under §26.89, you
must provide a transcript of the hearing to DOT and, on request, to the
firm. You must retain the original record of the hearing. You may charge
the firm only for the cost of copying the record.

\(3\) The firm may elect to present information and arguments in
writing, without going to a hearing. In such a situation, you bear the
same burden of proving, by a preponderance of the evidence, that the
firm does not meet the certification standards, as you would during a
hearing.

\(e\) Separation of functions. You must ensure that the decision in a
proceeding to remove a firm\'s eligibility is made by an office and
personnel that did not take part in actions leading to or seeking to
implement the proposal to remove the firm\'s eligibility and are not
subject, with respect to the matter, to direction from the office or
personnel who did take part in these actions.

\(1\) Your method of implementing this requirement must be made part of
your DBE program.

\(2\) The decisionmaker must be an individual who is knowledgeable about
the certification requirements of your DBE program and this part.

\(3\) Before a UCP is operational in its state, a small airport or small
transit authority (i.e., an airport or transit authority serving an area
with less than 250,000 population) is required to meet this requirement
only to the extent feasible.

\(f\) Grounds for Decision. You must not base a decision to remove
eligibility on a reinterpretation or changed opinion of information
available to the recipient at the time of its certification of the firm.
You may base such a decision only on one or more of the following:

\(1\) Changes in the firm\'s circumstances since the certification of
the firm by the recipient that render the firm unable to meet the
eligibility standards of this part;

\(2\) Information or evidence not available to you at the time the firm
was certified;

\(3\) Information that was concealed or misrepresented by the firm in
previous certification actions by a recipient;

\(4\) A change in the certification standards or requirements of the
Department since you certified the firm; or

\(5\) A documented finding that your determination to certify the firm
was factually erroneous.

\(g\) Notice of decision. Following your decision, you must provide the
firm written notice of the decision and the reasons for it, including
specific references to the evidence in the record that supports each
reason for the decision. The notice must inform the firm of the
consequences of your decision and of the availability of an appeal to
the Department of Transportation under §26.89. You must send copies of
the notice to the complainant in an ineligibility complaint or the
concerned operating administration that had directed you to initiate the
proceeding.

\(h\) Status of firm during proceeding.

\(1\) A firm remains an eligible DBE during the pendancy of your
proceeding to remove its eligibility.

\(2\) The firm does not become ineligible until the issuance of the
notice provided for in paragraph (g) of this section.

\(i\) Effects of removal of eligibility. When you remove a firm\'s
eligibility, you must take the following action:

\(1\) When a prime contractor has made a commitment to using the
ineligible firm, or you have made a commitment to using a DBE prime
contractor, but a subcontract or contract has not been executed before
you issue the decertification notice provided for in paragraph (g) of
this section, the ineligible firm does not count toward the contract
goal or overall goal. You must direct the prime contractor to meet the
contract goal with an eligible DBE firm or demonstrate to you that it
has made a good faith effort to do so.

\(2\) If a prime contractor has executed a subcontract with the firm
before you have notified the firm of its ineligibility, the prime
contractor may continue to use the firm on the contract and may continue
to receive credit toward its DBE goal for the firm\'s work. In this
case, or in a case where you have let a prime contract to the DBE that
was later ruled ineligible, the portion of the ineligible firm\'s
performance of the contract remaining after you issued the notice of its
ineligibility shall not count toward your overall goal, but may count
toward the contract goal.

\(3\) Exception: If the DBE\'s ineligibility is caused solely by its
having exceeded the size standard during the performance of the
contract, you may continue to count its participation on that contract
toward overall and contract goals.

\(j\) Availability of appeal. When you make an administratively final
removal of a firm\'s eligibility under this section, the firm may appeal
the removal to the Department under §26.89.

## 

## §26.89 What is the process for certification appeals to the Department of Transportation?

\(a\) (1) If you are a firm which is denied certification or whose
eligibility is removed by a recipient, you may make an administrative
appeal to the Department.

\(2\) If you are a complainant in an ineligibility complaint to a
recipient (including the concerned operating administration in the
circumstances provided in §26.87(c)), you may appeal to the Department
if the recipient does not find reasonable cause to propose removing the
firm\'s eligibility or, following a removal of eligibility proceeding,
determines that the firm is eligible.

\(3\) Send appeals to the following address:

U.S. Department of Transportation

Office of Civil Rights

400 7th Street, S.W., Room 2401

Washington, D.C. 20590

\(b\) Pending the Department\'s decision in the matter, the recipient\'s
decision remains in effect. The Department does not stay the effect of
the recipient\'s decision while it is considering an appeal.

\(c\) If you want to file an appeal, you must send a letter to the
Department within 90 days of the date of the recipient\'s final
decision, containing information and arguments concerning why the
recipient\'s decision should be reversed. The Department may accept an
appeal filed later than 90 days after the date of the decision if the
Department determines that there was good cause for the late filing of
the appeal.

\(1\) If you are an appellant who is a firm which has been denied
certification, whose certification has been removed, whose owner is
determined not to be a member of a designated disadvantaged group, or
concerning whose owner the presumption of disadvantage has been
rebutted, your letter must state the name and address of any other
recipient which currently certifies the firm, which has rejected an
application for certification from the firm or removed the firm\'s
eligibility within one year prior to the date of the appeal, or before
which an application for certification or a removal of eligibility is
pending. Failure to provide this information may be deemed a failure to
cooperate under §26.109(c).

\(2\) If you are an appellant other than one described in paragraph
(c)(1) of this section, the Department will request, and the firm whose
certification has been questioned shall promptly provide, the
information called for in paragraph (c)(1) of this section. Failure to
provide this information may be deemed a failure to cooperate under
§26.109(c).

\(d\) When it receives an appeal, the Department requests a copy of the
recipient\'s complete administrative record in the matter. If you are
the recipient, you must provide the administrative record, including a
hearing transcript, within 20 days of the Department\'s request. The
Department may extend this time period on the basis of a recipient\'s
showing of good cause. To facilitate the Department\'s review of a
recipient\'s decision, you must ensure that such administrative records
are well organized, indexed, and paginated. Records that do not comport
with these requirements are not acceptable and will be returned to you
to be corrected immediately. If an appeal is brought concerning one
recipient\'s certification decision concerning a firm, and that
recipient relied on the decision and/or administrative record of another
recipient, this requirement applies to both recipients involved.

\(e\) The Department makes its decision based solely on the entire
administrative record. The Department does not make a de novo review of
the matter and does not conduct a hearing. The Department may supplement
the administrative record by adding relevant information made available
by the DOT Office of Inspector General; Federal, state, or local law
enforcement authorities; officials of a DOT operating administration or
other appropriate DOT office; a recipient; or a firm or other private
party.

\(f\) As a recipient, when you provide supplementary information to the
Department, you shall also make this information available to the firm
and any third-party complainant involved, consistent with Federal or
applicable state laws concerning freedom of information and privacy. The
Department makes available, on request by the firm and any third-party
complainant involved, any supplementary information it receives from any
source.

\(1\) The Department affirms your decision unless it determines, based
on the entire administrative record, that your decision is unsupported
by substantial evidence or inconsistent with the substantive or
procedural provisions of this part concerning certification.

\(2\) If the Department determines, after reviewing the entire
administrative record, that your decision was unsupported by substantial
evidence or inconsistent with the substantive or procedural provisions
of this part concerning certification, the Department reverses your
decision and directs you to certify the firm or remove its eligibility,
as appropriate. You must take the action directed by the Department\'s
decision immediately upon receiving written notice of it.

\(3\) The Department is not required to reverse your decision if the
Department determines that a procedural error did not result in
fundamental unfairness to the appellant or substantially prejudice the
opportunity of the appellant to present its case.

\(4\) If it appears that the record is incomplete or unclear with
respect to matters likely to have a significant impact on the outcome of
the case, the Department may remand the record to you with instructions
seeking clarification or augmentation of the record before making a
finding. The Department may also remand a case to you for further
proceedings consistent with Department instructions concerning the
proper application of the provisions of this part.

\(5\) The Department does not uphold your decision based on grounds not
specified in your decision.

\(6\) The Department\'s decision is based on the status and
circumstances of the firm as of the date of the decision being appealed.

\(7\) The Department provides written notice of its decision to you, the
firm, and the complainant in an ineligibility complaint. A copy of the
notice is also sent to any other recipient whose administrative record
or decision has been involved in the proceeding (see paragraph (d) of
this section). The notice includes the reasons for the Department\'s
decision, including specific references to the evidence in the record
that supports each reason for the decision.

\(8\) The Department\'s policy is to make its decision within 180 days
of receiving the complete administrative record. If the Department does
not make its decision within this period, the Department provides
written notice to concerned parties, including a statement of the reason
for the delay and a date by which the appeal decision will be made.

\(g\) All decisions under this section are administratively final, and
are not subject to petitions for reconsideration.

##  

## §26.91 What actions do recipients take following DOT certification appeal

decisions?

\(a\) If you are the recipient from whose action an appeal under §26.89
is taken, the decision is binding. It is not binding on other
recipients.

\(b\) If you are a recipient to which a DOT determination under §26.89
is applicable, you must take the following action:

\(1\) If the Department determines that you erroneously certified a
firm, you must remove the firm\'s eligibility on receipt of the
determination, without further proceedings on your part. Effective on
the date of your receipt of the Department\'s determination, the
consequences of a removal of eligibility set forth in §26.87(i) take
effect.

\(2\) If the Department determines that you erroneously failed to find
reasonable cause to remove the firm\'s eligibility, you must
expeditiously commence a proceeding to determine whether the firm\'s
eligibility should be removed, as provided in §26.87.

\(3\) If the Department determines that you erroneously declined to
certify or removed the eligibility of the firm, you must certify the
firm, effective on the date of your receipt of the written notice of
Department\'s determination.

\(4\) If the Department determines that you erroneously determined that
the presumption of social and economic disadvantage either should or
should not be deemed rebutted, you must take appropriate corrective
action as determined by the Department.

\(5\) If the Department affirms your determination, no further action is
necessary.

\(c\) Where DOT has upheld your denial of certification to or removal of
eligibility from a firm, or directed the removal of a firm\'s
eligibility, other recipients with whom the firm is certified may
commence a proceeding to remove the firm\'s eligibility under §26.87.
Such recipients must not remove the firm\'s eligibility absent such a
proceeding. Where DOT has reversed your denial of certification to or
removal of eligibility from a firm, other recipients must take the DOT
action into account in any certification action involving the firm.
However, other recipients are not required to certify the firm based on
the DOT decision.

SUBPART F - COMPLIANCE AND ENFORCEMENT

## 

## §26.101 What compliance procedures apply to recipients? 

\(a\) If you fail to comply with any requirement of this part, you may
be

subject to formal enforcement action under §26.103 or §26.105 or
appropriate program sanctions by the concerned operating administration,
such as the suspension or termination of Federal funds, or refusal to
approve projects, grants or contracts until deficiencies are remedied.
Program sanctions may include, in the case of the FHWA program, actions
provided for under 23 CFR 1.36; in the case of the FAA program, actions
consistent with 49 U.S.C. 47106(d), 47111(d), and 47122; and in the case
of the FTA program, any actions permitted under 49 U.S.C. chapter 53 or
applicable FTA program requirements.

\(b\) As provided in statute, you will not be subject to compliance
actions or sanctions for failing to carry out any requirement of this
part because you have been prevented from complying because a Federal
court has issued a final order in which the court found that the
requirement is unconstitutional.

## 

## §26.103 What enforcement actions apply in FHWA and FTA programs?

The provisions of this section apply to enforcement actions under FHWA
and FTA programs:

\(a\) Noncompliance complaints. Any person who believes that

a recipient has failed to comply with its obligations under this part
may file a written complaint with the concerned operating
administration\'s Office of Civil Rights. If you want to file a
complaint, you must do so no later than 180 days after the date of the
alleged violation or the date on which you learned of a continuing
course of conduct in violation of this part. In response to your written
request, the Office of Civil Rights may extend the time for filing in
the interest of justice, specifying in writing the reason for so doing.
The Office of Civil Rights may protect the confidentiality of your
identity as provided in §26.109(b). Complaints under this part are
limited to allegations of violation of the provisions of this part.

\(b\) Compliance reviews. The concerned operating administration may
review the recipient\'s compliance with this part at any time, including
reviews of paperwork and on-site reviews, as appropriate. The Office of
Civil Rights may direct the operating administration to initiate a
compliance review based on complaints received.

\(c\) Reasonable cause notice. If it appears, from the investigation of
a complaint or the results of a compliance review, that you, as a
recipient, are in noncompliance with this part, the appropriate DOT
office promptly sends you , return receipt requested, a written notice
advising you that there is reasonable cause to find you in
noncompliance. The notice states the reasons for this finding and
directs you to reply within 30 days concerning whether you wish to begin
conciliation.

\(d\) Conciliation.

\(1\) If you request conciliation, the appropriate DOT office shall
pursue conciliation for at least 30, but not more than 120, days from
the date of your request. The appropriate DOT office may extend the
conciliation period for up to 30 days for good cause, consistent with
applicable statutes.

\(2\) If you and the appropriate DOT office sign a conciliation
agreement, then the matter is regarded as closed and you are regarded as
being in compliance. The conciliation agreement sets forth the measures
you have taken or will take to ensure compliance. While a conciliation
agreement is in effect, you remain eligible for FHWA or FTA financial
assistance.

\(3\) The concerned operating administration shall monitor your
implementation of the conciliation agreement and ensure that its terms
are complied with. If you fail to carry out the terms of a conciliation
agreement, you are in noncompliance.

\(4\) If you do not request conciliation, or a conciliation agreement is
not signed within the time provided in paragraph (d)(1) of this section,
then enforcement proceedings begin.

\(e\) Enforcement actions.

\(1\) Enforcement actions are taken as provided in this subpart.

\(2\) Applicable findings in enforcement proceedings are binding on all
DOT offices.

##  

## §26.105 What enforcement actions apply in FAA Programs?

\(a\) Compliance with all requirements of this part by airport sponsors
and other recipients of FAA financial assistance is enforced through the
procedures of Title 49 of the United States Code, including 49 U.S.C.
47106(d), 47111(d), and 47122, and regulations implementing them.

\(b\) The provisions of §26.103 (b) and this section apply to
enforcement actions in FAA programs.

\(c\) Any person who knows of a violation of this part by a recipient of
FAA funds may file a complaint under 14 CFR part 16 with the Federal
Aviation Administration Office of Chief Counsel.

## 

## §26.107 What enforcement actions apply to firms participating in the DBE program?

\(a\) If you are a firm that does not meet the eligibility criteria of
subpart D of this part and that attempts to participate in a
DOT-assisted program as a DBE on the basis of false, fraudulent, or
deceitful statements or representations or under circumstances
indicating a serious lack of business integrity or honesty,

the Department may initiate suspension or debarment proceedings against
you under 49 CFR part 29.

\(b\) If you are a firm that, in order to meet DBE contract goals or
other DBE program requirements, uses or attempts to use, on the basis of
false, fraudulent or deceitful statements or representations or under
circumstances indicating a serious lack of business integrity or
honesty, another firm that does not meet the eligibility criteria of
subpart D of this part, the Department may initiate suspension or
debarment proceedings against you under 49 CFR part 29.

\(c\) In a suspension or debarment proceeding brought under paragraph
(a) or (b) of this section, the concerned operating administration may
consider the fact that a purported DBE has been certified by a
recipient. Such certification does not preclude the Department from
determining that the purported DBE, or another firm that has used or
attempted to use it to meet DBE goals, should be suspended or debarred.

\(d\) The Department may take enforcement action under 49 CFR Part 31,
Program Fraud and Civil Remedies, against any participant in the DBE
program whose conduct is subject to such action under 49 CFR part 31.

\(e\) The Department may refer to the Department of Justice, for
prosecution under 18 U.S.C. 1001 or other applicable provisions of law,
any person who makes a false or fraudulent statement in connection with
participation of a DBE in any DOT-assisted program or otherwise violates
applicable Federal statutes.

## 

## §26.109 What are the rules governing information, confidentiality, cooperation, and intimidation or retaliation?

\(a\) Availability of records.

\(1\) In responding to requests for information concerning any aspect of
the DBE program, the Department complies with provisions of the Federal
Freedom of Information (5 U.S.C. 552) and Privacy Acts (5 U.S.C. 552a).
The Department may make available to the public any information
concerning the DBE program release of which is not prohibited by Federal
law.

\(2\) If you are a recipient, you shall safeguard from disclosure to
unauthorized persons information that may reasonably be considered as
confidential business information, consistent with Federal, state, and
local law.

\(b\) Confidentiality of information on complainants. Notwithstanding
the provisions of paragraph (a) of this section, the identity of
complainants shall be kept confidential, at their election. If such
confidentiality will hinder the investigation, proceeding or hearing, or
result in a denial of appropriate administrative due process to other
parties, the complainant must be advised for the purpose of waiving the
privilege. Complainants are advised that, in some circumstances, failure
to waive the privilege may result in the closure of the investigation or
dismissal of the proceeding or hearing. FAA follows the procedures of 14
CFR part 16 with respect to confidentiality of information in
complaints.

\(c\) Cooperation. All participants in the Department\'s DBE program
(including, but not limited to, recipients, DBE firms and applicants for
DBE certification, complainants and appellants, and contractors using
DBE firms to meet contract goals) are required to cooperate fully and
promptly with DOT and recipient compliance reviews, certification
reviews, investigations, and other requests for information. Failure to
do so shall be a ground for appropriate action against the party
involved (e.g., with respect to recipients, a finding of noncompliance;
with respect to DBE firms, denial of certification or removal of
eligibility and/or suspension and debarment; with respect to a
complainant or appellant, dismissal of the complaint or appeal; with
respect to a contractor which uses DBE firms to meet goals, findings of
non-responsibility for future contracts and/or suspension and
debarment).

\(d\) Intimidation and retaliation. If you are a recipient, contractor,
or any other participant in the program, you must not intimidate,
threaten, coerce, or discriminate against any individual or firm for the
purpose of interfering with any right or privilege secured by this part
or because the individual or firm has made a complaint, testified,
assisted, or participated in any manner in an investigation, proceeding,
or hearing under this part. If you violate this prohibition, you are in
noncompliance with this part.

# APPENDIX A TO PART 26 \-- GUIDANCE CONCERNING GOOD FAITH EFFORTS

I. When, as a recipient, you establish a contract goal on a DOT-assisted
contract, a bidder must, in order to be responsible and/or responsive,
make good faith efforts to meet the goal. The bidder can meet this
requirement in either of two ways. First, the bidder can meet the goal,
documenting commitments for participation by DBE firms sufficient for
this purpose. Second, even if it doesn\'t meet the goal, the bidder can
document adequate good faith efforts. This means that the bidder must
show that it took all necessary and reasonable steps to achieve a DBE
goal or other requirement of this part which, by their scope, intensity,
and appropriateness to the objective, could reasonably be expected to
obtain sufficient DBE participation, even if they were not fully
successful.

II\. In any situation in which you have established a contract goal,
part 26 requires you to use the good faith efforts mechanism of this
part. As a recipient, it is up to you to make a fair and reasonable
judgment whether a bidder that did not meet the goal made adequate good
faith efforts. It is important for you to consider the quality,
quantity, and intensity of the different kinds of efforts that the
bidder has made. The efforts employed by the bidder should be those that
one could reasonably expect a bidder to take if the bidder were actively
and aggressively trying to obtain DBE participation sufficient to meet
the DBE contract goal. Mere pro forma efforts are not good faith efforts
to meet the DBE contract requirements. We emphasize, however, that your
determination concerning the sufficiency of the firm\'s good faith
efforts is a judgment call: meeting quantitative formulas is not
required.

III\. The Department also strongly cautions you against requiring that a
bidder meet a contract goal (i.e., obtain a specified amount of DBE
participation) in order to be awarded a contract, even though the bidder
makes an adequate good faith efforts showing. This rule specifically
prohibits you from ignoring bona fide good faith efforts.

IV\. The following is a list of types of actions which you should
consider as part of the bidder\'s good faith efforts to obtain DBE
participation. It is not intended to be a mandatory checklist, nor is it
intended to be exclusive or exhaustive. Other factors or types of
efforts may be relevant in appropriate cases.

A. Soliciting through all reasonable and available means (e.g.
attendance at pre-bid meetings, advertising and/or written notices) the
interest of all certified DBEs who have the capability to perform the
work of the contract. The bidder must solicit this interest within
sufficient time to allow the DBEs to respond to the solicitation. The
bidder must determine with certainty if the DBEs are interested by
taking appropriate steps to follow up initial solicitations.

B. Selecting portions of the work to be performed by DBEs in order to
increase the likelihood that the DBE goals will be achieved. This
includes, where appropriate, breaking out contract work items into
economically feasible units to facilitate DBE participation, even when
the prime contractor might otherwise prefer to perform these work items
with its own forces.

C. Providing interested DBEs with adequate information about the plans,
specifications, and requirements of the contract in a timely manner to
assist them in responding to a solicitation.

D. (1) Negotiating in good faith with interested DBEs. It is the
bidder\'s responsibility to make a portion of the work available to DBE
subcontractors and suppliers and to select those portions of the work or
material needs consistent with the available DBE subcontractors and
suppliers, so as to facilitate DBE participation. Evidence of such
negotiation includes the names, addresses, and telephone numbers of DBEs
that were considered; a description of the information provided
regarding the plans and specifications for the work selected for
subcontracting; and evidence as to why additional agreements could not
be reached for DBEs to perform the work.

\(2\) A bidder using good business judgment would consider a number of
factors in negotiating with subcontractors, including DBE
subcontractors, and would take a firm\'s price and capabilities as well
as contract goals into consideration. However, the fact that there may
be some additional costs involved in finding and using DBEs is not in
itself sufficient reason for a bidder\'s failure to meet the contract
DBE goal, as long as such costs are reasonable. Also, the ability or
desire of a prime contractor to perform the work of a contract with its
own organization does not relieve the bidder of the responsibility to
make good faith efforts. Prime contractors are not, however, required to
accept higher quotes from DBEs if the price difference is excessive or
unreasonable.

E. Not rejecting DBEs as being unqualified without sound reasons based
on a thorough investigation of their capabilities. The contractor\'s
standing within its industry, membership in specific groups,
organizations, or associations and political or social affiliations (for
example union vs. non-union employee status) are not legitimate causes
for the rejection or non-solicitation of bids in the contractor\'s
efforts to meet the project goal.

F. Making efforts to assist interested DBEs in obtaining bonding, lines
of credit, or insurance as required by the recipient or contractor.

G. Making efforts to assist interested DBEs in obtaining necessary
equipment, supplies, materials, or related assistance or services.

H. Effectively using the services of available minority/women community
organizations; minority/women contractors\' groups; local, state, and
Federal minority/women business assistance offices; and other
organizations as allowed on a case-by-case basis to provide assistance
in the recruitment and placement of DBEs.

V. In determining whether a bidder has made good faith efforts, you may
take into account the performance of other bidders in meeting the
contract. For example, when the apparent successful bidder fails to meet
the contract goal, but others meet it, you may reasonably raise the
question of whether, with additional reasonable efforts, the apparent
successful bidder could have met the goal. If the apparent successful
bidder fails to meet the goal, but meets or exceeds the average DBE
participation obtained by other bidders, you may view this, in
conjunction with other factors, as evidence of the apparent successful
bidder having made good faith efforts.

# APPENDIX B TO PART 26 - FORMS

\[Reserved\]

# APPENDIX C TO PART 26 \-- DBE BUSINESS DEVELOPMENT PROGRAM GUIDELINES

The purpose of this program element is to further the development of
DBEs, including but not limited to assisting them to move into
non-traditional areas of work and/or compete in the marketplace outside
the DBE program, via the provision of training and assistance from the
recipient.

\(A\) Each firm that participates in a recipient\'s business development
program (BDP) program is subject to a program term determined by the
recipient. The term should consist of two stages; a developmental stage
and a transitional stage.

\(B\) In order for a firm to remain eligible for program participation,
it must continue to meet all eligibility criteria contained in part 26.

\(C\) By no later than 6 months of program entry, the participant should
develop and submit to the recipient a comprehensive business plan
setting forth the participant\'s business targets, objectives and goals.
The participant will not be eligible for program benefits until such
business plan is submitted and approved by the recipient. The approved
business plan will constitute the participant\'s short and long term
goals and the strategy for developmental growth to the point of economic
viability in non-traditional areas of work and/or work outside the DBE
program.

\(D\) The business plan should contain at least the following:

\(1\) An analysis of market potential, competitive environment and other
business analyses estimating the program participant\'s prospects for
profitable operation during the term of program participation and after
graduation from the program.

\(2\) An analysis of the firm\'s strengths and weaknesses, with
particular attention paid to the means of correcting any financial,
managerial, technical, or labor conditions which could impede the
participant from receiving contracts other than those in traditional
areas of DBE participation.

\(3\) Specific targets, objectives, and goals for the business
development of the participant during the next two years, utilizing the
results of the analysis conducted pursuant to paragraphs (C) and (D)(1)
of this appendix;

\(4\) Estimates of contract awards from the DBE program and from other
sources which are needed to meet the objectives and goals for the years
covered by the business plan; and

\(5\) Such other information as the recipient may require.

\(E\) Each participant should annually review its currently approved
business plan with the recipient and modify the plan as may be
appropriate to account for any changes in the firm\'s structure and
redefined needs. The currently approved plan should be considered the
applicable plan for all program purposes until the recipient approves in
writing a modified plan. The recipient should establish an anniversary
date for review of the participant\'s business plan and contract
forecasts.

\(F\) Each participant should annually forecast in writing its need for
contract awards for the next program year and the succeeding program
year during the review of its business plan conducted under paragraph
(E) of this appendix. Such forecast should be included in the
participant\'s business plan. The forecast should include:

\(1\) The aggregate dollar value of contracts to be sought under the DBE
program, reflecting compliance with the business plan;

\(2\) The aggregate dollar value of contracts to be sought in areas
other than traditional areas of DBE participation;

\(3\) The types of contract opportunities being sought, based on the
firm\'s primary line of business; and

\(4\) Such other information as may be requested by the recipient to aid
in providing effective business development assistance to the
participant.

\(G\) Program participation is divided into two stages; (1) a
developmental stage and (2) a transitional stage. The developmental
stage is designed to assist participants to overcome their social and
economic disadvantage by providing such assistance as may be necessary
and appropriate to enable them to access relevant markets and strengthen
their financial and managerial skills. The transitional stage of program
participation follows the developmental stage and is designed to assist
participants to overcome, insofar as practical, their social and
economic disadvantage and to prepare the participant for leaving the
program.

\(H\) The length of service in the program term should not be a pre-set
time frame for either the developmental or transitional stages but
should be figured on the number of years considered necessary in normal
progression of achieving the firm\'s established goals and objectives.
The setting of such time could be factored on such items as, but not
limited to, the number of contracts, aggregate amount of the contract
received, years in business, growth potential, etc.

\(I\) Beginning in the first year of the transitional stage of program
participation, each participant should annually submit for inclusion in
its business plan a transition management plan outlining specific steps
to promote profitable business operations in areas other than
traditional areas of DBE participation after graduation from the
program. The transition management plan should be submitted to the
recipient at the same time other modifications are submitted pursuant to
the annual review under paragraph (E) of this section. The plan should
set forth the same information as required under paragraph (F) of steps
the participant will take to continue its business development after the
expiration of its program term.

\(J\) When a participant is recognized as successfully completing the
program by substantially achieving the targets, objectives and goals set
forth in its program term, and has demonstrated the ability to compete
in the marketplace, its further participation within the program may be
determined by the recipient.

\(K\) In determining whether a concern has substantially achieved the
goals and objectives of its business plan, the following factors, among
others, should be considered by the recipient:

\(1\) Profitability;

\(2\) Sales, including improved ratio of non-traditional contracts to
traditional-type contracts;

\(3\) Net worth, financial ratios, working capital, capitalization,
access to credit and capital;

\(4\) Ability to obtain bonding;

\(5\) A positive comparison of the DBE\'s business and financial profile
with profiles of non-DBE businesses in the same area or similar business
category; and

\(6\) Good management capacity and capability.

\(L\) Upon determination by the recipient that the participant should be
graduated from the developmental program, the recipient should notify
the participant in writing of its intent to graduate the firm in a
letter of notification. The letter of notification should set forth
findings, based on the facts, for every material issue relating to the
basis of the program graduation with specific reasons for each finding.
The letter of notification should also provide the participant 45 days
from the date of service of the letter to submit in writing information
that would explain why the proposed basis of graduation is not
warranted.

\(M\) Participation of a DBE firm in the program may be discontinued by
the recipient prior to expiration of the firm\'s program term for good
cause due to the failure of the firm to engage in business practices
that will promote its competitiveness within a reasonable period of time
as evidenced by, among other indicators, a pattern of inadequate
performance or unjustified delinquent performance. Also, the recipient
can discontinue the participation of a firm that does not actively
pursue and bid on contracts, and a firm that, without justification,
regularly fails to respond to solicitations in the type of work it is
qualified for and in the geographical areas where it has indicated
availability under its approved business plan. The recipient should take
such action if over a 2- year period a DBE firm exhibits such a pattern.

# APPENDIX D TO PART 26 \-- MENTOR-PROTEGE PROGRAM GUIDELINES

\(A\) The purpose of this program element is to further the development
of DBEs, including but not limited to assisting them to move into
non-traditional areas of work and/or compete in the marketplace outside
the DBE program, via the provision of training and assistance from other
firms. To operate a mentor-protŽgŽ program, a recipient must obtain the
approval of the concerned operating administration.

\(B\) (1)Any mentor-protŽgŽ relationship shall be based on a written
development plan, approved by the recipient, which clearly sets forth
the objectives of the parties and their respective roles, the duration
of the arrangement and the services and resources to be provided by the
mentor to the protŽgŽ. The formal mentor-protŽgŽ agreement may set a fee
schedule to cover the direct and indirect cost for such services
rendered by the mentor for specific training and assistance to the
protŽgŽ through the life of the agreement. Services provided by the
mentor may be reimbursable under the FTA, FHWA, and FAA programs.

\(2\) To be eligible for reimbursement, the mentor\'s services provided
and associated costs must be directly attributable and properly
allowable to specific individual contracts. The recipient may establish
a line item for the mentor to quote the portion of the fee schedule
expected to be provided during the life of the contract. The amount
claimed shall be verified by the recipient and paid on an incremental
basis representing the time the protŽgŽ is working on the contract. The
total individual contract figures accumulated over the life of the
agreement shall not exceed the amount stipulated in the original
mentor/protŽgŽ agreement.

\(C\) DBEs involved in a mentor-protŽgŽ agreement must be independent
business entities which meet the requirements for certification as
defined in subpart D of this part. A protŽgŽ firm must be certified
before it begins participation in a mentor-protŽgŽ arrangement. If the
recipient chooses to recognize mentor/protŽgŽ agreements, it should
establish formal general program guidelines. These guidelines must be
submitted to the operating administration for approval prior to the
recipient executing an individual contractor/ subcontractor
mentor-protŽgŽ agreement.

# APPENDIX E TO PART 26 - INDIVIDUAL DETERMINATIONS OF SOCIAL AND ECONOMIC DISADVANTAGE

The following guidance is adapted, with minor modifications, from SBA
regulations concerning social and economic disadvantage determinations
(see 13 CFR 124.103(c) and 124.104).

## Social Disadvantage

I. Socially disadvantaged individuals are those who have been subjected
to racial or ethnic prejudice or cultural bias within American society
because of their identities as members of groups and without regard to
their individual qualities. Social disadvantage must stem from
circumstances beyond their control. Evidence of individual social
disadvantage must include the following elements:

\(A\) At least one objective distinguishing feature that has contributed
to social disadvantage, such as race, ethnic origin, gender, disability,
long-term residence in an environment isolated from the mainstream of
American society, or other similar causes not common to individuals who
are not socially disadvantaged;

\(B\) Personal experiences of substantial and chronic social
disadvantage in American society, not in other countries; and

\(C\) Negative impact on entry into or advancement in the business world
because of the disadvantage. Recipients will consider any relevant
evidence in assessing this element. In every case, however, recipients
will consider education, employment and business history, where
applicable, to see if the totality of circumstances shows disadvantage
in entering into or advancing in the business world.

\(1\) Education. Recipients will consider such factors as denial of
equal access to institutions of higher education and vocational
training, exclusion from social and professional association with
students or teachers, denial of educational honors rightfully earned,
and social patterns or pressures which discouraged the individual from
pursuing a professional or business education.

\(2\) Employment. Recipients will consider such factors as unequal
treatment in hiring, promotions and other aspects of professional
advancement, pay and fringe benefits, and other terms and conditions of
employment; retaliatory or discriminatory behavior by an employer or
labor union; and social patterns or pressures which have channeled the
individual into non-professional or non-business fields.

\(3\) Business history. The recipient will consider such factors as
unequal access to credit or capital, acquisition of credit or capital
under

commercially unfavorable circumstances, unequal treatment in
opportunities for government contracts or other work, unequal treatment

by potential customers and business associates, and exclusion from
business or professional organizations.

II\. With respect to paragraph I.A) of this appendix, the Department
notes that people with disabilities have disproportionately low incomes
and high rates of unemployment. Many physical and attitudinal barriers
remain to their full participation in education, employment, and
business opportunities available to the general public. The Americans
with Disabilities Act (ADA) was passed in recognition of the
discrimination faced by people with disabilities. It is plausible that
many individuals with disabilities - especially persons with severe
disabilities (e.g., significant mobility, vision, or hearing
impairments) - may be socially and economically disadvantaged.

III\. Under the laws concerning social and economic disadvantage, people
with disabilities are not a group presumed to be disadvantaged.
Nevertheless, recipients should look carefully at individual showings of
disadvantage by individuals with disabilities, making a case-by-case
judgment about whether such an individual meets the criteria of this
appendix. As public entities subject to Title II of the ADA, recipients
must also ensure their DBE programs are accessible to individuals with
disabilities. For example, physical barriers or the lack of application
and information materials in accessible formats cannot be permitted to
thwart the access of potential applicants to the certification process
or other services made available to DBEs and applicants.

## Economic Disadvantage

\(A\) General. Economically disadvantaged individuals are socially

disadvantaged individuals whose ability to compete in the free
enterprise system has been impaired due to diminished capital and credit
opportunities as compared to others in the same or similar line of
business who are not socially disadvantaged.

\(B\) Submission of narrative and financial information.

\(1\) Each individual claiming economic disadvantage must describe the
conditions which are the basis for the claim in a narrative statement,
and must submit personal financial information.

\(2\) When married, an individual claiming economic disadvantage also
must submit separate financial information for his or her spouse,

unless the individual and the spouse are legally separated.

\(C\) Factors to be considered. In considering diminished capital and
credit opportunities, recipients will examine factors relating to the
personal financial condition of any individual claiming disadvantaged
status, including personal income for the past two years (including
bonuses and the value of company stock given in lieu of cash), personal
net worth, and the fair market value of all assets, whether encumbered
or not. Recipients will also consider the financial condition of the
applicant compared to the financial profiles of small businesses in the
same primary industry classification, or, if not available, in similar
lines of business, which are not owned and controlled by socially and
economically

disadvantaged individuals in evaluating the individual\'s access to
credit and capital. The financial profiles that recipients will compare
include total assets, net sales, pre-tax profit, sales/working capital
ratio, and net worth.

\(D\) Transfers within two years.

\(1\) Except as set forth in paragraph (D)(2) of this appendix,
recipients will attribute to an individual claiming disadvantaged status
any assets which that individual has transferred to an immediate family
member, or to a trust, a beneficiary of which is an immediate family
member, for less than fair market value, within two years prior to a
concern\'s application for participation in the DBE program, unless the
individual claiming disadvantaged status can demonstrate that the
transfer is to or on behalf of an immediate family member for that
individual\'s education, medical expenses, or some other form of
essential support.

\(2\) Recipients will not attribute to an individual claiming
disadvantaged status any assets transferred by that individual to an
immediate family member that are consistent with the customary
recognition of special occasions, such as birthdays, graduations,
anniversaries, and retirements.

\(3\) In determining an individual\'s access to capital and credit,

recipients may consider any assets that the individual transferred
within such two-year period described by paragraph (D)(1) of this
appendix that are not considered in evaluating the individual\'s assets
and net worth (e.g., transfers to charities).

## NOTES

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.

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.

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 programs and should act aggressively to
remove any discriminatory barriers in their programs.

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